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Privatizing adoption and foster care: Applying auction and market solutions

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Children and Youth Services Review 26 (2004) Privatizing adoption and foster care: Applying auction and market solutions Erwin A. Blackstone*, Andrew J. Buck,
Children and Youth Services Review 26 (2004) Privatizing adoption and foster care: Applying auction and market solutions Erwin A. Blackstone*, Andrew J. Buck, Simon Hakim Temple University, Ctr. For Competitive Government and Department of Economics, 1301 Cecil B. Moore Avenue, 877 Ritter Annex, Philadelphia, PA 19122, United States Available online 11 September 2004 Abstract Hard to adopt children remain in foster care for a long time and are often shifted from one temporary arrangement to another. In this paper, we present and evaluate the privatization of the administrative aspects of adoption and foster care in Kansas, Michigan, and Illinois. The Illinois model which permitted the most competition among private and public providers achieved the best results in increasing adoptions and eliminating inefficient providers. A national adoption market with ubiquitous information is recommended. Then, we apply a modern economic theory of auctions to the adoptive process. This will help solve the problem of children languishing in foster care and provide additional resources to assist adoption of hard to place children. D 2004 Elsevier Ltd. All rights reserved. Keywords: Foster care; National adoption market; Modern economic theory 1. Introduction Hard to adopt children remain in foster care for a long time and are often shifted from one temporary arrangement to another. Some children reach adulthood without ever having achieved permanency. In addition, the management of these services has largely been by state government monopolies where spending is usually higher and quality of service is lower than in competitive markets. * Corresponding author. Tel.: address: (E.A. Blackstone) /$ - see front matter D 2004 Elsevier Ltd. All rights reserved. doi: /j.childyouth 1034 E.A. Blackstone et al. / Children and Youth Services Review 26 (2004) There are both high social costs and government expenditures for foster care. Higher incidence of criminal behavior is associated with growing up without family ties and the lack of permanency. For example, 90% of Rochester, New York youths who endured five or more family transitions became delinquent (Blackstone & Hakim, 2003). Furthermore, the Bureau of Justice Statistics reported that former foster care children comprised 17% of the inmates in local jails (NCPA, 1997). Former foster care children also tend to have a high incidence of public assistance. In any event, the direct annual cost of foster care nationwide has been estimated at $17,500 per child or $10 billion, which is itself a substantial commitment of resources that justifies efforts to improve efficiency in their use. In this paper, we will present and discuss the privatization of the administrative aspects of adoption and foster care in Kansas, Michigan, and Illinois. Then, we shall suggest the application of the modern economic theory of auctions to the adoptive process. This will help solve the problem of children languishing in foster care and provide additional resources to assist adoption of hard to place children. Section 2 discusses the federal legislation, the national picture of the process and its cost and the ensuing problems. Then, in Section 3, we describe, and in Section 4, evaluate the privatization efforts of the administrative aspect in the three states. Section 5 presents our market-oriented auction model that is a comprehensive treatment of the entire process. 2. Background of adoption and foster care in the U.S. The number of children nationwide in foster care was 400,000 in 1991, increasing on the average by about 4% a year until 1999, then decreasing by 2% each year to 542,000 in The total number of adopted children is 1.5 million or 2% of all children (Evan B. Donaldson Adoption Institute, 2003). The average age of children in foster care was 10.1 years in 2001 and the average child remained in foster care for 33 months. About 32% of the children remain in foster care for more than 3 years and 17% remain for 5 or more years. The average age of children in foster care who are waiting to be adopted was 8.3 years in 2001, and on average, they have been in foster care for 44 months. Only 3% of those awaiting adoption were less than a year old. A total of 88% of adopted children receive some subsidy (DHHS, 2001). Subsidies are available for the adoption of special needs children. The definition of special needs includes physical and emotional aspects of the child, whether a sibling group exists, and the age and ethnic background of the child (NACAC, 2003). Special needs children may allow adoptive parents to receive monthly stipends and medical assistance. They may also receive a subsidy for nonrecurring adoption expenses. The latter is the only subsidy available for international adoptions and that depends on the state of residence. An increasingly common form of adoption is international. For example, in 2002, 20,000 children were adopted from other countries, an amount equal to 40% of the 50,000 children adopted from foster care in fiscal 2001 (Smiley, 2003; DHHS, 2003). Especially noteworthy, not quite 50% of international adoptions involve infants as opposed to only 2% of those adopted from foster care. Furthermore, while 50% of foster care adoptees are older than 5 years, about 90% of international adoptions involve children younger than 5 E.A. Blackstone et al. / Children and Youth Services Review 26 (2004) years of age (Evan B. Donaldson Adoption Institute, 2003). Most healthy infants are adopted through private placement including international adoptions (Heldman, 2003). The cost of international adoptions ranges from $7000 to $25,000 for just the normal expenses similar to those incurred in private adoptions in the U.S. Even in the U.S. private adoptions, including the birth mother s expenses, agency, and court costs, can exceed $30,000. International adoptions involve additional expenses for travel to the country and sometimes expenses for the foster care agency. Domestic public agency adoptions involve the least expense, ranging up to $2500 (National Adoption Clearinghouse, 2003). Specific state data illustrate that minorities comprise a much greater percentage than their share in the population of those in foster care and those waiting to be adopted. For example, black children comprised 18.5% of all Illinois children in 1999 but made up 78% of those waiting to be adopted and 76% of those in foster care (DHHS, 1999). Indicative of the difficulty of placing children above the age of 12 is the fact that only 2% of them exit by adoption when total exit by adoption from foster care is 46%. Summary data for 30 states indicate that blacks comprise 17% of the population of children, 55% of those waiting to be adopted, and 49% of those adopted (DHHS, 1998). White children comprise 66% of the population, 27% of those waiting to be adopted, and 33% of those adopted. National and state data clearly indicate that the number of children in foster care has increased, the length of time in foster care is considered too long, and too few children are being adopted. The problem is especially acute for minorities, disabled, and older children. The national policy is both to discourage children from being kept in foster care for an extended period and to encourage adoption when reunification is undesirable. The Child Welfare Act of 1980, for example, required states to make reasonable efforts to prevent placing the child in foster care. Its intent was to reduce the number of children in foster care and increase permanency. It mandated case plans for children. In spite of its goals, the Act has been criticized because it created incentives to maintain children in foster care. An Assistant Secretary of the Health Education and Welfare Department testified in 1979 that Our basic concern has been that there are fiscal incentives to place children and young people in out-of-home care because of the open-ended nature of the appropriation, and that may be in part the reason that there has been an increase in the number of children in foster care (quoted in Crossley, 2003, p. 276). It also may have overemphasized the reasonable efforts to maintain children within their families. In any event, to reduce the number of children in foster care, the 1997 Federal Adoption and Safe Families Act (ASFA) was enacted. As opposed to the earlier 1980 Act, which stressed breasonable effortsq to maintain children with their families, the ASFA mandated health and safety of children as the primary goal. States are required to place children whose permanency plan is adoption in a timely manner, to document their efforts to achieve adoption, to plan for adoption even while efforts are made to reunify the family, and to not allow cross-jurisdictional issues to act as barriers to permanency (Heldman, 2003). 1036 E.A. Blackstone et al. / Children and Youth Services Review 26 (2004) Specifically, the ASFA requires a permanency hearing within 12 months of a child s entry into foster care and termination of parental rights if a child has been in foster care for 15 out of the last 22 months unless certain exceptions apply. The ASFA also provides incentive payments to a state that increases its adoption from foster care above the base rate. The payment is $4000 for each eligible foster care child adopted and $6000 for a special needs child. These incentive payments are not passed to the adoptive parents but become parts of the general state expenditures on child welfare. The early results from ASFA seem promising; some states have markedly increased their adoptions from foster care. Illinois had 7113 adoptions in 1999, more than three times its average of 2200 in the 3 years prior to the passage of ASFA (Copley News Service, 2003). Missouri doubled its adoptions in a 5-year period and in September 2003, was awarded $366,000 of incentive payments. Adoptions from foster care in the nation as a whole grew from an average of 28,160 in the period to a peak of 50,683 in 2001, and then declined. The annual percentage increases were 27% in 1998, 29% in 1999, and 9% in Adoption then grew by less than 1% in 2001 and in 2002 declined by 5% (calculated from McDonald, 2003). A more detailed examination of the early results is less supportive of the law s success. Illinois adoptions have declined since 1999, falling to 3585 in 2002, a situation similar to what has happened in a majority of states. Furthermore, the General Accounting Office (GAO), a Congressional Agency, studied the impact of ASFA and found that although adoptions grew since the federal law (31,000 in 1996 compared to 45,000 in fiscal 2000), they were increasing even before its enactment (Statistics from Welte, 2003). States had initiated reforms prior to ASFA to increase adoptions and otherwise achieve permanency. In the 1995 to 2000 period, the GAO found that adoptions increased 89% or an annual average increase of 8% to 12%. In 1999, when states began implementing the provisions, adoptions increased 29%. Cities contend that the easiest adoptions were hastened by the ASFA and now the adoption rates have declined. They also point to the fact that the number of children in foster care has not decreased substantially since the law went into effect. They argue that the law promotes termination of parental rights instead of encouraging reunifications of families. 1 In any event, ASFA indicates the National policy toward encouraging adoption and permanency instead of having children languish in foster care. 3. Description and evaluation of privatization in three states In order to accelerate adoption, a few states chose to contract out the administrative tasks, including operation of the foster care process and including searching for and placing children with adoptive parents. Clearly, privatization is often undertaken to save public resources. Unfortunately, when the states began the process, they did not have their own accounting system set to determine their real total per child costs for each function. This issue will be discussed in more detail. 1 Wulczyn (2002), in general, supports these conclusions. E.A. Blackstone et al. / Children and Youth Services Review 26 (2004) Michigan In Michigan, either the state agency, Family Independence Agency, or the foster care provider that manages the child is given 6 months exclusivity to place a child eligible for adoption. The 6-month exclusivity provides the original agency with an incentive to push the adoption. Within 3 months, adopting parents need to be identified. Then, if not placed within 6 months, the child must be listed on the publicly available Michigan Adoption Resource Exchange that the state established in Now, the information about eligible children is disseminated over the Internet. A 20% penalty in the form of a reduction in the foster care agency s administrative rate is imposed for not listing the child at the appropriate time. Any of the 53-licensed private adoption agencies can then compete to place the children (Blackstone & Hakim, 2003; Michigan Division of Adoption Services, 2002). These companies normally provide both adoption and foster care services. Prior to 1992, the agencies were paid on a cost plus basis. Specifically, larger agencies that could provide detailed cost estimation were paid between $15,000 and $18,000 per adopted child. Smaller agencies that were unable to provide detailed cost estimation were paid only $3900. The result was that small agencies could not compete and larger agencies had little incentive to expedite the process. Since 1992, fixed prices are paid for placing children based on the outcome, the time, and the difficulty of the case. The State imputes estimated cost for eight prototype cases and adds an incentive component. For example, a fee of $9325 is paid to a noncustodial agency that places the child from the exchange with a nonfoster or relative family. The adoptive family can act as a foster care family for the child for up to 150 days. Private agencies handle 60% of adoption services and the rest are managed by the state agency. The total number of children adopted between 1991 and 1999 increased by 83%, black children increased by 82%, and disabled children by 52%. Because the number of children available for adoption increased by 116%, there is no obvious improvement since privatization started. Furthermore, Michigan increased its adoptions between 1998 and 2002 compared to the base period of by only 56%, ranking it fifth lowest among the 50 states (calculated from McDonald, 2003). On a positive note, only 3.5% of its adoptions were disrupted compared to 12% for the nation as a whole (Blackstone & Hakim, 2003). Some other findings are notable. First, 90% of children are adopted by their foster parents or by relatives. Furthermore, of those adopted, 50% are adopted within 6 months through the agency that had initially placed the child in foster care. Although we cannot compare this performance to the period before privatization, it appears to be modestly successful. In any event, we may comment on the effectiveness of the process based on economic theory. Michigan introduced an interesting form of competition to the process, including the widespread dissemination of information about children available for adoption. Private companies have the incentive to search for both a large number and high-quality foster care families. Thus, once a child is removed from his family, the agency with the available foster homes is likely to obtain the child. Then, once a company places a child in such a family, the probability of maintaining the service for this child, possibly even through adoption, is high. Prospective adoptive parents have greater choice under this system than 1038 E.A. Blackstone et al. / Children and Youth Services Review 26 (2004) with the previous state run system. The number of competitors differs among counties or cities roughly in line with population. For example, Grand Rapids, Michigan s second largest city, has 5 foster care agencies, Muskegon has 4, Detroit, the largest, has 14, but Ann Arbor, a small city, has only 1. This method has some shortcomings. The prices for adoption are set by the state and are not market-sensitive. In addition, the state provides identical services to the private companies that compete with it while the state s cost per child is of no concern. Thus, this method lacks the basic advantage of managed competition where government is forced to operate efficiently with respect to its cost. Finally, the 6-months exclusive awarded to the agency that is the child s foster care provider lacks justification. Allowing all agencies to seek the child s adoption immediately could reduce the time to adoption, at no cost to the child Kansas The American Civil Liberties Union sued the State of Kansas, claiming that children remained in foster care too long and too few were adopted. In response to the settlement, Kansas moved in 1996 to privatize its foster care and adoption services (Blackstone & Hakim, 2003). After the initiation of privatization, the governor of Kansas stated that the objective was to improve the system to the benefit of the children and not to save resources (Geiszler-Jones, 2003). Kansas was divided for foster care into five regions where bidding was conducted for each region. Contractors were selected for a 4-year period and prices were negotiated. In order to provide incentives for prompt reunification or adoption, the contractor received a fixed amount per child. The amount ranged in 1997 among regions from $12,860 to $15,504. Over time, prices were changed and adapted for children with special needs. For adoption, bidders competed for the statewide contract. However, the contractor, Lutheran Social Services, had 12 subcontractors throughout the state. In the case of foster care, it was important that the child remain close to her family for possible visitation and reunification. In the case of adoption, proximity to the natural parents is less important and a wider market enhances the likelihood of adoption. This is the rationale for selecting a single provider for the entire state. The Kansas Department of Social and Rehabilitation Services established performance standards which would be presumably used to evaluate renewal or bidding for subsequent contracts. Standards for foster care included limitation to no more than three placement moves and 65% of children will achieve permanency within 12 months of referral. Adoption standards included the requirement that 70% of children be placed within 180 days of referral and that 90% of adoptions shall be intact for 18 months from finalization. During the first 4 years, some contractors lost substantial amounts. Kansas paid foster care contractors $105.1 million above the $178.7 contracted amount and the adoption provider $31.4 million above the contract amount of $37.4 million for unanticipated expenses. The adoption provider alone lost $5.5 million in the first 2 years and was in danger of bankruptcy (Blackstone & Hakim, 2003; Kansas Action for Children, 2001). These losses prompted Kansas in 2000 after only 4 years of experience to revise its contract system. Contractors were now paid on a per month basis ranging between $1958 E.A. Blackstone et al. / Children and Youth Services Review 26 (2004) and $2200 per month per child for the first year of the contract. This means that under the previous contract system, children remaining in foster care more than 6 months yielded losses to the contractor. About 32% of the children remain in foster care between 1 and 2 years, indicating the extent of the unrealistic nature of the initial incentive contract. In addition, performance standards were revised to reflect new experiences. Evaluating the Kansas experience reveals that the act of privatization itself led to better data collection on cost and performance for both foster care and adoption.
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