Economic incentives and foster care placement.

• Author: Duncan, Brian
• Position: Report

1. Introduction

   A large number of children in the United States spend time in foster care, separated from their biological parents. For example, in 1999, over 547,000 children lived in foster care, with an estimated 238,000 children entering the system in this year alone. (1) Unable to remain in the care of their biological parents as a result of abuse or neglect, these children are placed in various foster care settings, including with members of their extended family, with unrelated foster families, or in group homes.

   Care for foster children is supervised by state child welfare agencies and is subsidized by federal, state, and local dollars. Foster care providers receive a monthly payment on behalf of the child. In cases that meet the requirements of the foster care legislation in Title VI of the Social Security Act, the federal government shares much of the burden of foster care subsidization, although many children in foster care are not eligible for federal aid. Regardless of who foots the bill, states are granted latitude in determining the characteristics of their foster care programs, and as a result, licensing requirements for foster homes and compensation for caregivers vary dramatically across states. (2) For example, the basic foster care payment ranges from a low of just over $200 per month to over $700 per month.

   In this article, we extract data on children who entered the foster care system in 1998 from the Adoption and Foster Care Analysis and Reporting System (AFCARS) data. We then link these data to state foster care regulations and subsidy rates. The combined data allow us to determine whether foster care subsidy rates and other foster care regulations affect the type of child placements that occur. Specifically, we examine the factors that determine a foster child's type of placement (i.e., with relatives, with an unrelated foster family, or in a group home), racial and ethnic match with his or her caretaker, placement with a two-parent family, and stability of the foster care experience (measured by the number of times the child is moved to a new placement within the first year).

   In addition to a standard cross-sectional approach, we are able to control for state effects by exploiting the variation in foster care payments by the child's age. For example, in certain states, there is little difference in the basic foster care payments between two-year-olds and nine-year-olds. In other states, this difference is large. If one state's foster care payments are more generous for nine-year-olds, relative to two-year-olds, than another state's payments, are there also better foster care placements for nine-year-olds relative to nine-year-olds? Our state-effects analysis uses the variation in payments across age, rather than across states, to identify the effect that foster care payments have on placement outcomes.

   We find that more generous subsidy levels facilitate the placement of children in more desirable foster care settings. Specifically, our results indicate that a $100 increase in the monthly basic foster care payment will reduce the likelihood that the average child will be placed in a group home by 7.1% and that the majority of children moved out of group homes will find placements with unrelated foster families. This result holds when we allow the estimates to vary by the child's age, gender, race/ethnicity, and disability status. The willingness of families to take in a related child (kinship care) is less sensitive to the amount of the foster care payment. Existing research on the relative merits of the various placement settings indicates that group residence is least beneficial for children, so shifting foster children into family settings by altering foster care subsidy levels could have important consequences for children.

   Further estimates indicate that the children pulled from group homes through higher subsidies are equally likely to be placed in two-parent and single-parent homes, but they are less likely to be placed with caregivers who share the child's race or ethnicity, although these results are somewhat sensitive to the empirical specification. Finally, foster children with higher subsidies face a lower probability of removal from their initial placements. Our estimates indicate that a $100 increase in the basic monthly foster care payment reduces the number of times a child is moved from one foster placement to another by 20%. Allowing this estimate to vary by age indicates that increasing the foster care payment has a slightly larger effect on the placement stability of older children compared to younger children.

2. The Foster Care System

   State child welfare agencies are charged with providing board and maintenance for children removed from their homes either by voluntary agreement or by court order. To meet the federal funding requirements for foster care, a child remanded to the care of a child welfare agency must be placed in a foster family home (a relative or nonrelative family that has been approved by the state) or a "child care institution" (a public or nonprofit child care institution that is approved by the state to care for no more than 25 children). The state, often with contributions from the federal government, provides monthly subsidies to the families or institutions providing care for a foster child.

   Federal government participation in the foster care system has its roots in the 1935 Social Security Act that established the program eventually referred to as Aid to Families with Dependent Children (AFDC). It was not until the 1961 Flemming Ruling, however, that the use of federal funds for children had been removed from their homes was approved (Ross and Cahn 2000). This ruling authorized foster care providers to receive child-only AFDC payments in cases in which the child's family of origin would have qualified for AFDC. Since that time, many states have increased their foster care subsidies to levels substantially higher than the child-only AFDC payment. In 1996, more than half of the states (26) had foster care payments in excess of the corresponding welfare benefit (Boots and Geen 1999).

   Monthly payments from the state to foster care providers vary across states, and some states further devolve the responsibility to the county level. Most states provide a basic foster care rate that varies based on the age of the child. In addition, many states supplement their basic rates according to the special medical or emotional needs of the child. (3) Mirroring estimates of family expenditures on children, the basic monthly subsidy levels, for the most part, increase with age. The 1998 basic foster care subsidy rates in 34 states for children aged 2, 9, and 16 years are shown in Table 1. (4) Caretakers of teenaged foster children receive, on average, nearly $72 more per month than those caring for very young children, and there is substantial variation in basic foster care subsidies across states. For instance, the minimum payment for a two-year-old is $212 in South Carolina, compared to the maximum of $622 in Connecticut. Typically states designate age ranges and set one basic monthly subsidy rate for children under the age of five or six years; another, usually higher rate for children between the ages of about 6 and 12 years; and a higher rate yet for children over the age of 11 or 12 years. However, not all states increase payments with age. In six states, basic monthly subsidy rates are identical for children of all ages, and in two other states, subsidy levels actually decrease with age for some age groups.

   In the empirical analysis below, we exploit the variation in basic foster care payments across states and within states across age groups to examine the effect of subsidies on the type of foster care placement as well as on the number of placements a child experiences while in foster care.

3. Economic Incentives and Foster Care Placement

   Researchers examining the effect of economic incentives on foster care outcomes typically have focused on the response of foster care providers to variation in the subsidy rates. Simon (1975) notes that the relationship between foster care placements and foster care payments can be explained by a change in the quantity of foster children demanded. Specifically, when "foster payments go up, the 'price' of a child ... goes down and the quantity of children demanded may be expected to rise" (Simon 1975, p. 406). This relationship could be expected to hold whether the foster provider was a relative, an unrelated foster family, or the administrator of a group home.

   Three studies have examined the response of foster care providers to subsidy levels. In one of these studies, Campbell and Downs (1987) used cross-state variation in subsidy rates to explain differences in the supply of family foster care, measured by the number of children taken into each family foster home. Using data from a 1980 survey of over 1000 licensed foster family homes in eight states, the authors find a positive, but statistically insignificant, relationship between the subsidy rate and the number of children in each foster home. Because this study did not identify changes in the number of available foster family homes, however, one cannot conclude that subsidy rates have no effect on the overall availability of family foster care.

   In the two other studies, researchers using aggregate data were able to include a wider cross section of states, multiple time periods, and measures of the number of foster care placement sites to estimate the sensitivity of the overall supply of foster care homes to changes in subsidy levels. Simon (1975) analyzed data from 38 states and the District of Columbia at three points in time between 1959 and 1968. He regressed the ratio of children in foster care to the state population on the average payment per foster care child. (5) Results from cross-sectional models in each of the three years yield...