Across the United States, foster parents are not paid a single flat rate for every child. Reimbursement is layered: states pay a base amount for routine care and progressively higher amounts for children assessed as having greater behavioral, emotional, or medical needs. Those higher tiers — labeled “special,” “exceptional,” “specialized,” or “difficulty of care” depending on the state — can add hundreds of dollars a month per child.

That structure exists alongside two persistent and well-documented problems. Children in foster care are prescribed psychotropic medications at far higher rates than other children, and they graduate from high school and college at far lower rates than their peers. The coincidence of these facts has led some child-welfare scholars and advocacy groups to ask a pointed question: does a payment system that pays more for higher-needs children create incentives that work against the children it is meant to protect?

This article lays out how the payment tiers function, what the data show on medication and education, and how the competing arguments line up. It does not conclude that any system was built to harm children; it reports the documented mechanics and the debate around them.

Background: How Foster Care Payments Are Structured

Most U.S. foster care is financed through a combination of federal and state dollars. The federal backbone is Title IV-E of the Social Security Act, which reimburses states for a share of “maintenance” payments — money intended to cover a child’s food, clothing, shelter, daily supervision, and incidental costs. Because foster children are wards of the state, their medical care is typically covered by Medicaid.

Crucially, foster care reimbursement is legally framed as cost reimbursement, not salary. In simple terms: the payment is meant to offset what it costs to raise the child, not to pay the adult a wage. The IRS treats qualified foster care payments as non-taxable for that reason.

On top of the base rate, every state operates some form of graduated schedule. A child entering care is assessed and assigned a level of care. The higher the assessed need — across physical, behavioral, emotional, medical, and educational domains — the higher the reimbursement tier. Assessments are periodically re-reviewed, and the tier can move up or down as a child’s situation changes.

Policy Explanation: What Triggers a Higher Tier

No state publishes a rate card that pays a bonus simply for filling a prescription. Instead, higher payments are tied to a documented level-of-care or difficulty-of-care designation. Behavioral difficulties at school, the need for therapy or psychiatric care, and the demands of managing medications are among the factors that can push a child into a higher-paying tier.

This is where medication and reimbursement intersect indirectly. A child on multiple psychiatric medications, or one with significant behavioral challenges, is more likely to be assessed at a higher level of care — and a higher level of care carries a higher payment. Some state rate documents make the link explicit: specialized rates are described as compensating caregivers for added duties that include supervising the administration of prescribed medicines and managing crisis behavior. In simple terms: medication itself is not a payout, but the higher-needs status that often accompanies it is.

Critics argue this creates a feedback loop worth watching: if a higher needs designation means more money, the people doing the assessing and the people receiving the payment may have a quiet incentive to maintain or escalate that designation rather than work toward reducing it.

Examples: How the Tiers Look Across States

New York maintains separate “normal,” “special,” and “exceptional” board rates set by county and by the child’s assessed needs. A caseworker or foster parent can request the higher rate, which a local department of social services must approve, and the rate moves with the child’s level of difficulty.

New Hampshire publishes a general daily rate and a higher specialized rate for children whose needs require more skill and supervision — for example, roughly $40.78 per day for a teenager at the general rate versus about $50.97 per day at the specialized rate, with the specialized track requiring extra caregiver training.

Oklahoma uses tiered “difficulty of care” levels that add supplemental monthly amounts on top of the base — ranging from modest add-ons for children needing routine medical supplies to several hundred dollars a month for children whose needs would otherwise point toward institutional or inpatient psychiatric placement.

Nevada’s rate schedule states plainly that specialized rates are intended to compensate providers for additional daily supervision, dispensing over-the-counter medicines, and supervising prescribed medications for children with disabling mental or behavioral health needs. The pattern repeats, with local variation, across the country.

Impact: The Medication and Education Data

The medication figures are stark. In congressional testimony, the U.S. Government Accountability Office and federal health officials reported that foster children are prescribed psychotropic medications at far higher rates than other children covered by Medicaid. Estimates of the share of foster children on one or more psychotropic medications have ranged from roughly 18 percent in some agency data to 21 to 39 percent in GAO estimates, with rates reaching about 48 percent among children living in group homes and residential treatment centers. Reviewers also flagged polypharmacy, off-label use, and prescriptions issued to very young children.

The educational picture is similarly difficult. In California, state dashboard data showed roughly 65.7 percent of foster youth graduating high school against an 86.7 percent statewide rate, with foster students chronically absent and dropping out at far higher rates than their peers. National research has found foster youth completing college at roughly 8 to 12 percent by their mid-to-late twenties, compared with about 49 percent of young adults overall — though newer studies note real progress and reject the older, bleaker “3 percent” figure as a myth.

Researchers consistently attribute these outcomes to instability — frequent placement and school changes, trauma, lost support at age 21, and over-identification for special education. In simple terms: the strongest documented drivers of poor outcomes are disruption and lack of support, not a single hidden lever.

Analysis: The Incentive Debate

The argument that the system’s incentives are misaligned is made seriously in the academic and advocacy literature. The Cato Institute has argued that privately contracted foster agencies, often paid per day a child remains in care, can be financially motivated to keep children in placement rather than move them toward reunification or adoption. The National Coalition for Child Protection Reform and its director Richard Wexler have made parallel points about per-diem funding. A 2023 research paper on algorithmic decision-making in child welfare documented caseworkers reporting that some foster parents exaggerated children’s behaviors to obtain higher compensation — and that low base rates left little incentive to fight for lower-needs designations.

Federal analysts have also acknowledged structural problems. A Department of Health and Human Services policy review concluded that the current financing structure does not align well with the field’s goals, and proposed alternatives explicitly designed to reward keeping children safely at home, returning them home quickly, or moving them to adoption.

There is a substantial counterargument. Higher payments exist because higher-needs children genuinely cost more to care for — more appointments, more supervision, more training, more lost work time for the caregiver. Medication rates and poor school outcomes are heavily explained by the trauma and instability that bring children into care in the first place, which means correlation should not be read as deliberate design. State officials note that assessments are conducted by professionals, reviewed periodically, and that several states have reduced psychotropic prescribing through tighter oversight. And many states have built in protections — such as not lowering a family’s rate when a child’s assessed needs improve — precisely to remove the incentive to keep a child classified as high-need.

What the evidence supports is narrower than the strongest claims on either side. There is a documented payment structure that pays more for higher-needs children; there are documented high rates of medication and low rates of school success; and there is a real, contested scholarly debate about whether the financial design contributes to those outcomes. There is no public evidence that any state built its rate schedule with the intent of failing children.

Conclusion

Foster care’s tiered payment model was designed to match resources to need: harder cases cost more, so they pay more. The open question is whether a system that attaches more money to a higher-needs label can reliably avoid rewarding the very conditions — heavy medication, behavioral escalation, prolonged time in care — that it is supposed to help children move past. That question is unresolved, and it sits at the center of an active policy debate among researchers, agencies, and advocates.

Key Takeaways

• Foster care reimbursement is tiered: states pay a base rate plus higher “special,” “exceptional,” or “difficulty of care” rates for children with greater behavioral, emotional, or medical needs.
• No state pays a bonus for a prescription itself, but a child’s medication and behavioral profile can raise their assessed level of care — which raises the payment.
• Foster children are medicated with psychotropics at far higher rates than other children (GAO estimates of 21–39 percent overall, near 48 percent in residential settings).
• Foster youth graduate high school and college at sharply lower rates than peers (e.g., about 65.7 percent vs. 86.7 percent high-school graduation in California).
• Scholars (Cato Institute, NCCPR) and a federal HHS review argue the financing structure can create misaligned incentives; others counter that higher payments reflect genuinely higher costs and that outcomes are driven mainly by trauma and instability.
• There is no public evidence of intentional design to harm children, but the incentive debate is real and ongoing.

Sources

1. U.S. Government Accountability Office, “Foster Children: … Oversight of Psychotropic Medications” (GAO-14-362): https://www.gao.gov/products/gao-14-362
2. U.S. House hearing, “Caring for Our Kids: Are We Overmedicating Children in Foster Care?” (2014): https://www.congress.gov/event/113th-congress/house-event/LC40123/text
3. Annie E. Casey Foundation, foster care education outcomes: https://www.aecf.org/blog/foster-care-education-outcomes-new-research-challenges-the-3-myth
4. California foster youth statistics (Pivotal / California School Dashboard): https://www.pivotalnow.org/awareness/statistics
5. Adoptive & Foster Family Coalition of New York, special/exceptional board rates: https://affcny.org/special-exceptional-foster-care-board-rates-in-new-york/
6. New Hampshire DHHS, current foster care daily rates: https://www.dhhs.nh.gov/programs-services/child-protection-juvenile-justice/current-foster-care-daily-rates
7. Nevada DCFS foster care rate schedule (PDF): https://dcfs.nv.gov/uploadedFiles/dcfsnvgov/content/Home/features/DCFS_Foster_Care_Rates_Effective_7.1.2023%20v2.pdf
8. Oklahoma difficulty-of-care reimbursement rates (PDF): https://okfosters.org/wp-content/uploads/2024/05/Reimbursement-Rates.pdf
9. Cato Institute, “How Misaligned Incentives Hinder Foster Care Adoption”: https://www.cato.org/cato-journal/winter-2021/how-misaligned-incentives-hinder-foster-care-adoption
10. HHS/ASPE, “Federal Foster Care Financing”: https://aspe.hhs.gov/reports/federal-foster-care-financing-how-why-current-funding-structure-fails-meet-needs-child-welfare-field-0
11. TalkPoverty (NCCPR / Richard Wexler on per-diem incentives): https://talkpoverty.org/2019/08/23/government-more-foster-adoption-reuniting/index.html
12. “Algorithmic Harms in Child Welfare” (arXiv, 2023): https://arxiv.org/pdf/2308.05224