Residential and Day Treatment Programs service children with Severe Emotional Disturbances (SED) in several parts of the human services sector. These settings are most common in the education and mental health sectors. The research proposed here will intensively study the economics of residential and day treatment programs for children with SED. We will make use of several unique data sets from NIMH and the Department of Education (DOE) to comprehensively describe this growing portion of the mental health services system. We will use the data to estimate cost function models. The cost function will attempt to take account of proxy measures for quality and use indirect estimation methods to account for quality. The results of these analyses will inform policy related to the regulation or budgeting of such facilities. Models of responses to payment system incentives with respect to volume and intensity of treatment will be specified and estimated. The impact of type and mix of payment method on intensity of care and mix of outputs will be a focus of this work. The results from this analysis will enable one to trace the consequences of adopting various reimbursement methods. Finally, proposals for improved future data collection will likely emerge from this study.