State contracts with private agencies account for more than half of all expenditures for substance abuse treatment, and the very large majority of expenditures made on behalf of vulnerable populations. The cost- effectiveness of services paid for under these contracts, and the impact of the form of contracting itself on costs and performance, are critical questions for research on substance abuse services. This project will study a natural experiment in contracting for substance abuse services in Maine. On July 1, 1992, the Maine Office of Substance Abuse (OSA) introduced an incentive contracting and monitoring system modelled on a similar system in Oregon. The new contracting system defines performance based on data from standard admission and discharge forms, and quarterly reports on expenditures and services supplied by the contracting agencies. Programs have financial incentives to meet performance standards defined in terms of the units of services delivered ("efficiency" standards), improvements in drug use and social functioning of clients ("effectiveness" standards), and targeting of high priority populations ("special population" standards). Data are available in comparable form at the individual, program and agency level for almost three years prior to initiation of performance contracting. By Year III of our research, we will be able to analyze more than 50,000 treatment episodes divided roughly equally before and after the intervention. This research will: 1) Document the intervention and its administration, 2) Estimate the impact of incentive contracting on program performance and costs, and in terms of targeting of special populations, such as women, the elderly, and the dually diagnosed, and 3) Investigate the determinants of the cost effectiveness of state-funded substance abuse treatment services, effectiveness defined in part by outcomes employed in the Maine system, and in part by our own additional measures. Although research will be conducted in a single state, the Maine/Oregon system has attracted national attention. Information from this investigation of cost effectiveness and the impact of contract incentives should be of immediate interest to all state substance abuse agencies. The methods developed here to analyze these data should be readily transferable to other states.