The Connecticut Department of Children and Families Title IV-E waiver demonstration evaluated whether the well-being of children approved for residential mental health services could be improved, and lengths of stay in restrictive placements reduced, by providing case rate payments to community agencies to provide continuum of care services. Children between ages 7 and 15 were randomly assigned to either the demonstration group (n = 78) or to usual state-supported services (n = 79). One-year outcome results indicated that in a situation that is less costly, improvement in outcomes occurred in less restrictive settings. Continuum of care services were more effective in 1) returning children to in-home placements, 2) reducing the length of stay in restrictive placements, and (3) utilizing higher levels of case management through coordination among agencies and family support services. (Contains 2 figures and 4 tables.)