Intensive Alternative Family Treatment (IAFT®) is an enhanced therapeutic foster care program that serves children and youth at risk for entry into a more restrictive level of care. The purpose of this study was to examine the effectiveness of IAFT in reducing first entry into psychiatric residential treatment compared to usual care. We linked IAFT program data to Medicaid claims data in order to develop a quasi-experimental study design to compare outcomes for two groups (N = 1655): (a) youth referred to IAFT who received services and (b) youth referred to IAFT who did not receive IAFT services (i.e., usual care). Propensity score analysis was used to balance treatment and comparison groups on pre-referral indicators. Cox regression analysis was used to examine group differences. Findings supported a significant reduction in risk for entry to psychiatric residential treatment favoring IAFT (hazard ratio 0.72; 95% CI 0.55, 0.93). Results of this study support IAFT’s efficacy as an intensive therapeutic foster care model for delivering mental health services and viability as an alternative to residential care.