Moving Forward: Why It’s Time to Rethink How States Set Child Care Reimbursement Rates

COVID-19 has brought the fragility of the child care market to the national forefront, highlighting both the important role child care plays allowing parents to work and the instability of our country’s child care businesses. As governors sought to control community-spread of COVID-19, stay-at-home orders closed businesses for all but essential personnel. As a result, hundreds of thousands of child care programs closed as Main Street and Wall Street shuttered, schools closed, and parents’ demand for care declined.

Unlike our schools, which are publicly funded institutions, child care is a business, largely paid for by parent fees. At the same time, child care is a public good. This has never been more evident than in recent weeks, and out of sheer necessity, states had to move quickly to provide child care to children of essential personnel. States also raced to change long-held state subsidy payment policies related to supporting low-wage families and began paying for child care based on enrollment of a child in a program rather than attendance. To ensure programs were available after the pandemic, some even increased subsidy rates and provided staff bonuses. This shift in payment policies was the first recognition of the need for child care as a public good and to ensure the entire industry did not collapse. It was a temporary bridge to help stabilize the market.

As we look beyond the current COVID-19 crisis, we must re-examine how the public funding of child care is handled so that we can build back better.

In fiscal year 2020, Congress allocated about $8.7 billion to states through the Child Care and Development Fund to support child care access for low-wage families. This represents about one-fifth of the $48 billion in annual child care revenue and makes the government the single largest purchaser of child care, paying for the care of more than 1.3 million children each month. These payments are made through state-set subsidies that are distributed through certificates or vouchers. States set both family income eligibility as well as subsidy rates—or the value of the certificates. By law, states must promote parental choice across a range of settings including center-based care, home-based care, and faith-based programs, in a manner that supports equal access by ensuring subsidy payments are sufficient to ensure low-income families have access to comparable services provided to children whose parents are not eligible to receive child care assistance.

Federal regulations do not require states to pay specific payment rates. Instead, states are required to conduct a market rate survey at least every three years and use the results to set subsidy rates. Subject to approval, states also have an option to conduct an alternative methodology, such as cost modeling, however, only the District of Columbia has applied. To promote equal access, the Department of Health and Human Services recommends that rates be set at the 75th percentile of market rates meaning that parents have choices among 75% of child care providers within a community but does not require it.

One of the goals of the Child Care and Development Block Grant Act of 2014 is to increase the number and percentage of low-income children in high-quality child care. However, using a market rate survey to set subsidy rates undermines that goal, for the following reasons:

• Market rates reflect what parents can pay, not the cost of quality child care.
• High-quality child care costs more to deliver (for example, these costs include wages for trained staff who are paid decent wages with benefits such as health insurance).
• When the actual cost of quality care is passed on to the parents, they simply can’t afford it.

States use market rates to set their child care subsidy rates, which are almost always lower than the actual market rate, which impacts provider willingness to care for children on subsidy. Current market rates are used to set future subsidy rates. Because market rate surveys occur every three years, they do not accurately reflect cost of living and other increased costs of care. In some states, subsidies are not only lower than the current market but may lag several years behind. The result is that government subsidies actually undermine the provision of quality child care.

Currently, 33 states do not meet the equal access requirement under the CCDBG law. Some states are using outdated market rate surveys and some are well below the 75th percentile. For example, Minnesota child care center rates are below the 25th percentile of market rates. This approach is failing both parents and child care providers. It doesn’t work to promote parent choice when nearly two-thirds of states are in violation of the equal access requirement, nor does it work to support the provision of quality child care by providers when market rates do not reflect the actual cost of quality care.

The sudden near-collapse of the child care industry as a result of COVID-19 offers an opportunity to rethink how we set public subsidies for child care. Parent choice among quality programs can be achieved, but only to the extent that a quality supply of programs exists. Moving from a market rate survey approach to a cost modeling approach would base subsidies on the actual cost of providing quality child care. The District of Columbia, Alaska, and Arkansas are either using a cost model estimation approach or a hybrid that also factors in market costs. Maryland is in the planning stages of a hybrid model.

Cost modeling could be done in two ways: first, determine actual cost based on what is needed for each child (per child costs), or second, create a classroom construct where the funding is designed to cover the costs of operating a classroom, similar to how public schools operate. With a classroom construct, the public subsidy would be based on the cost to operate a classroom for specific age groups of children for a specified time—one year for example. This is also how most Head Start programs already operate. In this model, if program income was based on the costs to support the various age groups, there would be more incentive to provide the care demanded by the market. This is especially true for infant and toddler care where, under the current system, a program loses so much money that there is no reason to offer care to this age group. This in turn actually reduces parent choices within the market rather than support it.

To stabilize the child care market, incentivize quality, and truly offer parents a choice, it is time to rethink the manner in which public subsidies are structured. Whether contracts or certificates are used, funding needs to reflect the actual cost to provide a quality program. Providing public funding in this manner will enable programs to hire and retain a qualified workforce that is paid appropriately for the important work that they do, increase the number of low income children in high quality programs, and ensure that as parents return to work, a reliable supply of quality care will be available within their community.

Read BPC’s latest policy paper: The Limitations of Using Market Rates for Setting Child Care Subsidy Rates.