Using Cost Modeling to Design New Solutions for Child Care

COVID-19 intensified our nation’s child care crisis and destabilized an already fragile business model. Child care is a market-based system which operates on razor thin margins. Providers lack the capital to increase the supply or quality of care without increasing tuition for parents. Developing solutions to our nation’s child care crisis requires a better understanding of the true cost of providing care.

Cost modeling is a tool frequently used by the private industry that, depending on the methodology, can calculate the cost to run an entire child care system, an individual program, or determine the cost per-child.

Pre-pandemic, most government funding was used to provide child care subsidies to low-income families based on the average price of child care charged by providers in the state, which is determined through a market rate survey.

However, this strategy has fallen short for decades in its inability to address the fundamentally broken child care market. Simply put, when the cost to produce a good or product, in this case a child care slot, exceeds the price customers can pay for it, the market will fail.

To design effective government intervention, it’s important to know what factors and how they impact the child care business model and the market. Cost models can be the key to understanding these impacts, but much work remains. Cost modeling isn’t a silver bullet. This paper will outline opportunities to use cost modeling tools and preliminary considerations as cost modeling is implemented into strategic planning.

Recommendations

Given the urgent need for tools to rebuild and sustain the child care industry, BPC recommends the following:

1. Broaden federal requirements beyond market rate surveys: To support creative investment strategies that simultaneously address staff compensation and child care affordability, federal requirements should encourage states to use cost modeling tools to design interventions beyond tuition subsidy rates.
2. Support states to leverage cost modeling more effectively: Those working to convene state-level leaders should help integrate cost modeling with strategic planning to inform supply-side innovation.
3. Develop industry principles to use in cost modeling strategies: The field must be vigilant against a “one-size-fits-all” approach to applying cost models that are used simply to replace the use of a Market Rate Study. The growing group of cost modeling experts working in early education should coalesce around some standards to ensure appropriate guardrails are set when applying cost modeling tools to the child care sector.

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