The demand for subsidized child care slots varies considerably across communities. In many states, however, the supply of such slots is severely limited. Many families who qualify for subsidies are unable to use them because of shortages in supply.
To address the child care crisis, states must increase child care subsidy slots. One set of potential remedies for the shortage are state policies around provider reimbursement rates and fair compensation for educators. Offering competitive wages is critical to building the fully staffed workforce necessary for boosting child care supply.
In the first post of this four-part series, we described the failed child care market in the United States. We also showed how to think about this crisis through the economic lens of supply and demand. Today, we focus on policy choices to improve the supply of child care subsidy slots for families with young children.
Temporary Funding and Insufficient Reimbursement Rates
Subsidies are designed to help families with low incomes afford high-quality child care services, ensuring that their children are safe, nurtured, and stimulated while their parents work or attend school.
States vary significantly in how much they reimburse child care programs for subsidized care. Most states determine program reimbursement rates using market rate surveys (MRS). A MRS provides a detailed analysis of the fees that child care programs charge. But in many states, these surveys are analyzing a failed market with artificially low prices that enshrine low wages for most educators.
The federal Child Care and Development Fund—the main source of funding for child care subsidy programs—recommends that states set reimbursement rates at a high enough level to ensure that subsidy-eligible children have “equal access” to child care services compared to non-eligible children. This is called the equal access benchmark.
To allow for this degree of access, federal guidance says that states should reimburse programs at or greater than the 75th percentile of the market. Imagine a state with exactly 100 child care programs. Now, order those programs on a list from lowest to highest price. To meet the equal access benchmark, the state must set child care subsidy reimbursement rates at (or higher than) the price of the 75th highest program on the list. That price reflects the 75thpercentile.
In recent years, several states have moved closer to the equal access benchmark. Between October 2021 and September 2022, at least 35 states increased their reimbursement rates. As of September 2022, 15 states’ reimbursement rates met or exceeded the 75th percentile of a recent MRS—representing an increase of 9 states since July 2021. On October 12, we will release our updated roadmap, which will include information on which states have met this benchmark over the last year.
Although this progress is commendable, many states achieved these new payment rates by investing federal relief funding through the American Rescue Plan Act. This funding will expire in September 2024. Unless states significantly increase their investments, this funding cliff could lead to even more market instability.
Setting reimbursement rates at the equal access benchmark can increase the number of child care programs participating in the subsidy system—increasing child care supply for low-income families. Critically, however, rates set at the equal access benchmark are still based on information from a broken market. In other words, reimbursement rates based on MRSs reflect what parents in a region can afford to pay, rather than the actual cost of providing child care.
When the actual cost of providing high-quality care is significantly higher than the amount that child care programs are paid, the supply of child care may decline. If revenue is insufficient to cover costs, child care programs may close, opt out of accepting subsidies, or lower the quality of the care they provide. Setting reimbursement rates at the true cost of quality care is one strategy states can use to raise the supply of high-quality child care for families.
Reimbursing for What Care Costs and Paying What Educators Deserve
Market rate surveys provide information on what families pay for child care. But, as we discussed above, the market price often does not fully represent the true cost of providing quality care. The true cost would cover the maintenance of safe and supportive environments, the materials needed to provide nurturing and responsive care, and—most critically—living wages and benefits for educators. Reimbursement rates that fall below the true cost of quality care keep program margins thin and educator wages low because many of the costs of running a child care program (e.g., rent, insurance, food) are fixed, and programs cannot pay less if revenue falls short.
In response to the disconnect between the market price and the true cost, some states have explored the option of setting reimbursement rates using a cost estimation model, rather than an MRS. Currently, the District of Columbia, New Mexico, and Virginia use cost models to determine subsidy reimbursement rates. States vary significantly in the implementation of cost estimation models. Still, this approach offers a path to setting reimbursement rates that account for the costs that programs incur as they provide quality care, rather than the artificially low price that the market can bear.
Improved reimbursement rates are not the only solution for providing a living wage to educators. For example, generous wage supplementation programs, such as those in New Mexico, are another avenue.
As part of our research for the state of Texas, we convened a workgroup of 27 child care experts. These experts recommended a long-term strategy of reimbursing subsidized programs at the true cost of quality care, in addition to a short-term strategy of wage supplementation.
Currently, the average reimbursement rate for infant care across Texas is merely half of the true cost of care. For more information on how to model these costs, as well as how three states are leading the nation in support for early childhood educators, read Workgroup Recommendations to Inform the 2022 Child Care Workforce Strategic Plan.
Boosting Supply to Transform the Subsidy System
Supply-side policy levers, such as true cost of quality reimbursement and educator wage supplements, can do a lot. While increasing the supply of subsidized child care, these levers can also support educators, stabilize program revenues, and raise the quality of care. Importantly, when we pay child care programs what it actually costs to provide quality care, they can invest in quality for everyone.
True cost of quality reimbursement rates, however, cannot solve the whole problem. If subsidized child care continues to make up only a small portion of the child care market, child care programs will continue to collect the artificially low market rate for their remaining slots. In our next post of this blog series, we show how states can pull demand levers to bring more families into the subsidy system and why this strategy is an important complement to policies that impact subsidy supply.
Curious about how child care subsidy policies have changed in the past year? In the 2023 National Prenatal-to-3 Research to Policy Summit, we will give you a comprehensive update on state-level action throughout the country—as well as clues into what to expect next year. Sign up today for this free, virtual event.
