CHILD CARE SUBSIDIES
WHAT ARE CHILD CARE SUBSIDIES AND WHY ARE THEY IMPORTANT?
Child care subsidy programs provide financial assistance to help make child care more affordable for low-income families with parents who are working or enrolled in education or training programs.1 Subsidy programs also aim to promote parental choice of care arrangements, support the supply and enrollment of children in high-quality care, and subsequently improve child development. Subsidy programs are financed through a combination of federal and state funds, but are administered by states. States have considerable flexibility in setting rules on program policies and administration (e.g., eligibility requirements, application procedures, family copayment levels, and provider policies), resulting in substantial state variation in subsidy policy.
Child Care Is Not Affordable for Many Families, Especially Families With Lower Incomes
Families with low incomes face barriers to accessing child care that is not only affordable, but also reliable and high quality, especially for the youngest children. The average annual cost of center-based care in 2019 was $11,504 for infants, compared to $9,039 for 4-year-olds.2 The cost of center-based infant care ranges from 28.1% to 86.9% of median income for single parents and from 7.4% to 17.5% of median income for married couples, depending on the state. Although home-based child care is typically less expensive than center-based care, cost figures remain high relative to income for families with infants and toddlers as well.3
Child Care Subsidies Can Help Parents Work and Get Children Into Child Care
By providing access to child care, subsidy programs may allow more parents to work or complete education and training programs and may support healthy child development when care settings are high quality and stimulate children’s early brain development.4,5,6
Increased Parent Employment and Access to High-Quality Child Care Should Result in Improved Long-Term Child Outcomes
Child care subsidies may impact children’s social-emotional and cognitive development through two main pathways: (1) indirectly, through higher family income from increased employment, which may reduce family stress, boost access to needed resources, and limit adverse childhood experiences; and (2) directly, through access to high-quality child care that may provide enriching and safe environments for children that support positive early development.7,8,9,10
WHAT IMPACT DO CHILD CARE SUBSIDIES HAVE?
Research on child care subsidies has focused almost entirely on subsidy receipt and higher state subsidy expenditures, which are linked to improvements in access to needed services (e.g., use of single, formal care arrangements), the ability of parents to work (e.g., higher maternal employment), and to increased earnings, promoting sufficient household resources. However, the current evidence base does not provide clear guidance to states on how to implement subsidy policies to ensure subsidies increase access to high-quality child care for families with low-incomes (e.g., setting an optimal subsidy reimbursement rate level, eligibility thresholds, or family copayment and fee levels).
More Research Is Needed to Determine the Potential of Child Care Subsidies to Reduce Disparities
No strong causal studies directly assess the effectiveness of child care subsidies at reducing disparities in outcomes for parents and children by race or ethnicity. However, equal access to child care subsidies remains a concern. Recent research reveals a significant gap between the percentage of Hispanic families in the US who are eligible for child care subsidies and the families who receive them; Hispanic children account for 35% of eligible children but just 20% of the population served with child care subsidies.11 More research is needed to establish whether child care subsidies contribute to closing disparities in outcomes for parents and children by race and ethnicity.
HOW CAN STATES EFFECTIVELY IMPLEMENT CHILD CARE SUBSIDIES?
In contrast to the evidence for the five state-level policies that are included in this Roadmap, the current evidence base does not identify a specific policy lever that states should adopt and fully implement to effectively provide child care subsidies to families and ensure equitable access to affordable, high-quality care. In the absence of an evidence-based state policy lever to ensure child care subsidies effectively provide families the support they need, we present several choices that states can make to more effectively implement their child care subsidy program. Additionally, we leverage available data to assess state variation across a range of factors to identify the leaders among states in implementing their child care subsidy programs, and to demonstrate what progress states are making relative to one another.
State Leaders in Child Care Subsidies:
- Set reimbursement rates at or above the 75th percentile of a recent market rate survey;
- Set high reimbursement rates that fully cover or come close to covering the estimated true cost of providing care;
- Use cost estimation models to set reimbursement rates;
- Require low family copayments and fees; and
- Have families contribute a low share of the total cost of child care.
Policy and Administrative Choices States Make Affect the Implementation of Their Child Care Subsidy Programs
States demonstrate leadership in child care subsidy policy by making policy choices to improve families’ access to child care through increasing reimbursement rates, reducing cost burdens on families, and covering a substantial portion of the true cost of providing child care. States have considerable flexibility in implementing child care subsidy policy and there is substantial variation on these indicators as a result.
States Can Provide Child Care Subsidies to Families With Incomes up to 85% of the State Median Income, but Only Four States Meet This Threshold
The federal government sets the income eligibility threshold to receive a child care subsidy at 85% of a state’s median income. States may set eligibility thresholds higher than the federal level, but only if they are using state funds to cover the cost of this part of their subsidy program. States have latitude to set their thresholds lower, however, and most do. Expanding the income eligibility limit would allow more families to access care. However, without additional state or federal funding for the subsidy system, this expansion of access may require states to reimburse providers at a lower rate.
States Can Set Their Reimbursement Rates for Providers to Levels That Create More Equitable Access and Cover the True Cost of Providing Care
The federal government considers state reimbursement rates at the 75th percentile or above (covering three-fourths of slots in the state based on a recent market rate survey) as providing low-income families with equal access to the child care market. Prices for child care that are based on the market rate survey provide information on what providers are currently charging families for care, but the market price may not fully represent the true cost of providing high-quality care, which would include paying child care workers appropriate wages. As of July 1, 2021, six states’ base reimbursement rates for infants and toddlers in center-based and family child care arrangements meet or exceed the federal equal access target of the 75th percentile of a market rate survey conducted in 2018 or more recently. Louisiana, Maine, Montana, South Dakota, and West Virginia all meet this benchmark based on a recent market rate survey, and are reimbursing at or above the 75th percentile on an ongoing basis. Hawaii meets this threshold only through their temporary enhanced COVID-19 reimbursement rates, which are effective through December 2021. However, many states’ base reimbursement rates cover only a portion of the rate needed to meet the federal equal access target.
States are also continuing to explore the option of requesting federal approval to use an alternative methodology for setting reimbursement rates, typically meaning the use of a cost estimation model, rather than a market rate survey. Using cost estimation models can be a pathway toward setting reimbursement rates that are more representative of the costs that providers may incur to provide high-quality care, rather than merely the price charged by providers. As of July 1, 2021, the District of Columbia and New Mexico are using cost models to set their reimbursement rates.
Comparing states’ base reimbursement rates to cost estimation models also provides insight into how well the rates that are based on the market rate survey cover the true cost of providing child care. Market prices may differ from the true cost of care if the rates providers charge within a state do not reflect the full costs of providing care to families. For example, providers may set rates based on families’ ability to pay or subsidize the care of infants and toddlers through higher prices charged for the care of preschoolers (e.g., due to higher caregiver-to-child ratios). Five states have base reimbursement rates that fully or nearly cover the cost of base-quality care (as estimated by the Center for American Progress), including Hawaii, Virginia, Washington, Illinois, and South Dakota.
States Can Link Child Care Subsidy Receipt to Participation in the State’s Quality Rating and Improvement System (QRIS)
States can use a variety of mechanisms to try to ensure their subsidy dollars are spent on higher quality child care. Some states require that all licensed providers participate in the state’s QRIS system, other states require that providers participate in the state’s QRIS system to receive state funding or serve children with subsidies. In a small number of states, providers are required to achieve a minimum rating level higher than base quality to participate in the subsidy program. Another mechanism, tiered reimbursement rates, are used by most states to incentivize programs to provide higher-quality care. Currently, in 37 states, providers will receive a higher reimbursement rate if they have a higher quality rating.
States Can Reduce the Copayment Amount That Families Are Expected to Contribute to Providers
The cost burden placed on families with child care subsidies also varies considerably across states. Reimbursement rates received by providers are made up by both a state portion and a family copayment. Ten states have low copayments (at less than 2.0% of family income) for families with incomes at 150% of the FPL: Arkansas, Louisiana, Massachusetts, New Jersey, New York, South Carolina, South Dakota, Tennessee, Utah, and Wyoming. Ten of the least generous states require copayments of nearly 10% or more of a low-income family’s income.
States Can Prohibit Providers From Charging Families Additional Fees for Child Care
Families may face additional cost burdens in some states, depending on whether the state allows additional fees to be charged by the provider to the family to cover the difference between the reimbursement rate providers receive and the price providers typically charge. Families’ total share of the cost of care includes these fees in addition to copayment contributions. The District of Columbia, Massachusetts, New York, South Dakota, Utah, and Washington all have low overall cost burdens on families as a result of low copayments and/or high reimbursement rates relative to the market rate price. In states that do not permit providers to charge families additional fees to cover the full market price of care, providers may be required to absorb some additional costs.
WHAT PROGRESS HAVE STATES MADE IN THE LAST YEAR TO MORE EFFECTIVELY IMPLEMENT CHILD CARE SUBSIDIES?
Although most of the funding for child care subsidies comes from federal sources, states have substantial latitude in how they implement their programs. Over the past year, states made many improvements to their child care systems by executive order and/or agency action, and several state legislatures passed legislation to increase reimbursement rates, cap family copayments, and more.
A number of states considered or enacted legislation to lower or cap family copayments. In Oregon, Rhode Island, and Washington, state legislators enacted bills that will cap family copayments at no more than 7.0% of family income. Vermont passed similar legislation that will ensure that families at or below 150% of the FPL do not pay copayments.
The recently enacted legislation in Washington will also increase reimbursement rates, implement an infant care rate incentive, and develop a cost model. The legislation Oregon lawmakers enacted this year includes the creation of a Department of Early Learning and Care that will be launched in January 2023, which will centralize many of the state’s early childhood policies and programs.
New Mexico is also a state that made significant changes this year pertaining to its child care subsidy program, implementing reimbursement rates based on its new cost model as of July 1, 2021, increasing initial eligibility from 200% of the FPL to 350% of the FPL, and enacting legislation that will allow voters to approve of further funding early childhood education programs in the state.
HOW DO CHILD CARE SUBSIDIES VARY ACROSS STATES?
State Contributions to Child Care Funding Vary, Leading to Variation in the Number of Families Served
States vary in how they maximize funding from the federal government. States can opt to provide the full amount to maximize matching funds and may contribute additional funding beyond the matching contribution level or required maintenance of effort funds. These policy choices result in variation across states in how many children are served among families who want to access child care subsidies. It is difficult to accurately estimate the percentage of eligible families served in each state, however, because of limitations of available national data. Waitlists are an imperfect proxy for whether states are serving all who are eligible; however, intake was frozen or waitlists were maintained in 13 states in 2020.12
Most States Set Income Eligibility Limits Below the Federal Maximum
The income eligibility threshold to receive a child care subsidy varies considerably across states. States set subsidy eligibility at a specific dollar amount of family income, relative to the family size and/or structure. Federal eligibility requirements restrict states from setting income eligibility for subsidies above 85% of the state median income (SMI), regardless of family size or structure, unless a state fully funds the program for families above this threshold. However, all but four states (Alaska, Arkansas, California, and Maine) set their income eligibility limits below this level, which means that fewer families are eligible for subsidies than federal law permits. Eighteen states set their income eligibility limits to only 50% or lower of the state median income.
The income eligibility limits set by states also can be understood as a percentage of the federal poverty level (FPL), which allows for comparisons across states. Eligibility varies quite a bit based on where a family lives: Six states provide child care subsidies to families with incomes at 250% of the FPL or higher, whereas seven states only provide child care subsidies to families with incomes below 150% of the FPL. Some states, however, set continuing program eligibility higher than initial income eligibility, which enables families to retain child care when their wages increase slightly.
States Vary in How Base Reimbursement Rates Compare to the Price and Cost of Care
The federal government considers state reimbursement rates at the 75th percentile or above (covering three-fourths of slots in the state based on a market rate survey no older than 2 years old) as providing low-income families with equal access to the child care market. However, reimbursement rates vary widely between states and the federal recommendations still may be inadequate in providing parents with access to high-quality child care. This is particularly salient if rates are based on prices charged rather than the cost to providers of offering high-quality child care or if parent copayments or fees are high in a state. Increasing families’ access to high-quality child care while simultaneously keeping the cost burden low for families has the greatest potential on impacting the wellbeing of families.
The figure below illustrates the difference between the market rate price and estimated true cost of care across states.
Some States Reimburse at Higher Levels for Higher Quality
States typically use quality rating and improvement systems (QRIS) as a means to systematically assess key standards of child care environments and to communicate the quality of care in settings to a variety of audiences. Twenty-two states require either all licensed providers or those serving children with subsidies to participate in QRIS. Some states require participation at a certain quality rating level.
States also vary in whether they reimburse for higher quality standards, with 37 states providing a higher reimbursement rate to providers that have a higher rating level in the state’s QRIS.
Parents’ Contributions as a Share of Family Income Vary by State
The base reimbursement rate does not represent the full value of the child care subsidy for parents, but rather the value of the subsidy for the child care provider. Families may be required to participate in cost-sharing for child care received through subsidies, typically through copayments.13 States can set copayment rates at a dollar value or as a percentage of the total cost of care based on various factors, including family size, family structure, and family income.
The copayment rates that states charge families range from 0% of a family of three with an income at 150% of the FPL in South Dakota and Utah, to over 20% in Oregon and Hawaii. Half of states charge families copayments equal to 5% or less of the family’s income (at 150% of the FPL).
States may also allow providers to charge parents the difference between the reimbursement rate (subsidy amount) and the rate the provider charges to families who do not have a subsidy, often referred to as a fee. Families pay these fees in addition to any copayment.
The Total Cost of Child Care is Distributed Differently Across States
The total cost of child care for subsidy recipient families includes the amount the state provides as a subsidy, the family’s required copayment contribution, the difference between the total cost of care and the subsidy amount paid for by the family if the state allows it, and any unreimbursed cost to providers.
The variation across states on each of these elements is substantial, leading to widely different resources to families depending on where they live. For example, in five states (California, Louisiana, New York, South Dakota, and Utah), the state pays providers a large share of the market rate price of care for an infant in a center-based setting and families with incomes at 150% of the FPL do not have a substantial share of the total cost. In contrast, payments to providers are low in other states leaving a high cost burden on families (e.g., Georgia, Kentucky, and Texas) or high unreimbursed costs for providers (e.g., Colorado and Ohio) relative to the market rate price.
The Percentage of the Total Cost of Care that Families Must Pay Varies Across States
Variation across states in copayments and additional fees, as well as the extent to which state reimbursement rates cover a large portion of the market price for child care, leads to huge variation across states in the proportion of the total cost of care for which a family is responsible.
In several states, a family’s contribution to the total price of child care is nominal: for example, in the District of Columbia and Massachusetts, families with incomes at 150% of the FPL are responsible for less than 3% of the total price, and families pay nothing in South Dakota. However, families are responsible for more than one-third of the price of care in 16 states, and in seven states (Delaware, Georgia, Hawaii, Kentucky, Missouri, Texas, and Vermont) families must pay nearly half or more of the price of child care, which makes care unaffordable for many families.