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 the programs 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 policies.
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 2020 was $12,377 for infants, compared to $9,715 for 4-year-olds.2 The cost of center-based infant care ranges from 27.8% to 69.2% of median income for single parents and from 7.3% to 16.7% 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 fund or 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. A recent report provided an analysis of state polices and practices in 13 states, each with more than 80% of Hispanic children in the state living in low-income communities. The report indicated that considerable variation exists among these states in terms of their child care subsidy policies and practices.11 About half of the states currently have policies and practices (e.g., documentation requirements for immigration status, requirements for minimum weekly work hours) that might impose additional burden for Hispanic families to access services.11 Recent research also 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.12
More research is needed to establish whether child care subsidies contribute to closing disparities in outcomes for parents and children by race and ethnicity, and the specific policy levers that states should adopt to effectively provide child care subsidies to families and ensure equitable access to child care.
HOW AND WHY DO CHILD CARE SUBSIDY POLICIES VARY ACROSS STATES?
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;
- Have families contribute a low share of the total cost of child care; and/or
- Set income eligibility thresholds near or above 85% of the state median income.
State Policy and Administrative Choices Affect the Implementation of Child Care Subsidy Programs
States demonstrate leadership in child care subsidy policy by making policy choices to improve families’ equitable access to child care through increasing income eligibility thresholds and 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. The policy progress and choices described below generally represent state policies as of early September 2022. However, state child care subsidy policies change at different times throughout the year and states may update subsidy policies between Roadmap data collection and publication.
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 2021.13
States Can Provide Child Care Subsidies to Families With Incomes up to 85% of the State Median Income, but Only Ten States Meet This Threshold
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 thresholds 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 income threshold. Expanding the income eligibility limit would allow more families to access care. However, without additional state or federal funding for the subsidy system, the expansion of access to families with higher levels of income may require states to reimburse providers at a lower rate.
States make changes to initial income eligibility thresholds throughout the year. States may update thresholds annually alongside changes to SMI or FPL thresholds (published each year in October and January, respectively), while other states update eligibility thresholds at other times of the year. Data reported below represent policies as of February 2021, except where known increases were made, in these cases, more recent data were used.
All but 10 states set their income eligibility limits below 85% of SMI. Two states (Arkansas and Maine) set their income eligibility limit at 85% of the state median income, and eight states set it above, including New Mexico with the highest income eligibility limit, set at 140% of SMI. In the remaining 41 states, fewer families are eligible for subsidies than federal law permits. Ten of those 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: Fourteen 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 at or 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 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 and benefits.
As of September 2022, 15 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 2020 or more recently. 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, which represent what families are willing to pay. As of September 2022, the District of Columbia and New Mexico are using cost models to set their reimbursement rates. Virginia’s cost estimation model has recently been approved and the state began using that model to set their reimbursement rates in fall 2022.
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 for infants and toddlers in either center-based or family child care that fully cover the cost of base-quality care (as estimated by the Center for American Progress), including Michigan, Oregon, Virginia, Washington, and Wisconsin.
The figure below illustrates the difference between the market rate price and estimated true cost of care across states.
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. 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-six states require either all licensed providers or those serving children with subsidies to participate in QRIS. In a small number of states, providers are required to achieve a minimum rating level that is 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 38 states, providers receive a higher reimbursement rate if they have a higher quality rating. Between 2019 and 2021, several states (Alabama, Florida, Georgia, Kentucky, Ohio, and Texas) have moved toward mandatory participation for all providers or providers who serve children with subsidies.
States Can Reduce the Copayment Amount That Families Are Expected to Contribute to Providers and Prohibit Providers From Charging Families Additional Fees for Child Care
The cost burden placed on families with child care subsidies also varies considerably across states. 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.14 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% for a family of three with an income at 150% of the FPL in eight states (California, Louisiana, Michigan, New Jersey, New Mexico, South Dakota, Utah, and Vermont) to 14% for a similar family in Montana. Over half of states charge families copayments equal to 5% or less of the family’s income (at 150% of the FPL).
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 to non-subsidized families. Families’ total share of the cost of care includes these fees in addition to copayment contributions.
California, Louisiana, Maryland, Michigan, New Jersey, New Mexico, New York Oregon, South Dakota, Utah, and Vermont 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 the 11 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.
The Total Cost of Child Care is Distributed Differently Across States Because of Variation in States’ Policy Choices
In the figure below, the total cost of child care is based on the cost associated with the equal access target (or 75th percentile), and it 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 (i.e., a fee) if the state allows it, and any unreimbursed cost to providers if the state does not allow the provider to collect a fee.
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, the 75th percentile of the market rate survey varies substantially, from a low of $607 per month for an infant in center-based care in Mississippi to a high of $2,362 in Washington, or nearly four times the price. In seven states (Alabama, Arkansas, Kansas, Mississippi, Oklahoma, West Virginia, and Wyoming), the 75th percentile amounts to approximately $800 per month or less for an infant in center-based care, whereas the price is more than $1,600 in 12 states.
In ten states (California, Louisiana, Maryland, Michigan, New Jersey, New Mexico, Oregon, South Dakota, Utah, and Vermont), 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 leading to large out of pocket child care expenses (e.g., Georgia, Montana, Nevada, and North Carolina) or high unreimbursed costs for providers (e.g., Colorado, District of Columbia, and Ohio).
The Percentage of the Total Cost of Care that Families Must Pay Also 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 wide variation across states in the proportion of the total cost of care for which a family is responsible. In the figure below, the total cost of care is assumed to be the value of the equal access target in a state (the 75th percentile of the MRS). A family’s total out-of-pocket child care expenses include both a required copayment and any additional fees to cover the difference between the base reimbursement rate and the price of care at the 75th percentile; together, these equal the family’s total cost of care.
In several states, a family’s contribution to the total price of child care is nominal: for example, in eight states, families with incomes at 150% of the FPL are not responsible for any of the total cost. And in Oregon and Maryland, families with incomes at 150% of the FPL are responsible for less than 1% of the total cost. However, families are responsible for more than one-third of the price of care in eight states (Delaware, New Hampshire, Alaska, Missouri, Montana, North Carolina, Nevada, and Georgia). In Georgia, families must pay more than half of the price of child care, which makes care unaffordable for many families.
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 make child care more affordable for families. California extended a prohibition on the collection of family fees through the 2022-2023 fiscal year and authorized reimbursements to providers to cover those costs. Maryland also enacted legislation to lower the cost of child care for families by eliminating copayments for those that are eligible for other federal support programs (SNAP, WIC, etc.). New Mexico also continued to make significant changes to its child care subsidy program this year, eliminating child care copayments for all eligible families for one year, after expanding income eligibility in August 2021 to 350% of the FPL.
In addition, several states proposed bills to pay reimbursement rates based on enrollment rather than attendance, which could have the effect of increasing reimbursement to providers.
Several states—35 in total—worked to support providers and families by increasing reimbursement rates this year. Louisiana led those efforts by nearly doubling their reimbursement rates and reducing the overall family share of child care costs. Michigan also significantly increased their reimbursement rates and decreased the amount charged to families in the state. Reducing costs to families was a priority for states this year as well, with 37 states ultimately decreasing families’ out-of-pocket child care costs by decreasing copays and/or increasing reimbursement rates. In eight states, families with incomes at 150% of the federal poverty level have no out-of-pocket costs.