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www.prenatal5fiscal.org 9 day between the available revenue and expenses to run their child care home. The fluctuaYon can greatly affect income: Providers have reported annual net income that when factored out for working full Yme is equivalent to less than $10 per hour.xxxii This is reflected in the prices FCC providers charge which are typically much lower than in child care centers, but at the cost of a livable salary for the provider/owner.

To understand the true cost of delivering care in FCC sebngs, it is recommended that compensaYon (salary and associated mandatory and discreYonary benefits) for the provider/owner is built into the model, as well as for assistants or other staff they use to run their business. With this approach, the cost model more accurately captures the cost of operaYng an FCC, ensuring home-based providers are compensated in a way that allows them to operate as a core part of the early care and educaYon system.

Approaches to Integrate Rate and Cost Data There is potential for states to take a hybrid approach to rate setting, combining cost data and market data to inform subsidy rates. All states must conduct some form of cost analysis and consider the results when setting subsidy rates. This ‘narrow cost analysis’ can take many forms, and ACF provides flexibility in how much weight states put on the results when setting subsidy payment rates.xxxiii An analysis of the FY22-24 CCDF state plans by Prenatal to Five Fiscal Strategies found many states that use the market rate study approach to rate setting also used a cost model for their narrow cost analysis and made changes to rates based on the results of that model.xxxiv States can incorporate cost-related questions into their market rate survey to inform their narrow cost analysis, focusing on the primary cost drivers. Gathering data related to salaries, staffing patterns, and enrollment can provide inputs into a cost model that can highlight the largest gaps between market rates and the cost of care. This in turn can be used to inform how rates are set, such as paying a higher percentile of the market rate for certain populations. States using the market rate approach always have the option of setting rates higher than what the survey results demonstrate, and cost information supports this decision-making in rate setting.

Moving to a cost-of-care approach to rate setting, under the alternative methodology approval, does not mean a state cannot still gather data to understand the prices charged by providers in the private child care market. States that opt for an alternative methodology and develop a cost estimation model rather than conduct a market rate survey can also gather data on market prices. Alongside collecting data to inform the cost model, states can ask questions about current market prices, or analyze data submitted through state data systems, as Vermont currently does through its Bright Futures Information System (BFIS). With this market data, states can ensure that the results of their cost estimation model are at or above the current market rates so that providers are not being reimbursed at a level below market prices. If states build a cost model with robust compensation included it is unlikely that the results of the model would be below market rates, but if the model is using current salary data this could be possible, especially for older children groups.2 As states go through multiple cycles of rate setting using a cost model, periodically gathering market data can provide a useful data point to ensure that rates are continuing to meet or exceed the market. For example, the District of Columbia, which was the first jurisdiction to set rates based on cost in 2016, included a market rate analysis in its 2023 alternative methodology.xxxv

2 For example, New Mexico’s first cost model estimated the cost of care for school-age children in a center-based setting to be higher than the subsidy rates for providers at all but the highest levels of the QRIS.