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www.prenatal5fiscal.org 5 Comparing approaches to child care subsidy rate seAng Since the 2014 reauthorizaDon of CCDF, states have opDons for how they set rates. Federal guidance requires states to develop and conduct a “staDsDcally valid and reliable survey of the market rates for child care services or an alternaDve methodology.”xii This secDon of the report details these opDons and discusses the implicaDons of each approach.

Market Rate Study The market rate study approach relies on collecting market prices for child care through a market rate survey.xiii Data from this survey are then used to set maximum reimbursement rates for subsidized child care with variations for the age of care, provider type, geographic location, and other variables that are identified through the market survey.xiv A statistically valid and reliable market rate survey can provide insight into the current prices families are paying in the private child care market. When states set reimbursement rates at the federally recommended 75th percentile of this rate, they can provide “equal access for eligible children…comparable to child care services provided to children whose parents are not eligible for CCDF.”xv In essence, this means that subsidy payment rates should provide eligible families equal access to a majority of the child care options in their community. To fully represent the child care market, states must ensure a high response rate from providers, or develop an automated process for collecting tuition data, ensuring that data from all parts of the child care market are represented in the analysis. In addition to the market rate study, states must also complete a narrow cost analysis which estimates the cost to implement the required health safety, quality, and staffing requirements under CCDF regulations and the cost of meeting higher-quality standards as defined by the state.xvi States have flexibility on how they respond to this requirement and a review of the most recent CCDF state plans found states either developed a child care cost estimation model, used an existing cost calculator, such as the federal Provider Cost of Quality Calculator, or they conducted a limited cost study.xvii States can use the results from a narrow cost analysis to compare current subsidy rates, or reported market rates, to the estimated cost of care, and how this varies by provider type, child are, and location.xviii States are able to use the results of their narrow cost analysis to inform rate setting, but they have the discretion to determine how much weight to give to the results, based on the rigor with which the narrow cost analysis was completed. There are two primary drawbacks of the market survey-based approach to subsidy rate setting. First, many states do not set rates at the 75th percentile of the most recent market rate survey and therefore families relying on subsidy find that their voucher does not have the value to purchase the care that they need.xix In Vermont, only programs at the highest level of STARS were reimbursed at the 75th percentile until the February 2022 increases required by Act 45. With the move to higher rates the state now pays at the 90th percentile of the market rate.xx Most child care providers are small independent businesses, operating on tight margins, and therefore must maximize revenue wherever possible. If private pay families can pay more than the subsidy voucher will cover, providers will limit the number of subsidy-eligible families they are willing to serve. Second, the market rate reflects the prices that providers charge families, which in turn reflects what families can afford. Programs must set tuition at a level that families in their community can afford, rather than what the service costs. In a functioning market where parents can afford the true cost of care, setting rates based on price would allow subsidy-eligible families equal access to child care as those able to pay tuition. Unfortunately, this is not how the child care market works. Instead, the market rate reflects the prices that providers charge families, which are based on what families in that community can afford. While families are struggling to afford child care tuition, these