Why Boosting Subsidized Child Care and Preschool Provider Rates Is Important

California’s child care and development system provides care to roughly 290,000 children each month throughout the state. This care is critical to the safety of these children and to the economic security of working families as they earn their way into the middle class.

Yet, existing state policy may be hampering the effectiveness of California’s child care and development system. Currently, the state reimburses child care and preschool providers at rates that have failed to keep pace with the inflation. This policy has consequences for families as well as for child care and preschool providers. Inadequate provider payment rates limit families’ access to care. What’s more, it hinders child care and preschool providers from investing in quality improvements and retaining skilled caregivers and teachers. This blog post looks at the policy choices that underpin current child care and preschool provider reimbursement rates and why state policymakers must increase provider payment rates to support both families and child care and preschool providers.

How Are Providers Reimbursed?

Families access subsidized child care and preschool programs in one of two basic ways: via licensed child care and preschool providers that contract directly with the state or by using vouchers to select a child care provider of their choice. Providers that contract directly with the state are reimbursed at a level known as the Standard Reimbursement Rate (SRR). The SRR is a statewide rate that is adjusted for specific criteria such as the age of the child or the presence of physical disabilities. As part of the 2014-15 budget agreement, state policymakers increased the SRR by 5 percent — to $36.10 per child per day — the first rate increase these providers saw since 2007-08. Prior to this, since 1980-81, the first fiscal year the SRR was used, there have been other periods where providers did not see an annual increase in reimbursement rates. While the Governor’s 2015-16 proposed budget includes a modest increase in the SRR, the SRR would still be 19 percent lower than it was in 1980-81, after adjusting for inflation.

Data - Child Care and Development - Reimbursement Rate Issues - SRR Analysis, 1980 to Current; SRR Comp CHART

Meanwhile, families that use vouchers to select care from a child care provider of their choice have seen the value of these vouchers decline in recent years. Vouchers’ values are based on the Regional Market Rate (RMR) Survey, which provides “rate ceilings” for all 58 California counties by the type of care and the age of the child. Voucher-based care may be from (1) licensed providers offering care in a child care center or home or (2) license-exempt child care providers. These rate ceilings are the highest payment a provider can receive from the state, and they are typically set at the 85th percentile of an RMR Survey. This means that families would have access to 85 out of every 100 providers in their county, but only as long as policymakers adopted the most recent RMR Survey.

Prior to January 1 of this year, the state was using rate ceilings based off the RMR Survey from 2005. As part of the 2014-15 budget agreement, the rate ceilings were adjusted to reflect the 85th percentile of the 2009 RMR Survey — but with each of these rate ceilings reduced by 10 percent. Due both to the timing of the 2009 survey, which occurred during the Great Recession, and to this 10 percent reduction, the newly calculated rate ceilings in many cases are not higher than the 2005 rate ceilings, although none are lower. Many providers would get a much-needed boost in the rates they are paid if state policymakers updated rate ceilings to reflect the most current survey, which is from 2014. For example, licensed, center-based providers across the state offering full-time care to infants would see their monthly rate ceiling increase by an average of 26 percent, which is equal to around $300 per month. Because rate ceilings vary across counties, rate ceiling increases would range widely, from a $36-per-month increase in Alpine County to a $695-per-month increase in Napa County. The chart below illustrates the change in the monthly rate ceiling for a variety of counties across the state.

Data - Child Care and Development - Reimbursement Rate Issues - RMR Comparison, 2005-2014; 2009 v. 2014 LCC RMR CHART

Finally, many families access care from license-exempt providers — typically family and friends — due to having variable work schedules and/or needing to work nontraditional hours, such as during nights or weekends. However, license-exempt providers’ rate ceilings were cut dramatically during the Great Recession. In 2012, state policymakers reduced the license-exempt rate ceiling by one-third. Similar to licensed, voucher-based providers, many license-exempt providers also did not see a rate increase this fiscal year. The low reimbursement rates for license-exempt providers could limit the number of individuals willing or able to care for the children of their family and friends.

Reimbursement Rates Affect Families’ Access to Care

Child care and preschool providers’ willingness to offer state-subsidized care depends, in part, on reimbursement rates. When providers are not paid at a level that allows them to operate their businesses, attract and retain qualified staff, and afford materials and supplies, they have a reduced incentive to offer care to low-income families. This could limit the number of providers participating in the system, and, in turn, diminish families’ access to care. As the state begins to reinvest in the subsidized child care and development system, it is important that policymakers raise the SRR and use an updated RMR Survey to establish rate ceilings so as to encourage more providers to participate and to expand families’ access to child care and preschool that they may not have been able to afford without assistance.

For voucher-based care, in particular, state policymakers’ choice to base payment rates on an outdated RMR Survey means that families are able to access far fewer providers in their community. As mentioned earlier, the rate ceiling is meant to give families access to 85 out of every 100 providers in their county. In reality, because the state is currently using survey data that is six years old — with rates reduced by 10 percent — families have access to a smaller share of providers. For example, in Los Angeles County, the current rate ceiling for full-time, licensed, center-based care for an infant is $1,237 per month, which reaches only the 55th percentile of the 2014 RMR Survey. In San Francisco County, the rate ceiling for similar care ($1,591) reaches only the 60th percentile of the most recent survey. And in Fresno County, this rate ceiling ($1,082) reaches only the 65th percentile of the most current market rates. This small sample of selected provider rates shows that families may not be able to access as many providers in their community as intended.

Reimbursement Rates Affect the Quality of Care

The evidence is overwhelming: High-quality child care and preschool programs can help to mitigate the harmful effects of poverty and improve children’s life chances through stronger academic achievement and decreased behavioral issues. However, offering high-quality care requires providers to invest in educated and experienced staff, purchase materials that enrich and educate young children, and maintain low child-to-staff ratios, among other things. Without adequate reimbursement from the state, providers may not be able to offer high-quality care or they may simply opt out of the system.

In California, providers that contract with the state and voucher-based providers have different licensing requirements. Contract-based providers have to meet more stringent quality standards, in addition to meeting the health and safety standards that voucher-based providers are held to. Due to having to meet higher-quality standards, contract-based providers should be paid at a rate higher than that for voucher-based providers. However, in 47 counties — 4 out of every 5 — contract-based centers caring for preschool-age children are paid at a rate that is less than that for licensed, voucher-based providers. In addition, in nine counties, contract-based centers are paid at a rate for infant care that is less than that for licensed, voucher-based providers. This inequitable reimbursement policy likely discourages child care and preschool providers from offering state-subsidized care, potentially limiting the supply of high-quality care and families’ access to such care.

A Need to Reinvest in Children and Families

State policymakers dramatically reduced funding for California’s child care and development system during and after the Great Recession. Investments in recent years have resulted in modest gains, but policymakers have much further to go. Yet, the Governor’s 2015-16 proposed spending plan does not include any major reinvestments in the system, and, in fact, proposes funding that is still $1.1 billion below 2007-08 levels, after adjusting for inflation.

One crucial way that state policymakers can reinvest in the child care and development system is by updating provider reimbursement rates. This would include:

  • Updating voucher-based provider payment rates to reflect current market rates, as determined by the most recent RMR Survey;
  • Increasing the SRR so that it adequately reimburses child care and preschool providers for the quality of care they are required to offer; and
  • Ensuring that the SRR exceeds the RMR rate ceiling for a commensurate level of care in every county.

Boosting provider reimbursement rates would likely increase access to child care and preschool for families struggling to afford care in addition to other necessities such as rent and groceries. Boosting provider payment rates will also support providers offering state-subsidized care, allowing them to invest in high-quality resources and attract and retain skilled staff.

— Kristin Schumacher