A conversation with Prenatal to Five Fiscal Strategies.
The “cost estimation model” has been an option for states since the 2014 renewal of the federal child care law. It is a centerpiece of the Build Back Better plan. Only two states are using this as their alternative to market rate surveys currently, so, this is new terrain about the livelihoods of family child care providers.
Right now, only about 1 in 6 eligible children are served with a subsidy, and about 20% of subsidy-funded care is in family child care. In the Build Back Better legislation, Congress is proposing expanding eligibility for families with children 0-5 and ensuring those eligible families are served. So, this would mean a huge number of family child care providers coming into a public system maybe for the first time after Build Back Better passes, because families will need family child care. For those who have been enrolling families who pay with child care subsidy under the current federal law, the idea is that the systems are going to get a whole lot better.
One of our big questions from the field is: “how will I take care of myself and my family?”
On December 14, 2021, NAFCC State Representatives and the local and state family child care association leaders that make up NAFCC’s Policy Roundtable came together with Simon Workman and Jeanna Capito of Prenatal to Five Fiscal Strategies.
Our purpose is to learn together about the “cost estimation model” and think about the ways that it can benefit family child care providers.
NAFCC: Cost estimation model, what is it?
Jeanna: A cost estimation model is a way to understand cost in delivery of child care services. The model can account for the cost of different factors of running programs such as the age of the child, ratios, child care licensing standards and how higher levels of quality impact the costs of operating your program.
This is different from the current method of setting rates. Currently, it is based on the market rate study. The market rate approach is based on the tuition you charge which is collected from child care providers in a survey. The cost estimation model is focused on what it actually costs for you to deliver your services, not what you charge, and not based on what area families can afford.
Child care providers are an active part of the process. The cost estimation model considers your lived experience. The validity of the cost estimation model can only come from child care providers participating in the process of creating it. The market rate study simply sends out a survey and collects tuition rates from providers to determine an average of what the market is paying separately from the costs of providing care.
In order to create the cost estimation model, we build excel workbooks. These workbooks include: licensing regulations, quality regulations and state specific data to understand the expenses. These factors, as well as others, contribute to the total cost to deliver the services. To create the workbooks, we look across different variables related to running a program such as staff, quality-related activities and benefits.
It may sound like a budget, but it is not. The cost estimation model is not your program budget. It is a statement of factors in a state, or even a region, that reflect the actual cost of running a child care business. This is an important distinction. The cost estimation model is setting parameters which are based on data gathered from the provider. In other words, the model is the typical cost with additional considerations in mind.
It is critical that providers are part of the process. There is no bearing on the reality of the cost estimation model if child care providers are not involved. The most important asset is working with the child care providers.
NAFCC: Do any states do this now to figure out child care rates?
Jeanna: Under the current federal child care law, states have an option on a three year cycle to choose to use the market rate or an “alternate methodology” such as the cost estimation model. Washington D.C. was the first place to try the cost estimation model for providers across the city. They started to do it in 2015 and have continued to do it throughout the three year cycles. New Mexico started paying subsidy rates based on this approach in 2021 after going through the process of gathering data from providers to inform the state about the cost incurred by programs in providing child care services.
NAFCC: What is it like where it is happening, particularly for family child care providers?
Jeanna: D.C. is in the third cycle of setting rates with the cost estimation model. Throughout this process rates continue to change. D.C. saw how rates were higher than the market rate. The state uses the cost model to understand the actual cost of providing child care. The state learned that the types of service rates paid to providers don’t cover the cost. D.C. also found the gap between costs and rates using the cost estimation model. They talked about how to move the rates up. Acknowledging there’s a limited amount of funds from the federal government, they used local and state dollars to start to cover the full cost of care.
It is important to build modeling tools for both centers and family child care providers. The cost estimation model has to be different across the settings and account for their unique way of operating in order to compare the rates that are actually being paid to get closer to the actual cost of services.
This process of cost modeling is not a one time thing. You can build a model that reflects the current way of operating, which can help address a lot of the inequities in the current rate-setting, but then over time the model can be used to drive towards something different and better. Providers need to give input into the cost model to better reflect what is going on with their program and business costs and to inform what it ‘should’ cost, not just what it currently costs. In 2021, D.C. added a salary for family child care providers based on this iterative process. Family child care providers as small business owners typically just take home what is left at the end of the month or year. For the purposes of modeling, it was important to include an amount of money as a salary into the cost estimate in order to arrive at a rate that included sufficient funds for the family child care provider to make a living and have a stable, predictable income.
NAFCC: This feels more like partners. This is more than “please fill out a survey” and that’s the end of engagement.
Jeanna: Providers are creating and living the model.
NAFCC: This has been allowed as an alternative to market rate surveys for 7 years. Why don’t more states do this?
Jeanna: This is a fairly large system in every state. “Market rate” is how they set your subsidy and it has been that way for 20 or so years. Whole systems are set around the market rate. You may ask your state, why didn’t you do this to begin with? The state might say, the WHOLE SYSTEM has to change. The state is asking themselves questions like: do I have the capacity or knowledge to make this system change? In 2015, 15% of states indicated they would want to move toward the cost estimation model right away. The states knew they wanted to get there, but didn’t know how they would get it done. There wasn’t additional money provided to implement a new system. What would they have to give up in the child care system in order to pay for doing this a new way and then carrying it out? It was a safer leap for D.C. because they knew they had other dollars from the state/local government. They knew it was important to inform the rate setting based on what it actually costs to provide the child care service rather than rates based on tuition.
NAFCC: A big headline about the Build Back Better legislation is that parents will spend no more than 7% of their income on child care. That’s amazing relief for families, but for providers we need to make it make sense. One of the questions we have heard many times is: “they’re saying parents won’t pay more than 7% of their income on child care. But I set my rates?” Will you tell us about the cost estimation model process? We have questions like: who will decide, how will it be decided, how much we are paid? Is the rate set up by each state or at the federal level, like the CACFP? If the state is going to set my rate for operating costs, how will I take care of myself and my family? How will I make a profit?
Simon: Every state will have to develop this cost estimation model under the federal proposals in Build Back Better and they’ll be funded to do it. As it stands now, the plan includes capping family fees at 7%. The rate setting will be based on the actual cost of the services you provide, or the estimated cost of meeting quality standards, developed in a process that involves stakeholders – which are family child care providers. The state will reimburse providers up to this amount after deductions for family fees, based on the sliding fee scale.
There are strict requirements for developing the model that take into consideration different factors as we noted before such as quality, location, licensing regulations and more. The model has to be developed as part of the intentional stakeholder process (child care providers are the stakeholder). The state’s early childhood education advisory body has to be involved and you have to show how you involved stakeholders and incorporated their feedback to determine the data and assumptions in the cost estimation model.
Let’s think of the process of creating the cost estimation models by breaking it into four areas:
This involves everything from initial conversations to help child care providers understand the process, to conversations with policymakers to explain the modeling process, to convening a leadership team that guides the study. The leadership team can advise on a number of factors such as: these are the areas you need to look to and these are the providers that need to be interviewed to inform the model.
There is also usually a technical workgroup formed that helps provide context to the data that is received and helps develop the assumptions in the model based on that data. It is really important to have representation from family child care providers in this process. Be loud and not shy about what it actually costs to run your program or what it would take to operate at high quality, through NAFCC Accreditation or other initiatives or with an assistant if that is something you wanted. The model is only as good as the data that goes into it, so programs must ensure the reality of their business operations is reflected in the model.
It is imperative to conduct focus groups or interviews to actually talk about the costs with people. Surveys are a good tool to gather lots of data from lots of providers, but cannot be the only tool. When talking with providers you can probe for further information. We find that often providers are afraid to put out the big number that it takes to provide the services they do or could provide. We’ve been living in a scarcity mindset in this field for so long, but through the interview or focus group process we can really push to see what it would cost to meet licensing regulations and quality standards without doing so on a shoe-string budget. If Build Back Better is passed, there will be more money to come into the states and system. The state can say that this is the rate based upon the cost estimation model but it won’t be what you need if you don’t share what your true costs are.
- Develop the model
Once all the data has been collected, the model can be built. We take all the data, analyze the licensing and quality requirements and build a model that can reflect what a family child care service looks like with different variables for the specific state. This excel-based model can be used to understand the cost per child, or the cost per program, and captures different variables such as salary levels, whether the program pays benefits, etc.
- Determine the payment rate
Using the model, the state can run different scenarios in order to inform rate setting. For example, the model can be run for different regions of the state to estimate the cost per child based on different salaries and occupancy costs across the state. Scenarios can also be run that help support state policies, incentivizing care for certain populations. For example: family child care is usually set up as one classroom and so it is the same cost to serve a 2 year old and a 4 year old, unlike in a center-based program where these ages would have different ratios. If rates were aligned 100% with the cost model, there is a possibility that a provider would be discouraged from serving younger children because you get the same rate, but a more challenging age group. In New Mexico, they used the cost model to inform rates, but calculated a different rate based on age, in order to incentivize providers to serve younger children. They were able to use the model to look at the total revenue a provider can receive based on a mix of children and ensure that the rates were sufficient across the program, with variations by age.
So this shows why it is so important to have good data from stakeholders to inform the model. As envisioned by Build Back Better, the rate a provider gets will be based on this model, with the family paying a portion based on their income, and the government paying the rest.
NAFCC: How did the city of D.C. know to make a separate model for family child care, to acknowledge family child care? Did advocates work on this, did officials know this was the right thing to do? How do we ensure family child care is included?
Jeanna: The cost estimation model and process requires the Office of Child Care (at the U.S. Department of Health and Human Services) to approve the plan and the model, including looking for the plan being representative of the child care providers.
NAFCC: What we see happening when some of our states make choices is an ongoing feeling of family child care getting the leftovers after centers. How can we prevent this?
Jeanna: Current federal regulation around alternative methodology/cost estimation models is that the state has to explain how they understand the cost of care across different settings. It wouldn’t meet the letter of law if the state didn’t model for the difference in regulations and operations of centers and family child care. The federal government can say to the states: you are getting this money, but there are things you have to do for it.
NAFCC: Compensation is, of course, a large part of the question for family child care providers. How does cost estimation modeling account for paying higher compensation, and how can it be used to drive higher compensation for the field?
Jeanna: The first way is that the data collection and the model-creation includes compensation. The model will be built for the cost of operations – including paying yourself in family child care. It includes salaries and benefits and discretionary benefits, all the pieces of compensation. The model needs to show the current reality and cover the cost of care. We don’t want to stay at low wages for this field and we need to name a space in the model for paying yourself (the provider) in family child care and paying all the staff in the settings.
NAFCC: This is a big deal. “How will I take care of myself and my family?” If the “profit” they mean is how they do that, let’s reflect on these things together. What does it mean that compensation is in the model?
Simon: This is also about terminology. Salary in the FCC model: many family child care providers don’t pay themselves that way. We often see that they use whatever is left after parent payments or subsidy payments come in and expenses go out, as the payment to themselves. So let’s work with people to try and help them think through what needs to be built into the model is a number that reflects the salary. States only get this rate right if we see that you’re paying yourself. The model will generate revenue for you to live your life and pay yourself.
Stakeholder engagement becomes really important, knowing how many hours a family child care provider works each week can ensure that when we talk about salary parity, we are comparing apples with apples, and ensuring that an hourly rate is multiplied by the 60 hours a week or more that the family child care provider works.
Also, making a profit is not a bad thing and a 5% to 10% profit is healthy, on top of paying yourself a salary. It is your contribution to an operating reserve, ensuring you have money to fix your roof, add toys to the program, save for the future of your family. We build in this profit to the model to ensure that we are modeling for a sustainable system, not just one where providers are barely getting by.
NAFCC: Build Back Better is on everyone’s mind. Can you discuss what BBB requires around rate setting and how that might change things for family child care?
Simon: The Build Back Better legislation is constantly changing. I feel confident something will pass Congress and hopefully it is close to what we are seeing now. In the Birth to Five Child Care Entitlement section, states will have to start doing payment by cost estimation model within three years. States can move quicker, but by the fourth year they have to start using a cost estimation model. It is hugely beneficial and has a lot of potential, but it will depend on the model being built the right way in the states. Build Back Better also calls for shifting to a place where the majority of children are going to be subsidy-eligible. This is hugely important to make sure that families who don’t currently qualify for subsidy are able to access child care and that providers aren’t worrying about setting tuition levels based on what families can afford. The bill calls for eligibility to increase incrementally along with rates so that funding is available to support the system as it expands.
NAFCC: What can be done now?
Simon: States still have American Rescue Plan Act (ARPA) funds. States can lay groundwork for this. They can be developing cost models right now! State leaders can use the COVID relief child care funds to build the model upfront. Let’s make the case to do it now. Let’s get organized and get ready as we get closer to approval of Build Back Better. Providers and provider organizations can get prepared to be an active participant in the whole process.
The NAFCC team thanks Simon and Jeanna for their time and effort with us and for the field.