The Business Case for Child Development and Care (CDC) Subsidy

Long-established evidence shows that early childhood education most positively impacts children living in lower-income households and neighborhoods (e.g., Head Start FACES Study). With recent changes to CDC subsidy rules, now is a better time than ever to invest in Michigan’s children. In this blog post, Jordan Blough-Orr and I will look at the business case and barriers related to providing child care services to CDC subsidy eligible families.

Background

If you ask folks about the child care subsidy in Michigan, you’re likely to get one of two reactions: 1) the person won’t know what you’re talking about; or 2) you’ll get an earful. If you spend time asking early childhood professionals about the program, you’re likely to hear the system is hard to use, doesn’t pay enough, requires too much paperwork, or that they don’t even bother. Ask families and you’ll hear it’s hard to find a child care that will accept just the subsidy payments to cover the cost of care. The State of Michigan is clear about the purpose and limits of subsidy: “Help with childcare is available to parents who meet eligibility requirements to receive assistance with the costs of accessing high quality child care.”

Long before the recent changes to CDC subsidy eligibility and reimbursements, Michigan’s families have struggled to make ends meet given the typical additional expenses of care not covered by the subsidy. Perhaps over a decade ago one could have said there was significant utilization of the CDC subsidy program in Michigan (when there were about 50,000 unique providers accepting CDC subsidy) whereas there were only 6,158 providers accepting CDC subsidy as of 2018 (see Samuel Christensen’s 2019 House Fiscal Agency brief on the Child Development and Care Program). What does that say about access to quality in Michigan? It says there’s a huge divide.

Years of heightened restrictions and barriers to access resulted in the denial of funding to the providers and families that greatly needed it, especially during the Great Recession. Ultimately, these policies hurt Michigan’s child care providers and families through the return of millions of unused federal dollars allotted for Michigan’s children–a tragic denial of access with as few as 5% of eligible children receiving CDC subsidy funding (see 2022 Michigan Bridges exploration of the subject).

As described by Pat Sorenson at the Michigan League for Public Policy, Michigan’s restrictive policies blocked funding for Michigan’s providers and families (2017 MLPP blog: Michigan’s child care assistance program: Challenges and opportunities). The graph below depicts yearly expenditures and caseloads dropping in tandem over years of cost-cutting policies (Child Development and Care Program).

As noted in the 2016 report, “Building a Better Child Care System” (commissioned by the Child Development Care Program), “Michigan’s investment in the CDC program has declined since 2003, Michigan was a relatively high-spending state in FY 2003 with expenditures equal to about $1,556 per low income child in a working household–11th highest among the states and the District of Columbia and well above the national average of $933. By FY 2013, however, Michigan’s per-child spending dropped to $336, which was 11th lowest and significantly below the year’s national average of $679.”

Policy Update: Enrollment > Attendance

Before 2021, child care providers were paid based on attendance for CDC children; meaning, if a child did not show up for the day that provider could not bill for those hours. This meant that providers who accepted CDC payments could not create stable budgets because they had no control over whether or not children arrived at their programs each day. Ask almost any parent-paid program and you’ll find that parents pay whether or not the child comes.

Jordan here: at my daughter’s child care, we are allowed one week of half-cost vacation if we alert them far enough ahead of time. When her program was closed due to COVID for a week, and then again for another week, we were expected (and did) pay for care while she was at home with us.

Michigan Department of Education announced via memo on November 5, 2021 that “child care providers accepting the subsidy will bill the State based on enrollment and not attendance” (effective through September 30, 2023). This update profoundly benefits providers accepting subsidy because they can finally rely on income based on enrollment which helps guarantee revenue even if unrelated and uncontrollable circumstances impact attendance. However, as noted by the State announcement, this change is temporary, which means that this funding which makes it feasible for more providers to take on children who are funded by CDC subsidy will end in 2023. At that time, providers will be expected to go back to guessing what their revenue will be while scrambling to maintain cumbersome hourly attendance logs for every child.

We should expect increased utilization to follow recent efforts to simplify the reimbursement process since it requires less effort to be reimbursed and increases reimbursable time (not limited to attendance). In other words, this is a step towards maximizing our use of the federal money Michigan receives to support providers and families; however, the impact is only as permanent as the policy and so far this one sunsets in 2023.

Policy Update: Rate Increases

Michigan Department of Education, the department that oversees the child care subsidy program, announced on December 3, 2021 that “the state is raising provider subsidy rates” as of October 10, 2021. The rates are initially increased by 50% (October 10, 2021 – April 9, 2022) and gradually step down to an ongoing 30% increase. See Figure 2 below for the department’s breakdown of rate increases.

While only temporary, the extra 50%, 40%, and 30% in steps 1, 2, and 3 will massively benefit providers accepting CDC subsidy through April 8, 2023. Remember that ending these reimbursement increases will simply return the costs directly to the families, potentially sabotaging the most necessary investments in our children. Also, please note that step 4 (as shown in the Department of Education’s original figure above) does not include an increase as it suggest but rather a return to subsidy rates from before October 10, 2021. These conditions pose a recipe for short-term gains in CDC subsidy utilization rates but permanent policy is necessary to ensure stable investment across Michigan’s early childhood landscape.

Running the Numbers

While the post so far may seem to be calling into question why anyone would accept child care subsidy, that’s the opposite of our goal. Many providers do accept child care subsidy and some accept it and do not expect families to pay the difference. Soon we’ll dig into a group of subsidized providers that is almost always ignored, license-exempt subsidized providers. For now though, let’s actually run the numbers. Let’s take a look at what a child care provider’s income could look like accepting children whose care is funded by the child care subsidy and that subsidy alone (meaning a family who qualifies for the subsidy doesn’t pay additional tuition costs).

Would you believe me if I told you that a family home provider (licensed to serve 6 children) could gross $76,194 this year while not participating in Great Start to Quality (no tiered reimbursements; base rate only) by serving preschool children via CDC subsidy alone?

Figure 3 below is sourced from rate update materials published on the Department of Education’s website and it specifically details biweekly reimbursements under the first step of the reimbursements which covers the first 14 weeks of 2022. Comparable figures weren’t provided for steps 2, 3, and 4 but the rates can easily be calculated from the rates and step schedules shown in Figure 2. The family home provider described above truly could bring in a revenue of $76,194 serving 6 preschool children via CDC subsidy alone (this includes the step-down rates during steps 2 and 3), without even taking advantage of the significant tiered reimbursement available by participating in the State’s quality rating and improvement system.

As can be seen above in Figure 3, the difference between the biweekly rates for a provider not participating in Great Start to Quality versus Star rated programs is highly significant. In our example, an unrated home provider serving a preschool child makes $522 whereas the top end of home providers (currently “5 Stars”) receive $783–a 50% bonus for very high quality. A more attainable goal is a “3 Star” rating which still receives $657–a 25.86% bonus for high quality. In a future post, we’ll dig into what these quality ratings mean, and don’t mean. Also, it is important to note that this rating system is changing, limited information is currently available about how this will change reimbursement rates for homes and centers.

Using our example family home provider, our initial $76,194 revenue estimate could quite easily grow to $95,899 with a published 3 Star rating. As a home business, the actual business overhead is far smaller than your typical brick and mortar business. In our example, setting aside $35,303 of 2022 revenue as expenses leaves a take home income of $57,144–precisely the median household income from 2019 (per the US Census). So we’re looking at a well-paying job with enough revenue to cover benefits.

The Next Question

How will the market respond? The switch to a block reimbursement by enrollment as opposed to attendance is a huge barrier reduction and should increase utilization. The economic benefit of rate increases is clearly very important, especially when combined with the existing tiered reimbursement system, and should incentivize child care business growth. But will it?

Figure 4 above is from the 2021 Market Rate Survey commissioned by Michigan’s Department of Education and it details one of the big reasons to doubt a surge in child care providers accepting CDC: people have long dealt with a seriously cumbersome system while being paid fractions of minimum wage per child. Perceptions will not change overnight or without effort. As of now, there is no targeted recruitment by the State of Michigan to entice additional home-based or center child care providers to participate.

Moving Forward

The CDC subsidy program needs to overcome its image problem with marketing efforts targeting both families and providers to show how impactful the current changes actually are (including for unlicensed providers). Moreover, the program needs to acknowledge how these changes support more stable budgets for providers and more stable care arrangements for families. Furthermore, if we want to invest in early childhood educators and their pupils and we believe in the “cost of quality” then we need to make our investments permanent instead of another one-time stimulus that only temporarily stimulates a struggling sector of the economy. The repercussions of the Great Recession and an ongoing pandemic have yet to finish playing out: median family incomes have not risen much in the last decade (see historical median household income for Michigan at the Department of Numbers blog) yet consumer prices continue to rise at a rate that doubles every ten years (see a February 2022 Bureau of Labor Statistics release) and therefore have even less to spend on out of pocket child care. The economic argument for permanent expansion of CDC subsidy to ensure access for families is not going away.

The greater the number of providers and programs that accept the subsidy the more public support can be built for maintaining these stabilizing changes and transforming the child care landscape in Michigan. Every child deserves a high-quality, safe, comforting, warm child care provider, be it a parent, a family member, a neighbor, or a licensed home or center provider.

To further explore the business case of CDC subsidy in Michigan we are going to do a series of brief posts with accompanying interactive calculators to help Michigan’s small businesses gauge the impact of adding CDC clients for themselves. Our next post will expand on the home-based child care business model and present an interactive calculator to estimate revenue based on specifics of provider (e.g., QRIS tiered reimbursement level) and children served (e.g., age group and hours served).