Child Care Subsidy Rates and the Sustainability of the Child Care Market

• In Event: Supporting Access to Quality Child Care: Subsidy Policy, Providers, and Underserved Families

Abstract

Child care businesses operate on very thin margins, often sustained by low wages and unpaid labor. Child care subsidies are a critical revenue source, making state subsidy policy central to sustainability. Subsidy rate models based on the estimated cost of care rather than market prices can better align payments with actual costs and support financial viability. Because some providers pass gaps between subsidy rates and private prices on to families, subsidy levels shape how many child care options families can realistically access. This paper examines how subsidy rates, particularly those that fail to cover costs, affect child care market stability and access to care.

The purpose of this paper is to share recent work in North Carolina that sheds light on the adequacy of subsidy rates and the relationship between subsidy rates and provider business decisions.

This paper draws on a combination of two data sources:
1. Alternative rate cost models completed in 2024 to estimate the cost of child care. Alternative rate models were informed by statewide focus groups with child care providers, input from a state subsidy administrator advisory panel and national experts, and interviews with other states on subsidy policy design, resulting in two sets of cost estimation: the cost of care as currently provided and the cost of North Carolina’s five‑star license level.
2. Focus groups with child care providers in 2026. The North Carolina General Assembly is currently studying a proposed policy that would decouple providers’ star ratings under the state’s Quality Rating and Improvement System (QRIS) from subsidy reimbursement rates. Under the existing system, subsidy eligibility and reimbursement levels vary by star rating; a decoupled policy would standardize reimbursement rates and expand eligibility. We conducted provider focus groups to assess how potential reductions in reimbursement rates under this policy might influence provider behavior. To contextualize findings, we used GIS analysis to examine county‑level variation in subsidy participation and its relationship to the Child Opportunity Index.

Results from the cost modeling show that in some regions, current subsidy rates cover only a small share of the estimated cost of care, especially at the five-star level, making provider sustainability difficult and, in some cases, untenable—as reflected in the closure of 45 programs in the last quarter of 2025 (Gaskin, 2026). Provider focus groups suggest that reductions in subsidy rates would prompt providers to increase costs for families, reduce quality, or prioritize private‑pay families over subsidy‑paying families. Together, these findings highlight the implication that inadequate subsidy rates may destabilize the child care market and reduce access to high‑quality care for subsidy‑eligible families.

Ongoing funding constraints and uncertainty heighten risks to child care stability and family access. This paper documents gaps between subsidy rates and estimated costs and demonstrates how inadequate subsidy rates may affect provider operations and family access. As states revisit subsidy rate‑setting approaches, cost‑based methodologies offer a pathway to align payments with the cost of care and expand access to high‑quality child care.

Author

• Amanda E Danks, American Institutes for Research
  Presenting Author