CCDF subsidy payment rates must be set in accordance with the results of the most recent market rate survey or ACF pre-approved alternative methodology. Payment rates may not vary based on family eligibility status, such as Temporary Assistance for Needy Families status. However, Lead Agencies may choose to differentiate provider payment rates based on factors such as

• geographical area,
• age or needs of the child, and
• nontraditional hours of care.

The law requires states to reevaluate their existing payment rates at least every 3 years to determine whether they continue to provide equal access based on present market conditions, which may change over time as a result of shifts in local markets or inflation. Rates should also be examined and updated as states deem appropriate to keep pace with inflation. In the CCDF Plan, states will be asked to provide the date of their most recent market rate survey or ACF pre-approved alternative methodology.

Base provider payment rates should be sufficient to enable providers to meet health, safety, quality, and staffing requirements. [1]

Lead Agencies can choose to establish tiered rates, differential rates, or add-ons on top of their base rates as a way to increase payment rates for targeted needs (for example a higher rate for children with special needs as both an incentive for providers to serve children with special needs and as a way to cover the higher costs to the provider to provide care for children with special needs). Lead agencies may pay providers more than their private pay rates as an incentive or to cover costs for higher quality care.

Lead Agencies may also give higher rates as a way to improve quality or increase the supply of certain types of care. Linking enhanced subsidy rates to higher quality is an important component of promoting quality, particularly when implemented in conjunction with other ongoing financial supports, assistance, and incentives.

The law requires states to take into consideration the cost of providing higher-quality care than was provided before the CCDGB Act of 2014 when setting payment rates. Under the final rule, states may define higher-quality care using a quality rating and improvement system or other system of quality indicators.

Lead Agencies must consider how payment rates compare to the estimated cost of care at each level of higher quality. States may take different approaches to setting rates for higher-quality care, including the following:

• Increasing base payment rates
• Using pay differentials or higher rates for higher quality care
• Issuing direct grants or contracts that pay higher rates for child care services that meet higher quality standards

Besides tiered payment, other approaches could include the following:

• Setting rates after considering the cost of providing quality care by using a cost estimation model or other method, including any increased costs and provider fees because of COVID-19, and how such costs may be modified after the pandemic subsides
• Tracking the participation rate of high-quality providers in the subsidy system (using, for example, indicators from a quality rating system to measure provider quality) and adjusting payment rates if necessary

[1] Child Care and Development Fund, 45 C.F.R. § 98.45(f)(2)(ii) (2016).