Will States Use ‘Rescue Plan’ Funding To Give Direct Care Workers A Raise?

Direct care workers (DCWs) such as home health aides, personal care aides, and certified nurse assistants are a core component of Medicaid home and community-based service (HCBS) delivery. For years, scholars and policy makers have decried the low pay DCWs receive and called for better compensation for these essential workers. Predominantly women, people of color, and immigrants, DCWs make an average of $12.27 per hour, resulting in one in six workers living in poverty and nearly half living in low-income households. The American Rescue Plan Act (ARPA), signed into law by President Joe Biden in March 2021, offers some hope by including historic investments designed to shore up Medicaid HCBS and stabilize its workforce.

The key question now is how states will respond to this opportunity. Various approaches are available to stabilize the direct care workforce, and there is some question about which strategies will effectively result in increased compensation for workers. We reviewed 38 initial state plans submitted to the Centers for Medicare and Medicaid Services (CMS) and, not surprisingly, found significant variation, both in terms of the mechanisms for supporting DCW compensation and the degree of financial support provided. We argue that both of these considerations are critical to ensuring that the ARPA funds actually benefit workers. We also touch upon two developments that may significantly impact DCW compensation in the near future.

A major driver of ARPA’s investments is the growing demand for DCWs. Experts project 7.4 million job openings in this workforce by the end of the decade. Most states struggled with DCW shortages prior to the COVID-19 pandemic, and a recent national Henry J. Kaiser Family Foundation survey of Medicaid HCBS informants suggests that the pandemic has made the situation even more severe. Worsening shortages of DCWs are expected to grow, in part because workers can find better pay in other industries, such as retail and dining. Enhanced compensation is recognized as necessary to stabilize the direct care workforce. DCWs say that increased compensation is the single most important factor that could improve their jobs. Provision of health care benefits has also been positively associated with DCW retention.

While 35 states have used Medicaid policy actions to increase payment rates for HCBS during the pandemic, provider rate increases do not necessarily get passed on to DCWs as an increase in pay or benefits. ARPA funding presents both an opportunity to target DCW compensation, while providing the funding to back it. Section 9817 of the ARPA temporarily increases the federal matching assistance percentage (FMAP) in Medicaid by 10 percentage points for eligible HCBS provided between April 1, 2021, and March 31, 2022. The funds must be used to “enhance, expand, or strengthen” HCBS programs and must “supplement, not supplant” state spending on HCBS. States were required to submit initial spending plans to CMS by July 12, 2021.

Direct Care Worker Compensation Provisions In ARPA Plans

States’ proposed spending plans provide an early glimpse into how states will prioritize DCW compensation in the context of overall HCBS enhancements made possible by ARPA. Our review of 38 states’ initial spending plans assessed how states are planning to use these newly available funds to improve compensation (wages, bonuses, and benefits) for DCWs. Overall, there is substantial variation in the breadth, depth, and content of submitted plans. Nonetheless, compensation of DCWs is a prominent theme across all of the states’ spending plans.

Compensation of DCWs was typically addressed in state plans in the context of “workforce stabilization.” Combined, the 24 states that provided a line item for all proposed workforce stabilization initiatives in their ARPA plans allocated about 38 percent of their total budgets ($6.29 billion out of $16.76 billion) to this topic. This amounts to about two out of every five dollars proposed for all workforce stabilization efforts, of which increased compensation is just one of many. Therefore, the actual proportion of ARPA funds that will end up in workers’ pockets represents a narrow slice of the workforce stabilization pie. One notable exception to this observation is Idaho, which plans to spend the entirety of its increased FMAP appropriations on pay increases or bonuses for DCWs.

While wage increases for DCWs are mentioned as a possible mechanism for stabilizing the workforce in multiple state plans, New Jersey is the only state that quantifies a proposed new hourly rate in its plan ($23 per hour). Earlier this year, the New Jersey legislature had already passed a budget that included an HCBS-worker rate-setting provision. Similar initiatives were part of budget-making processes in states such as Colorado and Michigan, which may explain why many state plans do not specify exactly how much DCW wages will increase post-ARPA.

Twenty-five states proposed bonuses to bolster DCW recruitment and retention. These are most often included in plans as one-time payments in the form of sign-on or retention bonuses, with DCWs being eligible for the latter after continuous service for a predetermined timespan. Some states such as Colorado have also proposed “hero pay” to DCWs working throughout the COVID-19 pandemic in their plans. Similar to provisions on wage increases, bonus amounts are often not specified in states’ ARPA plans. Only Maine (between $1,000 and $1,500), Illinois (between $500 and $1,000), and California and Nevada ($500 each) clearly note dollar amounts of bonuses. In three states (Arizona, Florida, and Vermont), home care agencies that employ DCWs will have full discretion over the bonus amounts and timing.

None of the spending plans included the provision of employment benefits (for example, paid sick leave, health insurance, and so forth) in their spending plans, although Arizona and Texas suggested them as a workforce stabilization spending option for DCW employers to consider.

Some states plan to use alternative strategies to get and keep money in DCWs’ pockets. For example, three proposals include innovative opportunities to support DCWs financially while addressing their social needs. California’s plan includes financial incentives for workers who complete specialized training to care for clients with complex medical and social needs. New York plans to offer transportation grants to provider agencies to help workers commute to their clients, which could offset transportation costs previously borne by the workers, a well-documented industry barrier. Colorado is proposing to use ARPA funds to research strategies that address the social factors that most impact low-income workers’ ability to work and thrive, such as child care, housing, and education, thus acknowledging needed financial support for DCWs that extends beyond wage-related compensation (that is, the benefit cliff). In addition, many states including Minnesota, Kentucky, and Arizona plan on using ARPA investments to perform rate studies to shed light on how HCBS provider service rates and worker wages can be reformed. Findings from these studies could theoretically be used to justify increased worker wages.

Mechanisms Of Allocating Funds To Workers

Ultimately, in most states, the home care agency providers that employ DCWs will be responsible for ensuring that ARPA funds intended for increases in compensation end up in workers’ pockets. However, very few state plans have specific details on implementation benchmarks that would standardize spending across agencies and hold provider agencies accountable. Most state plans propose lump sum payments or service rate increases to providers. Proposed increases in provider rates are typically in the range of 3 percent to 5 percent in states such as Wisconsin, Vermont, and Missouri; exceptions include Minnesota (10.1 percent), Nevada (a one-time increase of 15.0 percent), and West Virginia (50.0 percent rate increase year one and 5.0 percent increase thereafter). Provider agencies can, in turn, allocate funds for workforce stabilization efforts, including compensation increases, thus giving them full discretion over how to pass funds on to workers (and how much they receive).

However, states such as North Carolina and Texas include explicit pass-through provisions in their spending plans stipulating the amount of funds that must be passed on directly to workers. In the case of the former, 80 percent of the rate increases agencies received must be passed onto workers as wage increases, while in Texas, 90 percent of the funds provider agencies receive must be directed toward one-time compensation payments to workers. Interestingly, the Texas plan prohibits the use of ARPA funds for wage increases to avoid a decrease in hourly wages once funds are exhausted.

Ensuring ARPA Investments Are Sustainable

One obvious concern with all of these strategies relates to compensation after ARPA funding expires. How will states ensure that DCW compensation does not return to pre-COVID-19 levels? Only a handful of state plans addressed plans for sustaining the compensation increases. North Carolina, for example, plans to sustain the wage increases beyond the FMAP period through legislative appropriations. Rhode Island plans to develop sustainability strategies for the temporary DCW compensation programs through the state’s budget process, particularly as full implementation of the state’s $15 minimum wage approaches in 2024.

As we mentioned above, there are two recent developments that may help states as they consider long-term solutions for sustaining better compensation for DCWs. First, although the provision of worker benefits is not currently prioritized in states’ spending plans, a proposed CMS rule would enable states to make payments to third parties for DCW employee benefits such as health insurance, training support, and loan forgiveness. Because many DCWs work on an hourly basis and may have a limited number of hours of work each week, many are considered part-time employees and not eligible for benefits. This status also meant they were left out of the emergency paid sick leave provided to many health care workers by the Families First Coronavirus Response Act. The proposed rule by CMS, which is undergoing a review of its public comments, would essentially allow DCWs to access all benefits that a typical full-time employee receives.

The next set of potentially positive developments includes the budget reconciliation negotiation process currently underway and the Better Jobs, Better Care act. The revised legislative text of the Build Back Better Act provides 6% increase in Medicaid Federal Medical Assistance Percentage (FMAP) to states if they agree to strengthen and expand direct care workforce. In a separate development, the Better Jobs, Better Care act, introduced both in the Senate and the House, will make permanent the HCBS FMAP increase under ARPA. This may allow several states to permanently increases DCW wages as proposed in their current plans, without additional administrative burden. If passed, either of these two developments would help avoid the fiscal cliff that otherwise awaits when the temporary, one-year increase after ARPA expires.

An Opportunity

States’ ARPA plans reflect widespread acknowledgement of the need to stabilize the direct care workforce and the important role compensation plays in doing so. However, vague details offered in most plans and the broad discretion states propose to give to employers in determining if, how, and how much money gets paid directly to workers raises questions about how these plans will be implemented and what real effects they will have on workers. Virtually no plan mentions how states will track and evaluate compensation patterns. Nor do they include measures of accountability for the agency providers who will be holding the purse strings.

CMS reporting requirements for ARPA-funded HCBS activities are somewhat unclear. States must submit quarterly reports of actual and anticipated expenditures and accompanying spending narratives, but CMS stops short of prescribing more detailed reporting criteria (a leniency reflected in the opacity and brevity of many states’ initial spending plans). While this approach provides states with needed flexibility and reduces administrative burdens, it doesn’t hold states or providers accountable for ensuring funds intended for DCWs are delivered or mandate the data collection necessary to rigorously assess outcomes.

To ensure that DCWs providing vital HCBS services are directly benefiting from ARPA investments, and to assess whether increased compensation, in turn, stabilizes the workforce, as well as identify and spread best practices in worker compensation strategies, CMS could provide explicit guidance to states on workforce stabilization evaluation and accountability criteria and provide technical assistance to aid them in doing so. The opportunities for learning from this unfolding natural experimental are exciting. For example, states may wish to assess and compare the effects of different types of bonus payment structures on stabilizing the direct care workforce or explore the return on investment for rate studies, in terms of ultimate contributions to the workforce.

Poor compensation is just one factor that contributes to low job quality and recruitment and retention challenges across the direct care sector. Education and training, supervision, and career advancement opportunities are recognized aspects in need of attention to achieve long-term stability within the direct care workforce. However, this goal is unlikely to be realized without compensation sufficient to achieve market competition and provide workers with a living wage and the benefits they need to ensure job security and a better quality of life.

ARPA funding has provided states with a golden opportunity to ensure that enhanced compensation is a baseline upon which to build a more sustainable direct care workforce. States will need to ensure that the funding does reach workers, that it is sustained, and that employers build on this opportunity to enhance job quality. Going forward, tracking the implementation of state plans to determine how proposals translate to real-world change for the DCW will be essential.