Care funding: read the small print

11 Feb 13
James Lloyd

Today's announcements on care funding are a small step forward. But they offer less than first appears, and duck the issue of how much society should spend on long-term care

It has finally happened. After fully 18 months of reflection since the final report of the Dilnot Commission, the coalition government is today announcing how it wants to see funding for long-term care in England reformed.

The ‘capped cost’ model proposed by the Dilnot Commission in July 2011 had three key components: a standardised contribution to ‘living costs’ in residential care of £7-10,000 a year; an increase in the ‘Upper Capital Limit’ component of the means test applied to those in residential care; and, a ‘cap’ on the financial value of council support that individuals are excluded from owing to their wealth.

Today’s announcement will put numbers to each of these components: a £12,500 (£240 per week) ‘living cost’ contribution; a £123,000 Upper Capital Limit and a£75,000 ‘cap’, and proposes a start date for the new system in 2017. In truth, apart from the higher ‘cap’ of £75,000 – which would have been £61,000 in 2010 prices when the Dilnot Commission got to work – the figures involved are pretty much what was recommended by the Commission, but uprated for inflation.

To really explain what has been announced and what it means, it’s best to use a thumbnail case study of an average individual. So I’ve put together the following vignette for ‘Mrs Smith’ using today’s announcement and various figures (uprated for inflation) gleaned from government social surveys and the social care market research company Laing & Buisson’s recent annual report, which includes figures for the average amount paid by councils for residential care.

Inevitably, this all makes for a rather long blog post, but it’s the only way to really get under the skin of today’s announcement.

Mrs Smith moves into residential care at the age of 89 in April 2017, becoming the very first person to be ‘metered’ under the new system. She has assets totalling £250,000 (including the value of her home, which is subsequently sold) and a total income – including disability benefits - of £250 per week.

She pays £652 per week for her place in a fairly standard care home, using all of her income on her care fees, and therefore spending down her assets at a rate of £402 per week to cover the difference.

Now, her local authority’s ‘usual cost’ benchmark rate for residential care is £540 per week. This is the most her local authority will pay for a place in residential care. So, Mrs Smith’s ‘meter’ only increases by this amount minus her notional £240 per week ‘living cost’ contribution, i.e. by £300 per week. In other words, £300 is the weekly progress she makes toward the £75,000 ‘cap’.

The months tick by. After 167 weeks, it’s June 2020 and so Mrs Smith, aged 92, votes in the general election.

After 250 weeks in residential care, by around February 2022, Mrs Smith’s ‘meter’ finally reaches the £75,000 ‘cap’. However, at this point, she has spent around £163,000 in care fees, and has spent down her capital by around £100,500.

From this point, she receives £300 per week from the local authority. However, this still leaves her with a shortfall, and so she pays the remaining fees of £352 per week herself, comprising £250 from income and £102 per week from depleting her capital. So, a year after she has reached the ‘cap’, she has depleted her assets by a further £5,304, and carries on doing so.

The most immediate response to this ‘typical’ case study is that it is far removed from what has been reported in the wake of the government’s announcement, and what the public may expect when they encounter this system.

But what of the £123,000 ‘Upper Capital Limit’, which is touted as protecting poorer households? Between this and the ‘Lower Capital Limit’, which by 2017 should have been uprated to £17,000, individuals will, as now, be charged ‘tariff income’ of £1 for every £250 of assessable capital, and this is where today’s announcement really does look very different from what many people imagine. To explain why, let’s take Mrs Smith back to the beginning, but lop £100,000 off the value of her home.

Mrs Smith moves into residential care at the age of 89 in April 2017, becoming the very first person to be ‘metered’ under the new system. She has assets totalling £150,000 (including the value of her home, which is subsequently sold) and a total income – including disability benefits - of £250 per week.

She pays £652 per week for her place in a fairly standard care home, using all of her income on her care fees, and therefore spending down her assets at a rate of £402 per week to cover the difference. After 67 weeks of spending down her capital by £402 per week, she has spent down her wealth to £123,000.

At this point, Mrs Smith has £106,000 of ‘assessable capital’ (£123,000-£17,000), so her local authority would be able to charge her £1 for every £250 of capital per week for support, i.e. up to £424 per week. However, with £250 of total actual income, that make £674 of income that Mrs Smith has in the eyes of the local authority, which is more than she pays per week in fees, so in fact she receives nothing from her local authority.

So even with less than £123,000 in capital, Mrs Smith doesn’t receive anything from her local authority. Mrs Smith carries on spending down her capital by £402 per week.

In fact, with a local authority benchmark rate of £540 per week, Mrs Smith has to spend down until she has around £72,250 in ‘assessable capital’, which the council will treat as tariff income of £230 per week. Adding this to her actual income of £250 per week will give Mrs Smith a notional income of £540, which is what the council would pay for her place in care. Only after this point will she receive a modest amount from the council, even while she has to carry on spending down her assets to cover the difference between what she pays and what the council pays.

I’m going to stop here.

Readers who haven’t been exhausted by all these numbers will draw their own conclusions about how much ‘protection’ the measures announced by the government provide.

But the reforms announced today also raise five wider issues, which merit detailed comment.

First: the ‘cap’ is not really a cap. On the one hand, this is because of the ‘living cost’ contribution that individuals will be expected to make. The Dilnot Commission proposed £7.5-10,000 per year as a reasonable amount that individuals would expect to have in retirement regardless of whether they need care. Today’s announcement of £12,500 is extremely significant despite being largely ignored by commentators. It is this, at the upper-range of what the Dilnot Commission considered, that will see far more pensioners forced to spend down their capital.

On the other hand, the ‘cap’ is not really a cap because among the 125,000 older people funding their own residential care in England, the vast majority pay more than the benchmark rates paid by their council (and in so doing, frequently cross-subsidise councils). So self-funders will pay more than the value of the ‘cap’ before they reach it, and carry on paying for care after it - a fact the government itself acknowledged in its ‘progress report’ on care funding reform published last summer. Crucially, this will mean many have to carry on spending down their capital beyond the ‘cap’, as the example above demonstrates.

Second: how will the punters actually view the new system? Upon discovering the ‘cap’ is not a cap, families may simply shrug their shoulders. But, if the wider populace comes to recognise that care costs are not capped, or they are very likely to die first, will they actually disregard and ignore the new arrangements? If so, what of the ‘peace of mind’ dividend that was touted as a key benefit of the ‘capped cost’ model? This will matter most in areas where the proportion of pure ‘self-funders’ in residential care are highest, identified recently by Laing & Buisson as: the South East (55% of residents), South West (53%) and East of England (50%).

Third: will the reforms create an insurance market? Both Jeremy Hunt and David Cameron have spoken in expansive terms about how the reforms will lead to a pre-funded care insurance market. This is, put bluntly, utter rubbish. There is not space here to set out why, although I’ve set out some of the issues elsewhere. Suffice to say: the £75,000 ‘liability’ under the reforms is actuarially uninsurable and, the reforms would only ever have a limited effect on the price of premiums for insurance policies - which insurers don’t anyway currently offer because there is no demand. The consensus view in the insurance industry is that the ‘capped cost’ model will not result in an insurance market, so it is a mystery as to why government ministers go on about this.

Fourth: what of the £1-2 billion ‘baseline’ gap that has opened up since 2010 in the current local authority social care system? This immediate care crisis is causing real hardship and anguish now, and more than a few irate Conservative south of England council leaders. If this is not fixed before the introduction of the ‘capped cost’ model, councils will understandably and justifiably find ways of diverting the extra resources made available to implement the ‘cap’ to pay for this baseline.

Fifth: will these reforms actually be implemented in the form described today? Clearly a lot of the peculiar outcomes for individuals could be ironed out by further work on both the means test and the standardised ‘living cost’ contribution.

But there’s a much bigger point to be made. The Dilnot Commission was told not to look at the care system’s relationship with the NHS. However, since 2010, an enormous head of steam has built up behind the ‘integrated care’ agenda, Health and Wellbeing Boards, and more recently, Labour’s vision for ‘whole person care’. This agenda implies radical changes to how the state funds social care in the community, and defines what a care versus health need is, as well as introducing even more local variation.

Let’s be honest: there are some who think local government won’t even have a direct role in social care by the end of the decade. So, while the principle of protecting people from catastrophic care costs is likely to persist, what eventually comes out at the end of this process years from now may look rather different from today’s announcement.

In short, what is being announced today is rather removed from what many people think it is (and what is being reported on), and it is highly like that the reforms may be substantially reworked between now and 2017, and not just because there is a general election taking place between now then.

The government’s care ministers Paul Burstow and Norman Lamb clearly deserve great credit for keeping this issue alive within the coalition. Indeed, the key significance of today’s announcement is that all three major parties will now have to go into the next election with a detailed commitment to do something on care funding in the next parliament.

However, if either of the coalition parties go into that election claiming to have ‘fixed’ social care funding, this will naturally strike many on the front line of the social care system as a sick joke.

Indeed, as much as today’s reforms do represent a step forward, the government has ultimately ducked the bigger challenge: in the era of population ageing, to have a discussion with older voters about what the state can be expected to pay for in their retirement, and what new contributions they will have to make. Rather than have this debate, the government has opted for the cheapest, credible reform option, and punted the implementation date nearly five years into the future.

The fact that the reforms will apparently be partially paid for by freezing inheritance tax thresholds is merely a toe in the water of the debate we all need, and a rather ironic toe at that given the Conservative’s pre-election ‘death tax’ campaign against using inheritance tax to pay for care.

The crucial issue is, was and will continue to be the overall quantum of money that society spends on care and support, and what the wealthiest older cohort in history contribute to this. At some point, politicians will have to face up to this. Meanwhile, Mrs Smith waits.

James Lloyd is director of the Strategic Society Centre




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