Implementation of the government’s ‘capped cost’ reforms in 2016 could impose an earthquake on the residential care sector. There is a real possibility that a significant proportion of care providers could be driven out of business
The Department of Health currently has a live consultation on care funding reform in England, which closes on 25 October.
At the very end of the consultation document is ‘Implementation Question 5’, which ‘welcomes views on how funding reform and increased transparency will affect the shape of local markets’.
This seems like a perfectly innocuous question, but behind it lies an observation that a growing number of care providers are waking up to: implementation of the ‘capped cost’ reforms in 2016 could impose an earthquake on the residential care sector.
How? In order to meter people’s care costs, the ‘capped cost’ reforms will see every self-funder in residential care given their own Independent Personal Budget, which will meter their ‘care costs’ using the local authority’s ‘usual cost’ rate.
So, for the very first time, all self-funders and their families will from 2016 know what their local authority pays for residential care.
As well as this massive shift in ‘consumer knowledge’, self-funders will retain the right to request that their local authority arranges their care for them, although there is a growing likelihood that people will be charged arrangement fees for this service.
Why does this matter? The vast majority of self-funders in residential care in England pay more than the local authority ‘usual cost’ rate. Sometimes this is simply because wealthier individuals like to pay extra for more luxurious accommodation.
However, in many instances it is the result of price discrimination among providers: self-funders paying more than local authorities for equivalent services, or paying an excessive quality premium for services that are just a bit better.
The result is a widely acknowledged cross-subsidy from self-funders to local authorities – often referred to as a ‘hidden tax’. Few providers enjoy talking about the fact that self-funders are charged more, but for many, it has been the only way to maintain quality standards and remain financially viable in the face of intense downward pressure on fees by councils. In the wake of recent public spending cuts, many believe the extent of cross-subsidy has increased.
For their own part, local authorities often know full well that they are benefiting from a cross-subsidy, but are happy to overlook their considerable price-setting buying power and instead pass off differences in fees as simply the operation of market forces.
Nobody really knows how big the cross-subsidy in the market is, and it is very difficult to pinpoint and measure, but it appears likely that it will be crystallised when the government implements the ‘capped cost’ funding reforms in 2016.
The story might unfold as follows: self-funder Mrs Smith and her family discover from her Independent Personal Budget what the local authority pays for care, and are shocked at how low it is given Mrs Smith is surrounded by council-funded residents.
Her family demands her care home place Mrs Smith on the local authority rate. The care home refuses, so the family requests that the local authority takes over arrangements for her care. The local authority does this, and then forces the care home to lower its fees for Mrs Smith.
Some observers are sanguine about this scenario, believing that many self-funders will never approach their local authority because of stigma and cultural reasons. Others simply think that the 2016 reforms are so big that it will be years before everyone has an Independent Personal Budget. Another group think care homes will – reluctantly – have to divide their residents, and give all self-funders south facing rooms, new linen, curtains and other frills, in order to justify the higher fees they pay.
However, such mild scenarios appear a tad optimistic. In austerity England, it seems unlikely that families will shrug their shoulders at the chance to cut their fees by upwards of £10,000 per year on average, just for the sake of picking up the phone to their local authority.
There will be a new industry of information services in 2016, and together with consumer journalists telling their readers to ensure they get the local authority rate, the cross-subsidy in the residential care market could be wiped out in six to 12 months after the reforms come on stream.
On this scenario, either providers will have to absorb lower fees, or councils will have to up their ‘usual cost’ rate. However, although this process of market clearing can be described on paper, in practice, local authorities don’t have any money and many providers have already cut their margins to the bone.
The doomsday scenario is therefore a rerun of Southern Cross on a much bigger scale, but with local authorities unable to arrange the transfer of homes to other providers, because the other providers will also be going under. And remember, local authorities will anyway be coping with an overwhelming amount of change in 2016, so will not necessarily have staff or resources to manage this transition in a calm, ordered way.
There are no precedents for the reforms to care funding that are due to be implemented in 2016, so it’s impossible to really know what will happen. However, it would be foolish for anyone to overlook the very real possibility that the government’s reforms will inadvertently drive a significant proportion of the residential care sector in England to the wall.
So what’s the conclusion? At this stage, there is only one: if they haven’t done so already, every manager of a ‘mixed’ care home in England needs to prepare a response to the Department of Health consultation and complete the sentence: ‘If all our self-funders move on to the local authority rate, the effect on our home will be….’
James Lloyd is director of the Strategic Society Centre
