Health CommitteeWritten evidence from University of East Anglia and London School of Economics (SC 79)

Summary

1. Our evidence concerns differences in the care home fees faced by self-funders and those that Local Authorities (LAs) support. Evidence suggests that self-funders typically pay fees which are £50–£100 a week higher than fees paid by LAs for similar services. These differences may constitute induced “price discrimination” in the care home market resulting from LAs using buyer power to negotiate fees for the residents that they support, which are below care homes’ average costs per place. To break even and cover costs, care homes must charge all other residents a higher price. People who are no longer willing or able to afford a care home place in the private market but remain ineligible for local authority support—the “squeezed middle”—lose as a result.

2. Our research demonstrates that under the current means test there are enough self-funders for care homes to be able to recoup any losses on LA-funded residents via higher fees for self-funders as long as the discount to LAs is not too large. But reforms to the means test could change this.

3. Reforms of the care home means test which would increase the proportion of residents entitled to state help with their fees, would reduce care homes’ revenue if homes received the pre-reform LA fee for all post-reform LA-supported residents. For reforms where there would remain self-funders, care homes might therefore increase the fees for self-funders. Alternatively, LAs might have to increase the fees they pay to care homes for residents they support. For some kinds of reforms it might be possible for those who would be self-funders under the current means test, to continue to be liable for the self-funder rate, while receiving a non means-tested contribution from their LA.

4. We have examined the effects of alternative assumptions on what would happen to fees, on the public costs and the size and distribution by income level of gains from reforms which increase the proportion of residents entitled to LA support with their fees and so eligible for the LA fee. In such cases, if LA fees rise to maintain care homes’ income and the supply of places under a policy of free personal care this could increase the public cost by as much as 20% initially, and double it by 2027. Alternatively if residents who would otherwise be self-funders remain liable for the self-funder fee rate residents’ gains from the reform would be reduced by almost 30% on average.

5. The scale of this additional public costs or reductions in gains to residents is dependent on the reform examined. However we conclude that LA behaviour in negotiating care home fees needs to considered more fully in the debate on long-term care funding and especially when considering the costs and potential gains from funding reforms.

Introduction

6. Our evidence concerns differences in the care home fees faced by self-funders and those that Local Authorities (LAs) support. Of the issues that the Committee is considering, our evidence is relevant to the economic regulation of the social care system and implications of alternative funding regimes. It draws on research funded by the Economic and Social Research Council.

7. LAs procure care home places for some two-thirds of older (65+) care home residents who pass a means test of their income and capital assets (Comas-Herrera et al, 2010). Evidence suggests that those excluded by the means test typically pay fees which are £50–£100 a week higher than fees paid by LAs for similar services (Laing and Buisson, 2011).

8. The care home market consists of a large number of relatively small private or not-for-profit providers. LAs, using their “buyer power”, may be able to procure assisted places from these providers at a price below the market rate. Low prices paid to care homes could force care homes out of the market resulting in a shortfall in capacity; and care homes might have to charge higher fees to self-funders to subsidise publicly-funded residents. Observed differences in self-funder and LA-supported fees may constitute induced “price discrimination” in the care home market.

Effects of Differences in Fees for LA-supported And Self-funding Care Home Residents

9. If the local authority negotiates a price which is below care homes’ average costs then, to break even and cover costs, the care home must charge all other users a higher price. The larger is the discount negotiated by the local authority, or the larger is the number of places procured by the local authority, the higher must be the private sector price for the care home to stay in business. People who are no longer willing or able to afford a care home place in the private market but remain ineligible for local authority support lose as a result. This is the “squeezed middle” who can afford the market (no price discrimination) price but not the higher private rate that care homes charge when local authorities exercise their buyer power. Other self-funders have to pay an inflated price to keep the care homes financially viable so also lose.

10. Our research (Hancock and Hviid, 2010) demonstrates that under the current means test there are enough self-funders for care homes to be able to recoup any losses on LA-funded residents via higher fees for self-funders as long as the discount to LAs is not too large. But reforms to the means test could change this. We found that the first round (unchanged demand) effects of a 6% LA discount on the market rate in residential care homes are that local authority costs would be about 8% lower than in the absence of price discrimination, costs met by user charges to local authority-funded residents would be lower by 3% but self-funders would pay 11% more.

11. One way to address concerns over those priced out of the market is for the local authority to include the squeezed middle by procuring places at the lower fee rate for all those who cannot afford the private fee rate. Including the squeezed middle does not cost local authorities anything directly because under the means test the squeezed middle are liable for the full fee rate negotiated by the local authority. But if the squeezed middle is large, such action may destabilise the market.

Fee Differentials and Reform of the Funding System

12. Reforms of the care home means test which would increase the proportion of residents entitled to state help with their fees, would reduce care homes’ revenue if homes received the pre-reform LA fee for all post-reform LA-supported residents. For reforms where there would remain self-funders, care homes might therefore increase the fees for self-funders. Alternatively, LAs might have to increase the fees they pay to care homes for residents they support. For some kinds of reforms it might be possible for those who would be self-funders under the current means test, to continue to be liable for the self-funder rate, while receiving a contribution from their LA. This is effectively what happened when Scotland introduced so-called free personal care.

13. Using two simulation models we have examined the effects of alternative assumptions on what would happen to fees, on the public costs and the size and distribution by income level of gains from certain reforms (Hancock et al under review). The reforms were:

(a)“free personal care”: a non means-tested subsidy, equivalent to the assumed care costs (as opposed to “hotel” costs) component of care home fees for all assessed as needing to be in a care home (similar to “free” personal care as implemented in Scotland);

(b)“limited liability”: a non means-tested subsidy as above after two years in a care home (proposed as an interim measure in the 2010 social care White Paper (HMG, 2010) and similar to the cap on costs proposed by the Dilnot Commission on Funding Care and Support (CFCS, 2011); and

(c)“housing disregard”: a disregard on housing wealth in the means test for the care component of care home fees.

14. All the reforms examined here would increase the proportion of residents receiving some LA support. If care homes were to receive the lower LA fee rate for all such residents, their income per resident would fall and the supply of care home places could reduce. We therefore examined three ways in which care home income per resident might be maintained after implementation of the reforms. One option is for the fee paid by LAs to rise. A second is for those who would be self-funders under the current system to continue to be liable for the self-funder fee. This is likely to be practicable only for reforms in which there is a non means-tested state contribution. The third option is for the self-funder fee rate to rise. This last option is clearly possible only for reforms where there remain some self-funders.

15. Working in April 2007 prices, we found that raising the LA fee rate would raise the public cost of the reforms by over £200 million (20%) for free personal care in 2007, and more than double that by 2027. For this reform it would reduce the average gain to care home residents by about £10 (10%) a week in 2007. Raising the self-funder rate has little effect on the public cost. Requiring residents who would self-fund under the current system to pay the self-funder rate under reforms where they would be eligible for a non means-tested state contribution reduces the average 2007 gains to care home residents by £13 (limited liability) and £26 (free personal care) or around 28% in both cases. If fee rates remain at their projected levels under the current system, the reforms would reduce the income per resident received by care homes by between £14 and £29 a week or 2.6% to 5.3% of their current average fee per resident.

16. The effects of the reforms and of the alternative assumptions on fee rates vary according to the residents’ income levels (Figures 1–3). Gains from free personal care increase steadily with income level, favouring most those in the highest income quintile. Without any fee adjustment, mean weekly gains in 2007 from free personal care range from £73 in the lowest income group to £175 in the highest group. Increased fee levels or maintaining self-funders on the self-funder fee rate reduces the gains most in the higher income quintiles but the association between size of gain and income level remains. The limited liability reform also benefits the highest income quintile most but there is less variation across the other income quintiles.

Figure 1

MEAN GAINS BY INCOME QUINTILE, FREE PERSONALCARE AND PARTNERSHIP REFORMS, CARE HOMERESIDENTS AGED 85+, 2007

Figure 2

MEAN GAINS BY INCOME QUINTILE, LIMITED LIABILITY REFORMS, CARE HOME RESIDENTS AGED 85+, 2007

17. In contrast to free personal care and limited liability, the housing disregard reform benefits those in the highest income group the least. Residents in this income group are likely to be able (and would be required) to meet their care home fees in full from their income. This is a reform that favours those who are housing rich but income poor. Indeed, if the self-funder fee rate rises to compensate for the increased proportion of residents paying the LA rate, residents in the top income quintile would lose an average of £66 per week from this reform in 2007.

Figure 3

MEAN GAINS BY INCOME QUINTILE, HOUSING DISREGARD FOR CARE REFORMS, CARE HOME RESIDENTS AGED 85+, 2007

Conclusion

18. It is commonly believed that LAs currently pay care home fee rates which are below the level at which care homes break even. If this is the case, the supply of care homes is dependent on care homes being able to charge self-funders higher rates to recoup losses on LA-supported residents. The form of the current means test facilitates this at least for modest LA fee discounts because it ensures sufficient numbers of self-funders are available to cross-subsidise LA supported residents.

19. A policy reform which substantially increases the proportion of residents on the lower LA fee may not be sustainable unless the LA fee rate is increased. If that happens, the cost of the reform to the public sector will be higher and the gains to care home residents will be lower. Alternatives to increasing the LA fee rate are either an increase in the self-funder rate or retaining the self-funder rate for those who would be self-funders under the present funding regime. While these have relatively small effects on the public finances, they can considerably reduce the benefits to residents that result from the reform. Indeed they can result in losses for some residents.

20. It would be unwise to ignore these issues when considering proposals to reform the long-term care financing system. We conclude that LA behaviour in negotiating care home fees needs to be considered more fully in the debate on long-term care financing.

References

Comas-Herrera A, Wittenberg R and Pickard L (2010) The long road to universalism? Recent developments in the Financing of Long-term Care in England Social Policy and Administration 44 (4).

Commission on Funding Care and Support (2011) Fairer Care Funding: the report of the Commission on Funding Care and Support,http://www.dilnotcommission.dh.gov.uk/2011/07/04/commission-report/

Hancock R and Hviid M (2010) Buyer power and price discrimination: the case of the UK care homes market. CCP working paper 10–17. Norwich: University of East Anglia, Centre for Competition Policy.

Hancock R, Malley J, Wittenberg R, Morciano M, Pickard L, King D and Comas-Herrera A (under review) The role of care home fees in the public costs and effects of potential reforms to care home funding for older people in England.

Her Majesty’s Government (2010) Building the National Care Service Cm784 London: The Stationery Office.

Laing and Buisson (2011) Care of Elderly People, UK Market Survey 2010–11. Twenty-third Edition. London: Laing and Buisson.

Ruth Hancock, Morten Hviid, Marcello MorcianoUniversity of East Anglia

Adelina Comas-Herrera, Derek King, Juliette Malley, Linda Pickard, Raphael WittenbergLondon School of Economics

November 2011

Prepared 13th February 2012