Uneven keel: social care funding

“Given the size of the ?structural deficit and the economic situation we face, we are unable to commit to introducing the new system at this stage.”

And with that, after a year of internal wrangling over the recommendations of the Dilnot Commission, the government shied at the fence of long-term care funding reform.

But it says it is not backing another horse: “While we support the principles of the approach recommended by the Commission, and it is our intention to base a new funding model on them if a way to pay for it can be found, there remain a number of important questions and trade offs to be considered about how those principles could be applied to any reformed system.”

Not so much ‘Dilnot’ as ‘Dilbut’.

So what are these proposed trade offs? And what direction is the government likely to take?

Mounting problems

We stand at a critical juncture in the future of social care and if we are not careful the system we end up with may be the worst of all possible worlds: directing scarce funding to the wealthy, with those of moderate means still using the bulk of their assets to pay for care. Meanwhile the issues of poor quality care services and unmet need for the majority remain unaddressed.

In order to critique a proposed solution, one first needs to be clear as to what is the problem.

Total public spending on older people, including benefits, health and social care, is presently around £140bn. Between 2008 and 2030, the number of people aged over 75 will have increased by 70 per cent from 4m to 6.8m and the 1.3m over 85 in 2008 will have increased to 3.3m.

By 2036 it is estimated that 1.4m people will have dementia.

Under the current system of care funding, spending on social care is expected to increase from £14.5bn in 2010/11 to £22.8bn by 2025/6.

Yet the present system is failing to provide adequate support. According to the latest social services activity report, in the year to 31 March 2011, the number of supported care home residents fell by three per cent, continuing a trend that has seen a 21 per cent fall since 2003.

Part of this undoubtedly reflects a policy to keep people at home for longer. Anecdotal evidence from care home managers suggests that the condition of those now being placed in residential care is significantly worse than in earlier times. But the number of service users receiving community-based services is also falling, down eight per cent in the year to 31 March 2011.

There was a fall of ten per cent in all social care services between 2005 and 2006 and 2010 and 2011. Yet the number of contacts from new clients was up six per cent from 2005 to 2006.

The report explains that: “Feedback from councils suggests that the fall this year is due to a number of reasons including data cleaning, dealing with more service users at the first point of contact, raising the level of need at which people become eligible for council-funded services and stopping some types of services altogether.”

The picture then is one of increasing need and declining provision.

System failure

The Dilnot Commission identified ?the following issues with the ?current system:?

• People are exposed to potentially very high care costs.

• There is inadequate funding – people are not receiving the care and support they need.

• The current system delivers inconsistent services.

• The system is complex and difficult to understand.

The Commission proposed that an individual should be responsible for paying the costs of their personal care up to a fixed amount between £25,000 and £50,000. It recommended £35,000. Thereafter, the state would pay for their personal care. The individual would be responsible for paying their own board and lodging costs in residential care which would be a standard amount between £7,000 and £10,000 and would not be capped.

The obligation to make payments would continue to be means tested, but the upper capital limit would be raised to £100,000. Tariff income would apply above £14,250.

The Commission suggested that housing equity could be taken into account whether care was delivered at home or in residential care. Contributions could be paid upon sale ?of the house.

One purpose of the proposals was to stimulate the development of a market in insurance products to cover the individual’s liability. Capping the costs curtailed the potential risks, making insurance products viable.

Personal care would be free to those under 40 on the basis that this age group could not reasonably have saved sufficiently to cover their costs. The cap would increase according to age between 40 and 65. Minimum eligibility criteria for domiciliary care should be established to avoid the present postcode lottery.

The proposals are a social insurance model in the sense that those requiring care would receive increased public subsidy from general taxation. The taxpayer foots the bill for better provision and the relief of individual liability. The purchase of an insurance product to cover the personal care contribution is optional and the premium goes to the insurer and not the state.

Bottom line

Analysis of these proposals shows their regressive nature. The press comment has generally failed to appreciate the impact of tariff income which would be charged at £1 for every £250 or part thereof for which the resident’s capital exceeds £14,250 up to £100,000.

The table below shows the contributions payable by an individual in residential care based on a number of likely criteria and compares their capital depletion with a person with initial capital of £200,000 with the same income. Over three years, a resident with £100,000 pays £11,619 less than the person with £200,000, but in just over three years the richer resident has met the £50,000 cap and their remaining capital of £150,000 is then protected.

Thereafter, the richer resident pays just £10,000 a year board, while the less wealthy person, who at that point has about 40 per cent of the richer person’s capital, pays for personal care for another 62 weeks until they have paid the ?same amount.

However, the average stay in a care home is two and a half years. Just 27 per cent of residents live for more than three years. The limited progressive element of the test therefore relies on the less wealthy resident being of average longevity. The less wealthy resident ?also loses a much larger proportion of their capital.

Whether one thinks this is fair ?is a matter of personal view. However, the bottom line is that a substantial ?state subsidy is delivered to the better off in respect of any stay of greater than three years, during which time they would otherwise still be capable of paying their fees without suffering ?a catastrophic loss of wealth.

Projected contributions for residential care

 

* less personal spending.

Calculations are based on an upper capital limit of £100,000, assessable capital of the same amount, a lower capital limit of £14,250, median pensioner income of £10,000, and care home fees of £26,000 per annum; inflation and previous domiciliary care costs are nil.

Capping costs

A key benefit under the Dilnot proposals is that the cost of domiciliary care will count against the cap. If the individual then needs residential care, their past contributions to personal care at home will cause them to meet the cap more quickly and thereafter the state will pay.

This further erodes the progressive aspects of the proposals, as a need for several years of domiciliary followed by residential care is common. While this delivers a benefit to care users, this saving by individuals represents a loss of cash to the care system. This is a major area where the issue of affordability arises.

The government’s paper on affordability, ‘Caring for our future: progress report on funding reform’ (July 2012), discusses a number of ways in which additional costs can be curtailed. These are:

• A higher cap, £50,000 or above.

• A less generous cap for working-age adults.

• Reducing the upper capital limit.

• Opting in to the cap.

• Making the cap rise over time even after the person has started to ?receive care.

• When the scheme is implemented, ignoring any past care payments.

The report refers to support in some quarters for a cap as high as £75,000. A cap at this level with a £100,000 upper limit still risks very significant asset depletion for the modestly wealthy.

One important way of making the proposals more affordable is for the government to take up the suggestion to include housing assets in the means test for domiciliary care. This is also one of several suggestions for increased revenue recently put forward by the NuffieId Trust (which has proposed a number of tax rises on the elderly to pay for the implementation of Dilnot).

In the context of affordability, there would be no purpose to this unless it ?led to substantially increased liabilities to pay for such care collectable upon sale of the house.

A combination of this proposal with a high cap will have the result that people whose principal asset is their home and who die there will leave estates of significantly less value than under the present system.

This would be a powerful disincentive to utilise care since doing so would deprive their children of any inheritance, something that will be increasingly important to cover the deficit in pension provision for the coming generations, and in some cases, given present housing trends, their only chance of home ownership.

Progress report

Whatever the level of the cap, the costs of insurance cover will only be kept relatively low if there is mass take up. According to the Dilnot report, around half of the population will incur care costs of £25,000, around a quarter costs of £50,000 and one in ten costs above £100,000. Any insurance product will need to look like a good deal. If the cap is set at £50,000, who among those of limited wealth will pay above £12,500 to cover such risks?

The case made is therefore that the public perception of the benefit of the Dilnot proposals to the modestly wealthy is already overstated and the higher the cap, the more this benefit will be eroded. This might be thought axiomatic, but the effect is obscured by the failure to appreciate the effect of tariff income on the superficially attractive £100,000 upper capital limit.

If in pursuit of affordability one then allows the cap to rise over time, starts to tinker with the upper capital limit, the likely cost of insurance and ignoring past payments, the deal starts to look increasingly unattractive for this group. If housing assets are taken into account for domiciliary care, the proposals start to look worrying.

The Progress Report is clear that: “All but the bottom quintile (who already qualify for state support) benefit from a cap and extended means test; however – in cash terms – the ?wealthiest benefit the most and the poorest the least.”

The Progress Report maintains that the distributional effects remain broadly similar as between a £25,000 and a £50,000 cap, but this is only because the difference between the two figures is of modest significance to the more wealthy. I contend that the plans to reduce the costs of the proposals risk being at the expense of the modestly wealthy and will skew the benefits substantially towards the better off.

One way of mitigating this effect would be for the cap to apply only to assets below, say, £100,000. As a trade off, the lower capital limit could be increased and the cap kept down. The end effect would be a less regressive system with greater preservation of wealth in the estates of those with modest wealth. But such tinkering is no substitute for additional funds to improve the quality and coverage of care.

Wrong priorities

The problem faced by the social care system is that it does not have enough money to provide care of sufficient quality to the extent required even by the present demographic, let alone meet the demands that it will face in the coming decades.

The positive aspect of Dilnot is that it socialises some of these costs instead of relying on the individual funding their own liabilities and therefore alleviates the potential for catastrophic loss of wealth. The real risk is that the scheme which emerges will only truly benefit the significantly wealthy. Clearly this ?is the wrong priority when funds are very scarce. There are only three ways of getting additional money into the system:

?1. The means test can be made less generous so that individuals pay more. It can hardly be less generous than it is now, but the incorporation of housing assets in the domiciliary care test would achieve that.

2. The government can pay more, which means raising more tax or cutting expenditure elsewhere. Its response to the report shows little inclination to do this.

3. The pool of people paying in can increase so that everyone contributes, whether they use the system or ?not. This is the social insurance ?model. The previous government suggested such a levy. Creating a voluntary opt-in scheme will defeat this method.

The government cannot relieve individuals of catastrophic liabilities, increase the quality and coverage of provision and also fail to provide more money. It has no choice about improving provision because social care is in reality a form of preventive health care. If inadequate funds are provided for social care, the unmet need will only turn up later, and more expensively, at the doors of the NHS.

It would be a travesty if in the search for affordability, the benefit of any relief that is made available is directed primarily to the wealthy.

Austin Thornton is a solicitor at Wrigleys and co-author of Coldrick on Care Home Fees 2nd Edition

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