John Godfrey was special adviser at the Home Office in the Thatcher Government, has been a Conservative Parliamentary Candidate on three occasions, and headed the Number 10 Downing Street Policy Unit.

We should celebrate longer life. But how to provide the quality of care that is often required in old age, and how to pay for it in a way that is fair and sustainable for care recipients, taxpayers and care providers?

And how to do this before the current system falls over due to excess demand, shortage of money, and the departure of providers from the system?

The Government has promised a Green Paper in the autumn – an opportunity for a serious, measured approach to a complex problem, and hopefully a stark contrast to the “more heat less light” general election experience.

The politics will not be easy, but it is urgent and the stakes are high. This short paper summarises the problem and proposes a series of principles for the Green paper to address.

A demand- and supply-side issue

A few numbers indicate the scale of the issue:

  • 538,000 people are today in receipt of official care (ie all or part-funded by the Local Authority). 310,000 receive care at home, 228,000 in a residential setting.
  • The number of people aged 65 and over is projected to grow by 20.4 per cent over 10 years and by nearly 60 per cent over 25 years in England. This is five times the growth rate of the working age population.  The fastest growth of all will be from those over 85 who will account for almost 15 per cent of pensioners by 2024.
  • Many will have high levels of acuity and dependency and require more care, for longer. By 2035, an estimated 190,000 additional people will require residential care.
  • Social care in total (elderly care plus adult social care) costs some £17 billion today. The IFS however estimates government care spending fell by eight per cent between 2009-10 and 2015-16. To maintain a steady state of provision, ie no improvement at all, and even before implementing the “Dilnot Cap”, an additional £2.5-3 billion per year is likely to be required by 2025.
  • A year’s residential care costs a self-funder on average around £30,000 (£550 per week), rising to £43,700 if nursing care is needed. Domiciliary care on average costs £11,000 per year for 14 hours’ care at home per week. The average hides wide regional cost variations.
  • 45 per cent of future care recipients could expect to spend £30,000 on care, but one in ten will spend over £100,000.
  • Absent changes to the funding model, we risk providers leaving the market resulting in an estimated shortfall of 50,000 care beds by 2024.

Intergenerational fairness and general taxation

Combined with longer lives, our population is changing shape – as it is everywhere except Africa. In the traditional demographic pyramid, fewer people in retirement are supported by many more younger people in work, who pay taxes.

This pyramid becomes more cylindrical as the older population group grows, and their share of the total population gets larger. Intergenerational fairness therefore comes to the fore.

There will always be older people without the means to contribute to care costs who will need to be helped by government funding. As a matter of broad principle, however, should the generation using the care system pay for it, or pass the costs to their children and grandchildren?

One argument for fiscal prudence is that we should not saddle future generations with our debts, and a generation of students benefiting from higher education now pay for it, rather than taxpayers as a whole.

Younger people of working age face their own costs: tax and National Insurance, student debt repayment, paying for housing or to raise a family, saving for a pension for themselves. To ask them also to shoulder the costs of a previous generation’s old-age care feels unreasonable, when average real wages in the public and private sectors have flat-lined for many years.

So a simplistic “a penny on income tax for care” is unfair as it passes the buck to the next generation who will, in the end, have to pay their own care bills too. Moreover, it would create a ratchet effect for future tax rises.

Wealth distribution

If we accept that asking young people to pay for their elders’ care through general tax is flawed, we need to establish where the alternative funding might come from.

Distributional analysis shows two interesting things. First, the present generation of over-65’s own around £1.5 trillion of housing equity. Buying a home is almost always a long-term endeavour requiring a financial and an emotional commitment – family homes are important.

However, for many, they have also been a canny, tax-favoured investment. If we are asked to “find the money for care”, this is a large pot.

Second, there are two particular concentrations of wealth among the over-65’s. One group have very low pension incomes and very low assets, and will be unable to contribute towards care costs under any system. There is another significant group whose per capita wealth (ie with the value of a house split between a couple, if both live there) falls between £100,000 and £125,000. This is the group for whom a fair system is needed.

The real “Dementia Tax”

There is a further anomaly. When the Attlee government created the National Health Service, it distinguished between medical needs, met free at the point of use by the NHS, and care needs, which are provided by local government and means-tested.

This disconnect is unaddressed seventy years on despite multiple Commissions and Reports. It contributes to hospital overcrowding as lack of care places is the reason for around a third of costly (and unhealthy) hospital overstays.

Following a judicial review in 2000, the NHS has to provide Continuing Health Care (“CHC”) when there is an underlying or primary “medical need”, which means care can provided free or part-funded irrespective of financial circumstances. Those not getting this already pay the real “Dementia Tax”.

Far from being a creation of the general election campaign, this is deep-rooted: the Alzheimers Society has been campaigning on this for a decade.

Take two elderly neighbours, with identical circumstances and care needs. One has had a stroke, the other has dementia. The first receives care (and accommodation) free under NHS CHC due to his underlying medical condition. The second’s eligibility for state support relies on a means test, because dementia is not an underlying medical condition. He will only start to get help once his assets have dwindled to below £23,250, and the value of his home could be included in the Means Test assessment if he needs residential care and no qualifying family members live in his house.

CHC is worth, in aggregate, £3 billion per year to its 60,000 recipients. The decision as to whether someone qualifies can be appealed and re-assessed. This assessment process, with annual reassessments and appeals is fraught, very expensive, and a substantial diversion of funds better used for care.

The funding issue: home in the Means Test, caps and floors

Under the current system, the Means Test upper limit for Residential or Domiciliary (in-home) Care is £23,250. Above this level of wealth, people self-fund.

The value of the family home is disregarded (not taken into account for the means test) if care is domiciliary; if it is residential, the value of the home is disregarded if a qualifying family member, in practice usually a partner or spouse, is still living there.

The Means Test lower limit is £14,250. Between £23,250 and £14,250, costs are shared. Where wealth is below £14,250, all care is funded by the Local Authority.

Nobody is required to sell the family home to pay for care costs. The Local Authority will take a charge on the property (Deferred Purchase Agreement or DPA) and subsequently recoup the costs from the estate.

Thus, wealth can be depleted to £14,250 under the current system. In some circumstances, i.e. residential care with no qualifying family member left at home, this will include the value of the family home.

The ‘Dilnot Cap’

Andrew Dilnot’s report of 2011 proposed a cap on the amount anyone would be required to spend on care. This was initially set at £35,000, and the Care Act reset it at £72,000. This is for care costs only, not “hotel” costs.

The Dilnot proposals also included a shallower means test with an upper limit of £118,000 and a lower limit of £17,000, and proposed no changes to the circumstances in which the family home would be included in the Means Test.

Introduction was scheduled for 2016, but subsequently delayed to 2020 on the grounds of cost. In steady state, the “Dilnot Cap” would cost an estimated additional £2.75 billion per year.

Apart from cost, the flaw with these proposals is that they only help around one in eight people – those being the people with more wealth. An individual with a large care requirement and relatively small assets could still see their wealth depleted to £14,500.

The Asset Depletion Floor

The proposal from the Conservative Manifesto 2017 was to ensure that nobody would see their assets depleted to less than £100,000 as a result of paying care costs. This essentially replaces the upper and lower limits of the means test with a single-level means test threshold, set at more than four times the current upper limit.

To make this affordable, the Home in the Means Test would apply for all care, residential or domiciliary. No-one would be required to sell their home in their lifetime to pay for care, as such costs would be subsequently recouped from the estate under a DPA as under the current system for residential care.

Detail was to be worked-up through the Green paper process, which would cover funding as well as other care-related issues.

This proposal was more progressive than either the current or Dilnot models. In particular, those with average or below average housing wealth requiring residential care stood to benefit.

However, the extension of Home in the Means Test caused concern, as did the perceived effect on those with valuable property who may require very long care. The Prime Minister therefore confirmed that other complementary or alternative measures would also be considered. A modified approach could be applied to, for example, “long tail” cases where care is required for a very extended period.

The current arrangements recognise that some people have sufficient wealth (based on a formula combining income and assets) to self-fund in almost all circumstances. Conversely those without adequate resources must, quite rightly, be entirely state-funded. This must surely remain the case.

The real complexity, and the policy challenge, lies between those two extremes. Setting parameters and boundaries always creates winners, losers, cliff-edges and hard cases. We have these already under the current system and most proposed alternatives also throw up anomalies.

However, based on the analysis above, the following five principles should form the basis of a consultation exercise on the funding component of care:

Five principles for funding

First, that the costs of elderly care should, so far as possible, be borne by the generation using that care, rather than collected from working-age people through general taxation.

Second, that within that cohort, the system needs to be more progressive. The current upper and lower limits for means testing are too low, and the proposed £72,000 Dilnot cap is insufficiently helpful to pensioners with median assets or below. A single Wealth Depletion Floor set at £100,000 per household would preserve significant assets (which can be turned into income or left to their children) for mid- or below-mid wealth pensioners.

Third, the Green Paper should model and analyse options for cap and floor interactions and associated distributional effects.  For example, setting the cap at £100,000, or alternatively £100,000 plus 25 per cent of assets above the £100,000 floor, with the individual not liable to pay care costs whenever either the floor or cap is reached, provides a useful baseline.

Affordability for taxpayers and intergenerational fairness require that some account is taken of housing wealth in the cases where it is currently disregarded. This can be done by applying a revised replacement formula to the family home than to other assets and investments. As is the case today, nobody should have to sell their home in their lifetime to pay care costs.

Fourth, the cliff edge between NHS CHC and Local Authority means tested care needs to be smoothed, and the real “Dementia Tax” tackled by applying equivalent treatment for “hotel” costs at a set level in both cases.

Finally, proper anti-avoidance measures need to be put in place as the system currently loses anything up to £500m annually through deliberate deprivation of assets to “game” the means test.

Longer-term demand management

The Green Paper should focus also on longer-term measures to promote independent living and reduce demand for formal care. Informal Care (typically provided by families) plays a large and crucial role in the care ecosystem, so the Green Paper needs to examine support for informal care settings. This can include more use of leave from work to care for elderly relatives and help with returning to work.

Proposals to support independent living should include measures to increase supply of specialist housing for older people who want to rightsize, to ensure effective use of financial support available for housing adaptations using Disability Facilities Grants and Social Care funds, and to optimise use and development of appropriate technology (“Caretech”).

Attendance Allowance provides funding for both informal and formal care needs, at an estimated cost of some £4 billion per year.  However, the uses to which it is put and the division between spend on care (formal or informal) and spending on daily living expenses is under-researched. More analysis is required – not to reduce spending on Attendance Allowance, but to ensure it is targeted in the moist effective ways.

Quality and the supply-side challenges

Funding is not the only issue in elderly care: the Green Paper should focus also on quality and sustainability of supply: government needs to be aware of the risks of market failures and producer exits in residential and particularly domiciliary care.

The Care Quality Commission should play a greater role in examining commissioners of care as well as suppliers, and proposals need to be brought forward to address the Private-Public Cross-subsidy, whereby individual self-funders pay over the odds to support cheap pricing for Local Authorities purchasing the same services.

In time, we should move towards a regional “fair funding rate” to provide greater price transparency and certainty for the industry to evolve, for example investing in more technology and providing better career prospects within the care sector. This should involve a thorough review of planned £5.6 billion of planned spending in 2018-19 under the Better Care Fund.

A long-term solution

For decades, elderly care policy has had to “make do and mend”. The problems are structural and financial – the shortfall is at least £2.5 billion annually, and will rise due to our changing population.  This is not solvable with short-term measures such as the Council Tax Precept, but requires a sustainable and bold long-term solution, which is worth the expenditure of political effort and capital.

A dignified old age should be a key legacy of the current Conservative government. The solutions outlined here are certainly not the only ones, nor even necessarily the right ones.  But they can help frame a rational debate, which the Green Paper offers the opportunity to start.

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