ISER Working Paper Series 2006-43
Winners and losers: assessing the distributional effects of long-term care funding regimes
16 Sep 2006
How should long-term care for older people be financed? This is an important issue which will affect many of us as more of us live to late old age. The 1999 Royal Commission on long-term care funding recommended that nursing and personal care components of the fees of care homes and home-based care should be met by the state without means testing and financed from general taxation. Means-testing would remain for accommodation and living costs ('hotel' costs) and for help with domestic tasks. The Government accepted many of these recommendations but did not remove the means test for personal care. The Scottish Executive, however, decided that it would also make personal care free of charge. The policy debate has continued, with commentators calling for abolition or reform of the means tests, with more of the costs falling on the state and less on older people at the time they need care. This study uses computer simulation to explore the expenditure implications of a range of options for reforming the long-term care funding system. The options are: (1) no reform; (2) free personal care; (3) a less stringent means test. The study also identifies who would be the main beneficiaries of each option. (1) No reform. Under the current funding system and a central set of economic and demographic assumptions, public expenditure on long-term care as a proportion of Gross Domestic Product (GDP) is projected to double over the next half century, from just under 1% in 2002 to almost 2% in 2051. These projections are sensitive to varying the assumptions about future life expectancy, trends in disability rates and trends in real unit costs. (2) Free personal care. A medium cost version would pay older people who need residential care a flat rate subsidy of around £175 a week towards care home fees and meet all assessed needs for personal care at home without a means test. Its immediate effect would be to raise the public cost of long-term care from just under to just over 1%. The projected public cost in 2051 under the central set of assumptions is 2.25% of GDP, assuming no effect on the demand for care, compared with 2% under the current system. (3) A reformed means test. Under the current means test, people with capital (usually including the value of their home) above £21,000 have to meet all the fees of the care home apart from any contribution to nursing care costs from the NHS. Below this threshold, the resident's contribution is an amount which leaves them with income no less than a small personal expenses allowance. Simulations suggest that under the current means tests, 43% of care costs are met from users' own resources and 57% by the state. Users in the top fifth of the income distribution meet just over two-thirds of the costs themselves, compared with under 45% for other groups. Reform options included more generous treatment of capital, a lifetime limit on the contribution required from any care user, a higher personal expenses allowance and some options specific to non-residential care. Of the options affecting residential care, a lifetime limit of £100,000 would currently cost the least. A complete disregard of housing assets would cost the most, raising public expenditure from 0.96% of GDP to 1.06% but, at least in the short term, it would cost less than free personal care. Compared to free personal care, means test reform would give greater benefit to low income groups. Raising the personal expenses allowance would benefit the lowest income groups more than any other of the reforms. The immediate beneficiaries of free personal care would be relatively well off care recipients: in the top fifth of the income distribution, gains from free personal care would be nearly 80% above average. The Royal Commission argued that the revenue to finance free personal care could be raised from income tax to counteract this effect. Our modelling suggests that an increase from 40% to 41.5% in the rate of tax on higher incomes would meet the costs of the medium-cost version of free personal care. This tax change would go some way towards counteracting the benefits better off people would receive from free personal care and those in the highest income group of the whole population would lose from a combination of free personal care and this higher tax rate.