How might changes to social care funding affect different service users?

The proposed introduction of a cap on costs for social care may limit how much individuals need to contribute. But its implementation alongside other means-tested requirements may still result in inequalities.

Plans to reform the funding of social care have been in the manifestos of political parties of all colours for many years. They have included many unpopular policies, including a controversial tax proposed by Theresa May’s government whereby assets would be sold after an individual dies to pay for the cost of their care (labelled the ‘dementia tax’).

Most recently, the UK government has announced plans to increase National Insurance contributions by 1.25 percentage points for both employees and employers, in part, to fund social care. There are also plans to introduce a cap on lifetime contributions of £86,000 for any individual service user. But is this cap on contributions desirable, and does it remove the requirement for individuals to contribute the majority of their assets to pay for care?

What is social care and how are the costs decided?

Social care is an umbrella term for a range of services that provide care and protection for individuals who may not be able to look after themselves. Most commonly, we think about care for older people (for example, in a care home or providing support for those suffering from dementia). But social care also encompasses care for young people, and for individuals with learning and physical disabilities.

Unlike healthcare, there is no universal funding for social care. Instead, funding is means-tested and based on the wealth of the individual. In England, care is only provided free at the point of need for individuals with assets worth less than £14,250.

Individuals with assets worth more than £23,250 receive no support, and those with wealth between the lower (£14,250) and upper (£23,250) thresholds receive means-tested support. This requires them to pay at most £1 per week for every £250 above the lower threshold. So, for example, an individual with £20,000 in savings, and no other assets, would be required to pay, at most, £23 per week towards the cost of their care.

The treatment of savings or assets (particularly housing assets) depends on the type of care received. Currently, if you are a single, home-owning person moving into a care home, the value of your house would count towards the means test. In contrast, if you receive care within your own home (known as domiciliarycare), the means test would ignore the value of your home. For simplicity, for the rest of this article, the analysis will focus on an older person receiving social care in the environment of a care home.

At the time of writing, the average house price in England is £271,434 (Gov.uk, 2021). This means that if an older person is a home-owner, and they need social care, then they will be liable for the full cost of that care. The annual costs of nursing care are approximately £50,000 (Laing and Buisson, 2021). For conditions such as dementia, social care service users may need care for many years. This means that some individuals face almost unlimited liability.

What policies are in place to fund and deliver social care?

Figure 1 illustrates the impact of the current policy. An older person facing £250,000 of care spread over eight years could be required to use up to 92% of their assets to pay for the service. But the impact is unequal: an individual whose initial wealth was £250,000 would be required to use 91.4% of their assets to pay for care, while individuals with wealth of £500,000 would need to use 50% of their assets to pay for care.

This current policy is unpopular, partly because of this inequality but also because individuals may be partly motivated by the wish to leave an inheritance to their children and grandchildren (this is known as a bequest motive – see, for example, Inkmann and Michaelides, 2012). The current policy means that individuals who are unlucky enough to have high care costs in their old age may need to sell almost all of their assets to pay for it, limiting any significant bequests.

Figure 1: Simulation of the proportion of assets contributed for an older person facing £250,000 worth of care, spread over eight years

Source: Author’s simulation

In September 2021, the UK government announced a new funding plan for social care. The first element of the proposed system is to introduce a cap on contributions. This means that individuals would only need to pay a maximum of £86,000 towards their care across their lifetime.

On its own, the cap has a significant impact, reducing the maximum contribution to 79% of initial assets (see Figure 1). But its effects are still very unequal: individuals with relatively low levels of assets (less than £108,000) gain little from the cap.

Conversely, those with higher levels of wealth benefit significantly. For an individual whose only asset is an average priced house (£271,434), the loss in assets would be reduced from 91.7% to 31.7%.

The second element of the new policy is to change the means-testing limits. Individuals with wealth below £20,000 are set to pay nothing towards the cost of care. Those with assets worth between £20,000 and £100,000 will receive means-tested support. Individuals will only be required to pay a maximum of 20% of their wealth (above the £20,000 lower limit) each year towards the overall cost of their care. In theory, the aim of this system is to lower the overall contributions of those with relatively low wealth.

Figure 2: Simulation of the proportion of assets contributed for an older person facing £250,000 worth of care with the new cap and means test introduced

Source: Author’s simulation

The latest government proposals mirror those made by the Dilnot commission in 2011 (Dilnot et al, 2011). That report recommended a cap on the cost of care of £35,000, and a similar uplift in the means-testing thresholds. The commission’s recommendations would have limited the loss of assets to a maximum of 26% of an individual’s wealth, if they faced £250,000 worth of care across eight years.

Figure 2 provides a simulation of the government’s proposals, which illustrates that an individual requiring £250,000 worth of care would need to contribute at most 46% of their wealth, and individuals across the wealth distribution would benefit from this policy.

Why might a cap be beneficial?

Politically, the bequest motive may be an important one. But there may be other, economic reasons for trying to reduce the likelihood of individuals facing (almost) unlimited liability. The need for social care is an uncertain risk: we don’t know with any certainty early in our lives whether or not we will need it. In many other circumstances, it is possible to purchase insurance to protect against risks. But with social care, other than some limited annuity products, there is little insurance protection.

Insurance pools risk between a wide group of individuals. For simplicity, let’s think of the market for insurance so that there is a group of 50 individuals, one of whom will need significant care (costing £600,000) and the other 49 will require no care. Until they reach old age, none of the group know for certain whether or not they will require care.

An insurance product would allow each of the individuals to pay a premium into a pot. This would be sufficient to pay for the cost of care for any individual who requires it. In our example, to provide the cost of care, each individual would need to pay a premium of at least £12,000 (the total cost of the expected number of people needing care divided by the population). In reality, a much greater proportion of the population will require some social care, but the cost of care for the majority may be much lower.

There is a wide range of issues that could affect this market. First, people may underestimate their own risk of needing care (Walz and Mitchell, 2007; Henning-Smith and Shippee, 2015). This would mean that many may be unwilling to pay the insurance premium.

Second, some members of the population may have private knowledge about their likelihood of needing care. If this is the case, those with relatively low risk may be unwilling to pay the premium that reflects an average level of risk. If low risk individuals don’t purchase insurance, then this will mean that the remaining population will be (relatively) higher risk. The impact of this would be to push up the cost of premiums, meaning that even fewer individuals purchase insurance, undermining the market.

Third, in both the UK and the United States, there is an expectation that there will be some government support – or implicit insurance – in the market for social care (Brown and Finkelstein, 2008). This is because the state will step in to pay for some of their care once their wealth falls below the upper limit (£23,250 in England).

In England, once an individual’s wealth falls below £23,250, the local authority would pay for part of their care bill, and once their assets fell below £14,250, they would pay for all of it. Consider a person with assets of £30,000. Unbeknown to them, they face lifetime social care costs of £600,000. Without insurance, initially, they would be liable for the full cost of their care. But once their assets had been depleted to £23,250, the state would step in to provide support. This would mean that the person’s total liability might be limited to £15,750.

Now consider the same example, but in this case the person has taken out an insurance policy, protecting their wealth against the need for social care. If the insurance company covers the full cost of care, the person’s assets will never be depleted. As such, they will never be eligible for state support, and the insurance company would need to continue to pay the full cost of the service (up to, in this example, £600,000).

We can think of the insurance company facing almost unlimited liability, while service users would only face limited liability (due to implicit insurance from the state). Because of this implicit aspect to the cover, the person in this example might decide not to purchase an insurance policy and run the risk that she needs to pay for the (relatively lower cost) of social care.

By limiting individuals’ liability, the likelihood of private insurance companies stepping into the market to provide insurance products to cover the costs up tothe cap is increased. By limiting the costs to any one individual, the market failure created by the potential unlimited liability (above) may be reduced.

The cost of care matters

The examples above compare the impact of introducing a cap of £86,000, along with means-tested support introduced at wealth of £100,000. But these are only for a particular case, where the total cost of care (spread over eight years) is equal to £250,000. But the way that the rules relating to the cap and the means testing interact can create some perverse outcomes.

Figure 3: Simulation of the impact of different costs of care

Source: Author’s simulation

Full details of the implementation of the new social care funding policy have not yet been published. But it is likely that the total contributions (towards the cap of £86,000) will be based on the local government’s total cost of care.

This matters because of the way this interacts with the means-testing threshold. If an individual’s wealth is between £20,000 and £100,000, their contributions are limited to 20% of their assets above the lower threshold (£20,000). This means that, if an individual had £100,000 in assets, they would have £80,000 above the lower limit, and the maximum they would need to contribute would be £16,000 per year. Consequently, if this individual required £50,000 worth of care in a single year, the service user would pay for £16,000 of the care, but they would be recorded as having contributed £50,000 towards the cap of £86,000.

Figure 3 provides a simulation of the impact of differing total costs of care for individuals with wealth of either £100,000 or £300,000. For an individual who has an initial wealth of £100,000, with a total care need of £86,000, spread over eight years, they will need to dispose of 65% of their total assets. But if their care needs were £500,000, then this drops to 22%. For a wealthier individual (with wealth of £300,000), the maximum wealth that would need to be disposed would be 29%, and this would be the same, whether the total cost of care was £86,000 or £500,000.

This occurs because of the way the means test and the cap interact. For relatively low care needs, it will take a long time for the total cost of care to reach the cap. For high care needs, the service user will reach the cap much more quickly. With care needs of £50,000 per year, irrespective of their initial wealth, the service user will reach the cap in less than two years. With £10,000 per year care needs, the same service user will take over eight years to reach the cap.

As we have seen above, for a person receiving means-tested support, the contribution is determined by the minimum of 20% of their wealth, or the cost of care (whichever is smaller). This means that the actual contribution may be related to the wealth of the individual and how long it takes to reach the cap. Because of this, the actual contributions decrease as the total cost of care increases.

Conclusion

The introduction of a cap on costs for social care will limit the overall contributions that individuals need to make. But the cap alone makes little difference to those with the lowest levels of wealth. The design of the cap, and the way it interacts with the means-testing formula, can lead to some surprising outcomes.

The cap only applies to the cost of care, and not other associated costs related to moving into a care home (for example, accommodation or hotel costs), which need to be paid for from the user’s income, over and above the contributions to the cap. As a result, work may still need to be done to develop a fairer care package.