Social Care Reform: A Veiled Threat to Private Providers?

On 7th Sept., the Government published ‘Build Back Better: Our plan for health and social care’ (the Plan), outlining its intentions to introduce a cap on lifetime care costs and to increase the means-testing thresholds. A new national health and social care levy will fund these initiatives, along with other proposals in the Plan, e.g., tackling the NHS backlogs and improving the integration of health and social care. The Government published further details on 19th Nov. about the standard daily living costs and exclusion of means-tested council support from the cap. The House of Commons endorsed this on 23rd Nov., despite opposition from Labour and some Conservative MPs.

Whilst the concept of a care cap and an expansion of the means-testing criteria can look ‘seismic’ for most of the public, the initiatives will sound very familiar to seasoned market participants and observers, as they had been the centrepiece of the Dilnot funding reform, scheduled for implementation in April 2016 but postponed before its roll-out.

In this Executive Insights, L.E.K. Consulting will evaluate some of potential impact of the Plan on the social care sector, instead of repeating too many comments and speculations with regard to funding and how much money might actually end up being directed towards social care. We will especially consider the two main changes:

• The introduction of a lifetime care cap of £86,000, which is intended to limit the total amount self-funders need to contribute towards their personal care (it is important to note that it excludes accommodation and general living costs)
• Raising the means-testing threshold from £23,250 to £100,000, making more elderly consumers eligible for either partial or full public funding

The Plan has been explicit that only personal care costs count towards the £86,000 cap; general living costs, notably accommodation and food, still need to be paid for in full by the individuals even if they reach the cap on care costs.

Providers in the UK currently do not invoice for care costs and general living costs separately, as is done in many other European countries. According to LaingBuisson’s Care Cost Benchmarks model of efficiently run, larger scale (50-bed plus) for-profit homes, care costs typically represent c. 50% (or £521 per week) of the average weekly fee in a nursing home, and c. 40% (or £288 per week) of the average weekly fee in a residential home (see Figure 1).

The implied daily living costs, c. £450-£470 per week, are materially higher than the daily living costs initially set by the Government on 19th Nov. (“For simplicity, these costs (daily living costs) will be set at a national, notional amount of £200 per week”). We would welcome further clarification on the calculation of the daily living costs, which seems to be a gross oversimplification (as it does not account for regional variations and different home standards) and an under-representation of the true costs for care home operators in providing the accommodation and sustenance. We are sure we will hear more on this topic in the months to come.

Instead of the Government figure, we have used LaingBuisson’s current care cost estimates as a guide as they seemed to be more realistic. On this basis, it will take a resident in a nursing home about three years to reach the care cap, significantly longer than the average length of stay of 16 months; for an individual in a residential home, it would take about six years to reach the cap, more than twice the average length of stay of 2.5 years. Service users receiving domiciliary care in their own homes will take approximately nine years to incur sufficient expenditure to reach the cap. These time frames will slowly shorten over time if the cap remains static due to rising care costs.

The introduction of the cap aims to prevent people from facing “unpredictable or unlimited care costs”, and it is hence logical that only a small fraction, the outliers, of the care home resident population will stay long enough to breach the cap. We estimate the proportion to be c. 10% of the care home population, leveraging a Bupa census on its care home residents (from 2012) and recent comment from a leading care home operator. These conclusions do not vary meaningfully from international benchmarks, e.g., average care costs in care homes in Germany are about 60% of the total (Germany has a long tradition of tracking and managing care cost separately).

Will the average weekly fee of a self-funder drop to the level of a public-funded resident once they reach the care cap? The Plan does not give any indication and the ‘small print’ has yet to be written. However, we consider it to be unlikely, for these reasons:

• The basic care costs, by definition, should be the same for private and public residents as the providers are not allowed to distinguish the quality of basic care provided based on funding sources.
• Even if the local authorities dispute the existing care costs and are reluctant to pay those in full, fee erosion should only affect the care component. General living costs, which account for c. 50% of the total costs, still need to be paid in full by the self-funders.
• Top-ups continue to be allowed, and there is a strong preference from all stakeholders to keep the individual in the same setting if possible.

Private fees are on average c. 40% higher than public fees, for a variety of reasons, and are widely regarded as a more appropriate reflection of the ‘true’ underlying cost of delivery. For a moment let us assume the 1.4x private-public fee differential also exists for the care costs (which it actually should not because the care quality should be the same) and the service user is unable to pay the difference, having breached the care cost cap of £86,000. For a care home with a 50:50 public:private funding we estimate that only 1% of its revenue is at risk, while the exposure for a home with 90% private funding is no more than 2% (see Figure 2). Moreover, the financial impact of the cap is unlikely to be felt by the providers before the end of 2026, as the personal contributions start accruing only after the planned introduction of the cap in October 2023. 

The same logic applies to home care operators — the quality of basic care should be independent from the funding — however companionship is often part of the service proposition of privately funded services. As such, only a proportion of the privately funded home care fee should be at risk once the care cap has been reached. The Plan is even less precise in articulating what home care services might applied against the care cap.

Under the Plan, the means-testing thresholds change from £14,250-£23,250 to £20,000-£100,000 (see Figure 3). The Plan makes no reference to changes in needs testing, and therefore we anticipate that activities which are currently not covered by public pay, such as companionship, will continue to be ineligible for public funding.

Increasing the minimum wealth threshold from £23,250 to £100,000 might bring more currently self-funded residents under the state’s responsibility, with a risk of self-pay fee erosion during the process. Therefore, a key concern is how many people are at risk, i.e. those with total wealth between the bands of £23,000 and £100,000. However, the final version voted on by the Government on 23rd Nov., in which means-tested care (i.e. publicly funded care) does not contribute to the care cap, will even further soften the impact.

Furthermore, property wealth is by far the most significant component of older people’s wealth, and c. 80% of those aged 75 and above own their homes outright. Since property wealth is generally included in the means test for care home funding eligibility (whereas it is excluded if the individuals need care at home, or if they need care home placements but their partners still live at the property), many homeowners are ineligible for public funding by virtue of their homeownership.

Our latest analysis of recent residential property transactions reveals that median property prices in all the regions in England exceed £100,000, and transactions below £100,000 account for only 5% of all the properties traded in England (see Figure 4).

High levels of property ownership among the elderly, coupled with above-threshold property values and the permissibility of third-party top-ups, suggests that raising the means-testing upper threshold from £23,000 to £100,000 is unlikely to lead to a significant drop in the number of self-funders and their associated care home fees.

The concerns about the Plan’s key initiatives (the introduction of the care cap and the change in means-testing thresholds) have predominantly highlighted the structural issues of the existing system, in the form of insufficient public rates and the fee differentials between public and private prices. 

The overall impact of the reform on independent social care providers is likely to be limited and not immediate. Nevertheless, good providers should consider fine-tuning their business models in anticipation of the changes, and we propose the following as a starting point:

1. All providers should include the 1.25% increase in national insurance contributions in their public and private rates. For providers with high exposure to public pay, this is particularly important as they typically operate with thinner margins.
    
2. Providers focusing on self-funders can continue to pursue their private pay strategy as public funding constraints are likely to persist, and the self-funders continue to represent an essential part of the market. However, providers should more carefully segment and profile the self-funders they want to attract to assess the revenue at risk.
    
3. Finally, to minimise the risks of self-pay fee erosions, providers should start to accurately track and clearly demonstrate the costs of their care and be prepared to bill the care and general living costs separately.