June 1998 - Ref 678
Disparities between market rates and state funding of residential care

New research by William Laing of health and community care analysts Laing & Buisson shows that there are frequent disparities between the fees that state agencies are willing to pay and the full, reasonable cost of long-term care. The study explored the funding provided by the Department of Social Security for 'preserved rights' clients (all those resident on or before 31 March 1993), by local authorities (for those who became resident from that date), and by voluntary organisations and individuals paying for themselves. The research found:

• Using the illustrative example of a nursing home, the analysis suggests that around £350 per week at 1997/98 cost levels offers a reasonable return to an efficient provider of good quality amenities and care. This is some £40 higher than the DSS rate of £311 per week, as well as being higher than the fee levels that most local authorities are prepared to pay.
• £80 million per annum is spent on 'top-ups' to bridge the visible disparities between care home fees and what state agencies are willing to pay. The bulk of this is met by residents' families. If the state were to reduce its contribution by £5 per week, this would increase the burden for families and other agencies by £75 million per annum.
• There are 'hidden' disparities, where local authorities and the DSS pay fees in full (with no top-up), but at rates which are insufficient to meet all costs. In these cases, deficits might be made up from providers' charitable funds or from 'cross-subsidisation' by self-payers, who often pay more for identical accommodation and care.
• Local authorities typically used their monopoly purchasing power to secure higher grade rooms for their clients. Thirty-one per cent of local authority-funded residents in this survey occupied single rooms with en-suite bathrooms (nearly as high a proportion as private payers) compared with 11 per cent of preserved rights clients.
• The study concludes that private sector care home operators are being discouraged from investing in good quality new stock for clients dependent entirely on state funding, as there are only a few regions in the UK where expected returns are sufficient to justify commercial investment.

Sources of funding

Almost 400,000 elderly or physically disabled people are accommodated in care homes registered under the 1984 Registered Homes Act. Four-fifths live in private (for-profit) homes and the remaining fifth live in voluntary or charitable (not-for-profit) homes. Payment sources for fees can be divided into four categories:

Self-payers Some 95,000 residents pay for their own care entirely out of their own pockets, or have it paid by third parties, without means-tested state support.

NHS funding The NHS accepts financial responsibility for some 15,000 residents. Typically, fees paid by the NHS are more generous than those paid by local authorities and the issue of disparities rarely arises.

DSS preserved rights funding People who were resident in an independent sector care home on or before 31 March 1993 have 'preserved rights' to special higher rates of means-tested income support set nationally each year. Some 84,000 such residents remained by May 1997.

Local authority funding Since 1 April 1993, local authorities have been the sole source of state funding (other than the NHS) for people who entered an independent sector care home after 31 March 1993. By mid-1997 they were paying for 202,000 residents.

Frequency of disparities

Preserved rights

Only about half of residents in receipt of preserved rights funding have their fees covered in full by the national limits set by the DSS. In about a quarter of cases the disparity is less than or equal to the Personal Expenses Allowance (£14.10 per week in 1997/98), which claimants receive from the DSS. For the remaining quarter the disparity is more than the Personal Expenses Allowance, implying the residents need a third-party 'top-up'. A small but significant minority, amounting to 8 per cent of all preserved rights recipients in 1996, were receiving top-ups of £65.00 per week or more (Table 1). Some of these disparities represent discretionary spending by families, charities and residents to buy a higher standard of care/amenity than the state could reasonably be expected to fund.

Almost half of care homes advertise their minimum fees for a shared room at above the preserved rights limits. However, this fact exaggerates the scale of the access problem. Care homes typically advertise minimum fees at a level they are willing to accept from private payers, but under current market conditions accept state-funded clients at lower rates if they have to. In interviews with a cross-section of care home managers, 41 per cent said their minimum (sharing) fees were above the preserved rights income support rate, but when asked specifically if they accepted preserved rights residents with no top-up, the proportion replying in the negative dropped to 15 per cent (Table 2).

Local authority-funded residents

Visible disparities between care home fees and what local authorities are prepared to pay are relatively infrequent, for a number of reasons:

• local authority baseline fees are better aligned with local care home charges than the inflexible, national preserved rights limits;
• local authorities must accept legal responsibility for the full contract fee. They consequently have an incentive to discourage third-party top-ups in case these stop being paid;
• most grant-giving charities will not offer third-party top-ups to local authority funded clients on legal advice that it may be ultra vires;
• government guidance prohibits residents' Personal Expenses Allowances from being used towards fees under local authority contracts.

Only 14 per cent of elderly local authority-funded residents are supplemented by a third-party top-up (Table 4).

It was found that local authorities used their monopoly purchasing power to secure higher grade rooms for their clients. Thirty-one per cent of local authority funded residents in Laing & Buisson's 1997/98 Continuing Random Sample Survey of Care Homes occupied single rooms with en-suite bathrooms (nearly as high a proportion as private payers), compared to only 11 per cent of preserved rights clients (see Table 3).

The cost of disparities

Some £80 million per annum is spent on bridging the visible disparities between care home fees and what state agencies are willing to pay. The bulk of the cost is met by residents' families, with perhaps £5-10 million met by grant giving charities and an estimated £6 million from Personal Expenses Allowances.

The value of 'hidden' disparities cannot easily be quantified. As an illustration, however, every £5.00 per week that local authorities shave off the fees they pay for elderly care home residents saves the state about £75 million per annum, and adds the same sum to the financial burden to be absorbed by other agencies and individuals.

Some of the costs of hidden disparities are borne by self-funding residents, who effectively cross-subsidise state-funded residents - self-funding residents usually pay more than state-funded residents for the same type of room and the same level of care (Table 5).

Some of the costs of hidden disparities are borne by voluntary sector care home providers which subsidise state-funded residents from charitable funds, and by private and voluntary sector providers whose fees may be driven below the level necessary to offer a reasonable return.

The question of whether operators are being offered an unsustainably low return for their service is one which turns critically on what a reasonable fee level is for an acceptable standard of care and accommodation. Benchmark figures for an illustrative case of a 50-bed provincial nursing home for frail elderly people indicate that state agencies should expect to pay around £350 per week at 1997/98 cost levels in order to offer a reasonable return to an efficient provider of good quality care in single room, en-suite accommodation. This is some £40 higher than the national preserved rights rate of £311 per week, as well as being substantially higher than the baseline fee levels that most local authorities are prepared to pay.

These figures help to explain why the profits record of larger publicly quoted care home companies supplying the state-funded market has been disappointing in recent years, and why share values have performed poorly. It also explains why new-build nursing home development among corporate for-profit providers has markedly slowed down. There are now few locations in the country where expected returns are sufficient to justify commercial investment in good quality new nursing home stock for a clientele dependent entirely on state funding.

Policy implications

The study concludes that in order to ameliorate the disadvantages in access experienced by those covered by preserved rights, responsibility for their funding should be transferred away from the DSS and placed in the hands of local authorities. This would need to be accompanied by a full transfer of funds. The net cost to public funds would be approximately £35 million per annum in additional fees plus the extra cost of assessment and administration to local authorities.

Local authorities should seek more proactively to encourage investment in good quality, efficient provision and to drive out low quality providers. They should set differential baseline fee rates according to the type of investment they wish to encourage, building on the practice of a number of authorities which currently pay premiums to care homes which meet defined quality criteria.

The additional burden on public funds of paying the full economic cost of single room accommodation in good quality care homes for all state-funded residents (with no subsidies from charitable care home operators, no cross-subsidisation from private payers and reasonable returns to investors) could ultimately be as much as £600 million per annum at current prices (300,000 residents times £40 per week). In the short to medium term, however, any additional public spending would be a fraction of this sum because only a minority of care homes have to date invested at a level sufficient to justify additional remuneration of that order.

About the study

The study makes extensive use of Laing & Buisson's proprietary database of information on long-term care, including:

• A survey of care homes throughout the UK in February 1997 which gathered, among other things, information on minimum and maximum fees charged for single and sharing rooms. Responses were received from 3,500 care homes for elderly people in the UK.
• A new Continuing Random Sample Survey of Care Homes (CRASSCH), which gathers information from a sample of 600 care homes throughout the UK. CRASSCH asks questions about source of funding at the individual resident level, which yields data better able to answer the key questions relating to fee disparities.

How to get further information

For further information about this study and the data contained in it, contact William Laing at Laing & Buisson, 29 Angel Gate, City Road, London EC1V 2PT. Telephone: 0171 833 9123.

The full report, A fair price for care? Disparities between market rates and state funding of residential care by William Laing, is published by YPS for the Foundation (ISBN 1 899987 68 1, price £9.95 plus £1.50 p&p).

This title is now out of print.