On Wednesday 14th December 2016, we launched a paper which reviews the present and proposed formula for means-testing adult social care in England.
In 2011, the Dilnot Commission recommended a cap of £35,000 on adult social care costs, and that the threshold for means-tested assistance be raised from £23,250 to £100,000 for those in residential care. This new paper by Cass Business School reviews the present formula for means-testing adult social care and the formula recommended by the Dilnot Commission, and finds fault with both.
Chaired by Baroness Sally Greengross OBE, Chief Executive of the ILC-UK, the launch included a keynote presentation from report author, Professor Les Mayhew, Professor of Statistics, Faculty of Actuarial Science and Insurance, Cass Business School, and a response from an expert panel of actuaries and related professionals.
3. Professor Les Mayhew
Professor of Statistics, Faculty of Actuarial Science
and Insurance
Cass Business School
Presentation of Paper
#CostingCare
4. Means testing
social care in
England
Les Mayhew
Faculty of Actuarial Science
and Insurance
Cass Business School
London
lesmayhew@googlemail.com
5. Why look at this now?
• Reforms to the means test in the Care Act have been
put on hold until the next Parliament
• Proposed means test received little scrutiny in the
lead up to the Care Act
• It includes a new burden on local authorities to set
up systems to monitor care costs
• The hope-for insurance products have not delivered
6. Aims of this research
• Create a means test that can be used both for domiciliary and
institutional care with equal clarity
• Make the system fairer and more transparent e.g. by removing
‘cliff edges’
• Treat people with similar personal wealth but split differently in
terms of income and assets equitably and fairly
• Simplify the rules including whether there is a need for a ‘cap’
on care costs
• Bring new money into the system by providing the appropriate
incentives to save
7. Headings
• Critique the current and proposed test
• Suggest a simpler approach and show how it
works and the advantages
• Give worked examples in two settings -
nursing and domiciliary care
• Give examples showing how a different
treatment of savings could bring new money
into the care system
8. How the current system works with a
worked example
Explanatory notes to Table 1: (a) Personal expense allowance =52 x weekly
allowance of £24.40 = 1,268.80; (b) Imputed income per year =( savings – lower
capital limit)/£250 x 52 =(£20,000 -£14,250) x 0.208 = £1,196; (c) Tariff – ( Income
– personal allowance + imputed income) =£20,000 –(£15,000 - £1,268.40 + £1,196)
= £14, 927.80; (d) Tariff – resident’s contribution = £20,000 - £14,927.80 =
£5,072.80; (e) Actual care home fees – Tariff = £25,000 - £20,000 = £5,000
Line Basis for assessment A B C D
1 Care home fees 25,000 25,000 25,000 25,000
2 Municipal tariff or standard rate 20,000 20,000 20,000 20,000
3 Income per year 5,000 15,000 25,000 15,000
4 Personal expense allowance 1,268.80 1,268.80
(a)
1,268.80 1,268.80
5 Savings 10,000 20,000 20,000 40,000
6 Imputed income p year 0 1,196(b)
n/a n/a
7 Residents contribution 3,731.20 14,927.20
(c)
25,000 25,000
8 Municipal contribution 16,268.8 5,072.8
(d)
0 0
9 Top up payment 5,000 5,000
(e)
self funding self funding
Table 1: How the present systems works with four examples of financial assessments
(all figures £s per annum.
9. £0 £5000 £10,000 15,000 £20,000 £25,000 £30,000
Income p.a.
£250k
£225k
£200k
£175k
£150k
£125k
£100k
£75k
£50k
£25k
£0k
Assets
Income-wealth map at age 65+
P
Q
10. £0 £5000 £10,000 15,000 £20,000 £25,000 £30,000
Income p.a.
£250k
£225k
£200k
£175k
£150k
£125k
£100k
£75k
£50k
£25k
£0k
Assets
2
3
Self-funding5
1
Key
1= Personal care
savings bonds
2= Equity release or
Immediate needs
annuities
3= Disability linked
annuities
4= Insurance products
5= Self funders
Product types based on wealth
4
11. £0 £5000 £10,000 15,000 £20,000 £25,000 £30,000
Income p.a.
£250k
£225k
£200k
£175k
£150k
£125k
£100k
£75k
£50k
£25k
£0k
Assets
2
3
Self-funding5
1
Key
1= PCSBs
2= Equity release or
Immediate needs
annuities
3= Disability linked
pension annuities
4= Insurance products
5= Self fund from
income
Proposed means testing boundary
Solid line shows proposed means test boundary
4
12. Proposed means test in more detail
Proposed means testing entitlement zone for different levels of assets and
income including capital limits for domiciliary and residential care
State support = Care tariff – (income net
of personal allowance + imputed
income)
Where:
Care tariff = Annual cost of care as set
by the local municipality
Imputed income p.a. = capital/250 x 52
•A new upper limit of £118,000
(previously £23,250)
•A limit of £27,000 for people that do not
own their own home.
•A new lower capital limit is £17,000
(previously £14,250)
13. Critique of the proposed means test
• Arbitrariness of formula - e.g. are people with same
wealth treated the same?
• Complexity - individual must contend with imputed
income and three different limits – one upper and
two lower
• Cliff edges in formula which confuse but might also
create incentives for people to game the system
• Strong financial disincentives – for example
additional income is penalised pound for pound
14. The preferred formula
Concepts:
1. Tariff - the cost of a care package including both care and living costs
2. Years afforded – the years of care you can notionally afford from your
assets and income based on a needs assessment and tariff.
Years afforded = Value of your assets/ (£25,000 – annual income)
e.g. £25,000 is the assumed tariff but it could be any amount
2. The taper – this is the fraction that is applied to the years afforded
which determines how much support you will receive.
3. The amount of support you receive is given by:
State support = (1 − 0.2 × Years afforded) × Tariff
Where the taper equals 0.2
15. Example
Suppose a person with £50k savings and £10k income was faced with a tariff of
£25,000.
His number of affordable years = 50,000/(25,000-10,000) = 3.33
His state support would be = (1- 0.2 x 3.33) x £25,000 =£8,333
If he had no income at all then he would not be entitled to any support if his savings
exceeded £125,000 because he could afford 5 years of care.
( 1 – 0.2 x 5) x £25,000 =0
In addition he would receive no support if his income was £25,000 or more because
fees could be paid out of income.
The maximum support a person can receive is given by the Tariff minus income.
16. Entitlement zone
-
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
- 5,000 10,000 15,000 20,000 25,000 30,000
Income (£s)
Assets(£s)
-
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
- 5,000 10,000 15,000 20,000 25,000 30,000
Income (£s)
Assets(£s)
A
B
There are no limits/cliff
edges in the proposed
system. The amount of
support depends on the
tariff (annual care cost)
and your means. This
example is based on
care costs of £25,000
per annum.
Zone A – supported costs Zone B – unsupported costs
17. Illustrative example for different levels of
income and assets
This chart shows the
level of support in
each wealth bracket
based on a care tariff
of £25,000 a year
and a taper of 0.2
State support is withdrawn as assets or income are increased. The dotted line shows the
state support boundary for this level of tariff and taper value e.g. a person with no assets or
income would receive the full £25k but this then tapers away
18. It can also be thought about in a different
way as follows….
Bandings:
A: 80% - 100%
B: 60% – 80%
C: 40% -60%
D: 20% -40%
E: 0% to 20%
>E zero
The support system can be imagined as a series of bands. Band A
receives the most support and E the least. Anyone who can afford
more than 5 years of care based on a tariff of £25,00 from their
assets and income gets nothing.
19. How is state expenditure controlled?
• An annual review of care needs including financial support
to take account of changes in circumstances
• Annual reviews of tariffs which combine both care and
living costs for setting LA rates
• Actual costs to individuals above the tariff would be met
out of pocket – the so-called ‘top up’
• Through the taper which also regulates state support which
would be fixed (a value of 0.2 is recommended or slightly
higher)
20. Proposed and preferred formula compared
Person Category Amount (£) Years of
care
afforded
Preferred
support (£)
Proposed
support (£)
A Income 10,000 3.33 8,333 6,603
Savings 50,000
B Income 15,000 3.33 8,333 8,136
Savings 33,333
C Income 5,000 3.33 8,333 9,669
Savings 66,667
Under the preferred formula income and savings are treated equally but
under the proposed formula those with higher incomes are penalised relative
to those with assets.
21. Worked example A
(Nursing or residential care)
Care cost progression over a six-year cycle up for a person in a care home
including the depletion of assets, state support and out-of-pocket costs for a
person with assets of £100,000 and an annual income of £10,000 and
assessed care and living cost of £25,000 of which care costs are £12,000
(based on taper of 0.2).
Year in
care
Cumulative
care
payments (£)
Assessable
capital at
start of
care year
(£)
State
support
(£)
Cost to
individual
(£)
Contribution
to cap
(£)
Years of
care
afforded
State
support
band
1 25,000 100,000 0 25,000 12,000 6.7 self-funder
2 50,000 85,000 0 25,000 24,000 5.7 self-funder
3 75,000 70,000 1,667 23,333 36,000 4.7 E
4 100,000 56,667 6,111 18,889 48,000 3.8 D
5 125,000 47,778 9,074 15,926 60,000 3.2 D
6 150,000 41,852 11,049 13,951 72,000 2.8 C
Final balance 37,901 27,901 122,099
22. Worked example B
(Domiciliary care)
Care cost progression over a six-year cycle for person receiving
domiciliary care with savings of £50,000 and income of £10,000
and assessed care and living costs of £18,000.
Year in
care
Cumulative
care
payments (£)
Assessable
capital at
start of care
year (£)
State
support (£)
Cost to
individual
(£)
Contribution to
cap (£)
Years of
care
afforded
State
support
band
1 18,000 50,000 0 18,000 5,000 6.3 self-funder
2 36,000 42,000 0 18,000 10,000 5.3 self-funder
3 54,000 34,000 2,700 15,300 15,000 4.3 E
4 72,000 28,700 5,085 12,915 20,000 3.6 D
5 90,000 25,785 6,397 11,603 25,000 3.2 D
6 108,000 24,182 7,118 10,882 30,000 3 D
Final balance 23,300 21,300 86,700
23. Same scenarios using proposed formula
1 - 25,000 1,136 16,864
2 856 24,144 2,564 15,436
3 3,798 21,202 3,694 14,306
4 6,128 18,872 4,590 13,410
5 7,973 17,027 5,299 12,701
6 9,435 15,565 5,861 12,139
Final balance 28,190 121,810 23,145 84,855
(b)
Domiciliary
care state
support
£s
(b)
Cost to
individudal
£sYear in care
(a) Residential
care state
support
£s
(a)
Cost to
individudal
£s
Over a six year cycle costs out of pocket and state support is fairly similar but
don’t forget that the picture is complicated in the proposed case because of use
of upper and lower limits and it also depends on whether your wealth is mainly in
income or assets.
24. How depletion works in the preferred case
• The lower capital limit is determined formulaically within the test
• It increases in value in line with the tariff recognising that the
people with higher care costs need greater financial protection
• People on high incomes have a lower capital limit since they not
need to draw on assets to the same extent
• For those on low incomes but high assets the limit is also lower
because the formula requires that they ought to make a bigger
contribution
• The capital limit is a maximum when a person’s income equals half
the tariff
25. An example of asset depletion
The rate of asset depletion
depends on the tariff and also
income so depends on
individual circumstances.
Remaining assets converge to
an asymptote. In this example,
the lower limit is £30k and is
reached in ~ six years i.e. in
the same period as the cap.
Under the proposed formula
there is one limit for
everybody. Assets would
continue to decline until they
reach £17,000.
Cap reached
after 6 years
26. Capping care costs – yes or no?
• The cap is a device introduced to prevent a person
incurring catastrophic costs and is set at £72k
• Care accounts will be created to monitor progress
towards the cap administered by LAs
• People previously regarded as self-funders will be
included in the arrangements
• LAs will need extra resources to administer the new
duties diverting resources from front line services
27. Capping care costs – yes or no?
• The results of this research show that by the
time the cap is reached most people will have
reached their lower asset limit so will receive
no additional protection
• It is also debatable whether high net worth
individuals will benefit if the other suggestions
of this report are implemented
28. Financial incentives
• Means test takes money away from people
that have bothered to save for care
• We propose new mechanisms to reward
people who save for their care
• There are several possible ways to do this
depending on the savings product or asset
class
• They could apply to the way savings are taxed
or to how the means test is applied
29. Savings allowances
The paper gives two examples:
1. A capital allowance not subjected to means
testing – could be product specific (e.g. a
savings vehicle)
2. A registered care account with HMRC which
entitles a person to ignore 20% of their
assets for financial assessment purposes
30. Person with protected capital in a care
savings product
Cumulative
care payments
State
support
case (i)
Cost to
individual
case (i)
Cost to
individual
case (ii)
(£s) (£s) (£s) £s)
1 18,000 0 18,000 0 18,000
2 36,000 0 18,000 3,600 14,400
3 54,000 2,700 15,300 5,580 12,420
4 72,000 5,085 12,915 6,669 11,331
5 90,000 6,397 11,603 7,268 10,732
6 108,000 7,118 10,882 7,597 10,403
Final balance 21,300 86,700 30,714 77,286
Year in
care
State
support
case (ii)
(£s)
Case (i) £10k savings are included in a person’s assets;
Case (ii) £10k savings are disregarded.
In case (i) the 6-year cost to the individual is £86.7k; in case (ii) it is £77,286, so
individual gets to spend all of his investment.
31. Care savings accounts
Year in care
Cumulative
care payments
(£s)
State
support
case (i)
(£s)
Cost to
individual
case (i)
(£s)
State
support
case (ii)
(£s)
Cost to
individual
case (ii)
(£s)
1 25,000 8,333 16,667 13,333 11,667
2 50,000 10,556 14,444 12,222 12,778
3 75,000 12,037 12,963 11,481 13,519
4 100,000 13,025 11,975 10,988 14,012
5 125,000 13,683 11,317 10,658 14,342
6 150,000 14,122 10,878 10,439 14,561
Final balance 71,756 78,244 69,122 80,878
Case (i) receives no disregard and so £50,000 is taken into account
Case (ii) receives 20%, which means that only £40,000 is taken into
account.
The results show that both cases are entitled to state support from the
outset but it can be seen that out of pocket costs for case (ii) are £69,122
on surviving 6 years as compared with £78,244 in case (i).
32. Evaluation
Criterion Verdict Comment
Fairness
Income and assets treated equivalently
Simplicity
No limits or cap so less scope for
‘gaming’ system
Transparency
Support linked to care package and a
person’s means
Cost control
Exercised through the tariff and taper
Incentives
Capacity to generate new money in the
system
33. Further work
• Better information on personal liability for care costs
over the care cycle
• The introduction of accredited care savings products
for everybody
• Thorough analysis of incentives for different savings
vehicles, income and asset classes
• New tools to help people select appropriate savings
vehicles and plan ahead
• Revisit cost to the public purse given the imminent
demographic changes
