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14Dec16 - Costing care event

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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.

Published in: Economy & Finance
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14Dec16 - Costing care event

  1. 1. Costing care: New approaches to means-testing and funding adult social care 14th December 2016 #CostingCare
  2. 2. Welcome Baroness Sally Greengross Chief Executive International Longevity Centre - UK #CostingCare
  3. 3. Professor Les Mayhew Professor of Statistics, Faculty of Actuarial Science and Insurance Cass Business School Presentation of Paper #CostingCare
  4. 4. Means testing social care in England Les Mayhew Faculty of Actuarial Science and Insurance Cass Business School London lesmayhew@googlemail.com
  5. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  34. 34. Trevor Llanwarne Former Government Actuary & ILC-UK Trustee Responses from Discussants #CostingCare
  35. 35. Richard Humphries Assistant Director, Policy The King’s Fund Responses from Discussants #CostingCare
  36. 36. Jane Ashcroft Chief Executive Anchor Responses from Discussants #CostingCare
  37. 37. Discussion #CostingCare
  38. 38. Close Baroness Sally Greengross Chief Executive International Longevity Centre - UK #CostingCare

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