The Future of Funding Long-term Care for Older People

James Lloyd Senior Research FellowSocial Market Foundation

January 14th 2010

Where are we now? The case for change in older people’s LTC funding• Unmet need among older people

– 6000 high-needs– 275,000 lower-need

• Reliance on excessive informal care provision– Informal care comprises majority of care provision– Quantifiable impact on QoL for those providing

20hrs+ p.w.• Experience of catastrophic costs

– Out-of-pocket payments on personal care + ‘hotel costs’.

• Not enough money in the system = poor quality care/outcomes.

Where do we need to get to?

•Short and medium term: – Address problems among current older

population.– Eliminate unmet need and reduce reliance on

excessive informal care. – Among those wealthy enough to be entitled to

state-support, increase number of older people insured for risks associated with LTC.

•Long-term: – Potential introduction of mandatory working-

age contributions into an insurance/risk-pooling mechanism, but not a P-A-Y-G transfer to baby-boomer generation.

Where do we need to get to?

• In short: increase proportion of GDP spent on formal care provision.

– Put another way: increase societal wealth spent on formal care.

•But do this in a way that is fiscally sustainable and fair between the generations, I.e. not simply reliant on taxation and public spending.

Progress in the Long-term Care Funding Debate

1999-2009

Universal free care funded by higher income tax

• Growing recognition:– Unaffordable

• Declining elderly support ratio• Increasing longevity• Current fiscal position.

– Unfair• New ‘universal’ entitlement for those retirees

that have only contributed to ‘safety net’ system of support.

Universal free care funded by new higher inheritance tax

•Administratively feasible and could generate the revenue.

•Growing recognition: – Politically toxic.– Prospects of adoption by Conservative

government?

Private-Sector Insurance Market

•Current ‘pre-funded’ insurance market of 0.4%.– 40,000 products sold against 9,000,000

people aged 65+ not entitled to state support.

• Immediate needs annuities– Only pools (longevity) risk among those

needing care– Currently only bought by very wealthy

households• Adding to burden on younger working-age

cohorts would exacerbate pernicious wealth inequalities between generations.

Private-Sector Insurance Market• Growing recognition:

– Demand-side and supply-side barriers to market.• Inertia• Declining financial capability in old age• Need to see an IFA• Liquidity problems

– Role of private sector market likely limited to ‘gold-taps’ groups.

– ‘Politically sustainable’ level of take-up likely to be impossibly high.• Low take-up --> poor outcomes --> demand

for reform --> political issue --> low take-up.

Progress in the Long-term Care Funding Debate: 2009 and after

•Shaping the Future of Care and Support, July 2009.

•Party Conference proposals– Labour - Free Personal Care – Conservative - Home Protection Scheme

•Politicisation of debate– Free Personal Care at Home Bill– Conservative Attendance Allowance

campaign

A quick Party Conference detour:

Labour Conference Policy

•Free state-funded personal care for those with “highest” care needs.

– Incoherent with Green Paper. – Small pot of new DH funding - (£680m?) - to

implement. – Sharp entitlement ‘cliff-edge’ between

highest needs and those just below. • Unfair for those with long-term mid-level

personal care needs who accumulate ‘catastrophic costs’.

Labour Conference Policy

– Questions remaining over figures and entitlement.

– No explanation of overall logic for policy. • Why not just put up AA for all groups?

– Effect on political strategy for LTC funding reform? • Reinforces expectation of state-funded free

care.• Will ultimately make it harder for any

government to tell public that they need to contribute to an insurance.

Conservative Conference Policy• £8000 lump-sum insurance paid at 65 for residential care

costs voucher. • Entitlement based on needs-test.• Insurance provided entirely by private sector through

branded-products. • Purchase via equity-release from 65 for those with

liquidity constraints. • Vouchers cover average cost of residential care (care +

‘hotel costs’):– Likely to require out-of-pocket top-ups in South East.

Conservative Conference Policy• Ignores domiciliary care costs.

– No real asset protection. •No explanation of how reasonable take-up of

product would be achieved, e.g. above 0.4%. •Encourages shift into residential care. •Likely to cause price inflation in residential care

market. •Questions over figures:

– Premium priced correctly?– Equal premium for men and women implies

cross-subsidy. • But where from? How is this undertaken

by private sector insurer?

Party Conferences proposals

•Both highly problematic•Neither appears thought-out•Both appear focused on achieving political

outcomes

“Shaping the Future of Care Together”

Evaluating the Green Paper Funding Options of Older People’s Long-term Care

(ignoring issues around systemic reform, personalization, standardized needs-assessments, etc., etc.)

Green Paper Option: ‘Partnership’

• Essentially the current system of means-tested state-funded co-payments.

– Disability benefits reallocated via a National Care Service.

– Entitlement more precisely proportional to need• Less cliff-edge through more means-testing.

– No real new public money in the system. – No protection for individuals from ‘longevity-

risk’, i.e. ‘catastrophic’ accumulated care costs. • Therefore, no more politically sustainable

than current system.– So, a ‘building-block’, not a solution.

Green Paper Options: ‘Comprehensive’• Mandatory insurance approach. • £17-20,000 contributions into state-sponsored insurance

fund for those 65+. – Core functions of insurance fund likely to be

outsourced to private sector.– Flexibility of contributions: at SPA, through income

contributions or as charge on estate.– Covers longevity-risk for personal care costs. – Ignores accommodation costs

• Therefore limited asset protection. – Mechanism to increase proportion of societal wealth

spent on formal care provision.– Political challenge of £20,000 mandatory

contributions.

Green Paper Options: ‘Insurance’• Voluntary insurance approach:

– £20-25,000 contributions.– Flexibility of contributions: at SPA, through

income contributions or as charge on estate.– Sidesteps accommodation costs.– Mechanism to increase societal wealth spent on

formal care provision. – Policy design choice between:

• State-sponsored insurance fund or private market in insurance products.

• NB: These are not mutually exclusive, particularly in relation to ‘top-up’/‘gold-taps’ insurance market.

Green Paper Options: ‘Insurance’•Voluntary insurance approach:

– Administratively feasible: state-sponsored insurance likely to see core functions outsourced to private sector.

– ‘Voluntary approach = Politically feasible– Principal problem for both voluntary

approaches is issue of ‘take-up’.

Green Paper Options: ‘Insurance’• In short, the voluntary “Insurance” option is

best starting point for funding reform. •At this stage, don’t worry about precise

premiums and entitlements – it is fixing the approach that is important.

Key questions for the Green Paper

Should the state adopt a mandatory or voluntary approach to insurance for long-term care?

• Green Paper presents a false choice: either/or. • Better to think of staged approach:• Voluntary insurance --> soft compulsion (e.g. mandated choice) --> mandatory insurance. • Reform is about changing awareness, culture and attitudes to insurance. • Phased approach avoids T5 moment. • Mandatory stage could coincide with mandatory working-age contributions.

Should insurance be left to a private sector market or organised by the state?

• For voluntary ‘Insurance’ option, the key issue: how to maximize rates of take-up?

• So, in evaluating choice of private-market vs. state-sponsored insurance approach: which will achieve higher participation?

• NB: this is not a ‘state’ vs. ‘private’ issue: – Working assumption: core functions of state-

sponsored insurance fund would be outsourced to private sector.

– Market for private-sector ‘gold-taps’/’top-up’ insurance will exist regardless of what state does.

Should insurance be left to a private sector market or organised by the state?

• So, which will achieve higher participation? • Private sector market has never overcome demand-

side barriers to LTC insurance. • State-sponsored insurance fund enables usage of

‘levers’ available to state. – Single brand– Impose much simpler ‘choice architecture’.– Promotion of insurance through GP surgeries,

and other routes. – Eliminate need to visit financial adviser?– Also implies different narrative, level of trust, etc.

Should insurance be left to a private sector market or organised by the state?•Crucial for premium and benefit design: •Private-sector market:

– Likely to necessitate individually risk-rated premiums. • Including gender specific premiums.

•State-sponsored insurance scheme: – Enables ‘community risk-rated’ premiums, e.g.

gender-neutral premiums. – Enables geographical variation in entitlements to

reflect variations in unit care costs. – Lower transaction costs for flexible contribution

mechanisms:• e.g. scaling up existing probate system to enable

estate-charge contributions.

Should insurance be left to a private sector market or organised by the state?• State-sponsored insurance scheme run by the private

sector scores better on take-up, benefit and premium design.

• An example of a state-sponsored insurance: Singaporean ‘Eldershield’ scheme.

• Government sets premiums and benefits• Private providers:

– Great Eastern– NTUCIncome– Aviva

• Working-age contributions among those aged 40+• Use of auto-enrolment at launch. • Transitional arrangements for current pensioner population

– “Interim Disability Assistance Programme For The Elderly”

Should insurance schemes for long-term care focus on personal care, residential care, or both?•Green Paper sidesteps ‘accommodation’ costs.

– Conservative proposal sidesteps ‘personal care’ costs.

•Both can cause of ‘catastrophic costs’.• If accommodation costs are ignored, likely to

undermine long-term support and consensus for new system.

•So, incorporate accommodation costs as optional add-on:

– Via state-sponsored insurance fund?– Via private-sector products linked to participation

in state-sponsored insurance?

What are the trade-offs between a national and locally organised system of care funding?

•Postcode lottery vs. local discretion•Responsibility (and problem) for national vs.

local government •Portability of entitlements •Reform vs. Administrative problem of

reorganising local government financing.

Future of health and social care integration

• ‘Supply integration’ is distinct from ‘user integration’.

•Still a major policy challenge. •Separate budgets inevitably incentivise cost-

shifting. •Unified budgets always likely to result in clinical

care absorbing resources. •Uncertainty on defining health and social care

needs. • Issue needs much investigation and thought.

What are the opportunities and pitfalls associated with long-term care funding becoming a mainstream political issue?

• Like pensions, LTC funding reform requires long-term political consensus

• Otherwise public will be inhibited from buying-in to any reform.

• All stakeholders in long-term care funding debate realize political consensus is pre-requisite for reform:

– Except for the politicians. • Timing of interventions politically motivated.• How useful are these interventions to advancing agenda?

Concluding Remarks

• There is no long-term care funding problem.• Even in the context of public spending constraints, there is significant wealth in the household sector.

• Fiscal crisis is no block on reform:• Reform is focused on private household wealth.• Obligation and ‘guiding principle’ for government: help people use the wealth they possess.

James LloydSenior Research FellowSocial Market Foundation11 Tufton StreetWestminsterLondonSW1P 3QBwww.smf.co.ukjlloyd@smf.co.uk