Where Next for Long-Term Care?

The Conservatives expected to win in 2017, and the manifesto was written accordingly. For the small team in Number 10, it was an opportunity to fix policies where there could be internal dissent and backsliding. The House of Lords observes a convention of not opposing policies that are based on clear manifesto commitments by the winning party, and May’s team evidently hoped that dissidents in the Commons could be subjected to a similar discipline. The manifesto was taken as an opportunity to reorient the party towards a new social and egalitarian vision of conservatism in which the instincts of middle England were identified and distinguished from the interests of the cosmopolitan elite.

Apart from the obvious problem of managing a party packed with representatives of the cosmopolitan enemy, the image of middle England was always vulnerable to deconstruction once policy details emerged. General and rhetorical appeals gave way to the calculus of interests, and therein lay a problem for long-term care policy in particular. Middle England may believe itself to be only ‘just about managing’, but it still enjoys or aspires to home ownership. But a goodly share of future long-term care finance will have to come out of housing equity, and the Prime Minister’s advisers took the plunge and said so. In a policy area riddled with complexity, their answer was crystalline in its simplicity: people should pay for their own care unless they could not afford to do so. Housing wealth, released if necessary by Deferred Payment Agreements, would count in what could be afforded, while the means-test threshold that delineates those who can afford care from those who cannot would be raised to £100,000.

Critics were quick to point out that this scheme offered no insurance against the lottery of long-term care costs for anyone but the worst off, for whom the £100,000 threshold provided protection. And long-term care costs really are a lottery: while many people will spend something on care in their old age, a crippling burden of high costs falls on about 10% of the elderly. It seems an ideal case for insurance, especially as the burden is genuinely difficult to predict. Wealth and education do not guard the privileged against dementia: the disease where the costs can be highest and most prolonged.

The argument that there should be insurance against very high costs, and that the state should provide it, was accepted in the Dilnot report. It proposed that there should be a cap on the amount anyone should have to pay towards their own care. The amount up to the cap can be thought of as an insurance ‘excess’. Economic theory (specifically, ‘Arrow’s theorem of the deductible’) suggests that it is efficient to have a certain amount of excess or self-insurance, although, somewhat confusingly, Dilnot thought that the private sector might provide insurance for the capped amount. Beyond that, the public sector would step in, effectively providing the ‘stop loss’ insurance. Thus the idea of a cap on the amount that anyone should have to spend on care became established, having received the imprimatur of economic expertise.

In 2015, the cap on care costs seemed to be a done deal: the Conservative and Liberal Democrat manifestos referred to it as if it was already in force, and Labour indicated that it supported the measure. Thus there was an outcry when the Conservatives did not include a cap in their 2017 proposals. But, as often happens when economic theorems are applied to public policy, the underlying arguments are far from straightforward. Dilnot proposed a cap but gave little guidance on the vexed question of how it should be set. A moment’s reflection tells us that setting the cap will always bring political torment. Set it low, and the state will have to meet the bulk of long-term care costs, which it is already failing to do, so the policy problem will not be solved. Set it high, and more and more people will find their wealth is not protected. Not only will the number of prospective beneficiaries of the cap fall, but also the beneficiary group has an undesirable feature: it consists of wealthy people. The higher the cap, the more it will be that only the wealthiest benefit from it.

In short, the cap is the policy instrument from hell. How did public policy on long-term care get into this predicament? We return to the Dilnot report on ‘Fairer care funding’ and its conception of ‘fairness’. Fairness, for Dilnot, meant finding a way to protect housing capital against care costs. Having to sell your home to pay for care, the report argued, was widely regarded by the public as unfair. The report gave no hint that there are vast inequalities in housing wealth; instead it claimed that ‘everyone’ faces a significant risk from care costs. This is patently untrue. Only those who have assets above the means-test threshold face a financial risk, and the scale of the risk increases with wealth. Estimates contained in the report showed that, if its proposals were adopted, the largest increases in public expenditure on care would accrue to those with the highest incomes, but this failed to ring alarm bells.

Dilnot also advanced a more prosaic defence of the cap, evaluated against the alternative of universal social insurance. Requiring a private contribution would restrain the cost to the public sector. Public schemes, Dilnot noted, tend to be, or become, underfunded. But the cap was really a limited gesture towards solving the problem of public underfunding. While dismissing a general insurance scheme, the Dilnot proposal envisaged the maintenance of public insurance beyond the cap. There was no discussion of the structure of this insurance: implicitly it was assumed that it would be the familiar British kind, whereby the premiums are collected through general taxation. This approach to insurance has many admirable features. Without the capped excess, it is the basis of the NHS: we pay in according to our income and use the services according to our needs. It is in a way a ‘double’ insurance, providing protection against health care costs and against having a low income. The Dilnot report is not to be faulted for planning on the continuation and augmentation of this insurance, but the report was silent on how that money might be found. That, apparently, was a problem for politicians to solve.

There is plenty of discussion in the report on how households could ensure that they could pay the capped amount: suitable private insurance products might be developed, or provision might be linked to pensions or savings plans. A private model was not seen as viable for the whole amount of care costs: private long-term care insurance has failed to get established anywhere. But insurance for a capped amount would be possible, as the cap would remove uncertainty about the potential cost of care. Thus Dilnot proposed a sort of ‘public-private partnership’ but, as so often with these wizard schemes, the government would have to find more money, and spend it on relatively wealthy recipients, in order to fulfil its role as partner.

In the face of Dilnot’s deafening silence about how to raise more public money, Labour and the Liberal Democrats ventured forth with their proposals. The Lib Dems proposed a 1p rise in income tax and the eventual introduction of a hypothecated health and care tax. In 2015, Labour proposed instead to create a new source of revenue, based on wealth rather than income, aiming particularly at those who have enjoyed large windfall capital gains from their home ownership. But this proposal came under intense criticism and was evidently deemed a vote loser, because in 2017 the party hedged its bets, keeping a wealth tax on the agenda but saying it would seek a cross-party consensus on how to raise the necessary revenue.

In proposing that a significant contribution to long-term care costs would have to come out of (a tax on) housing wealth, Labour tacitly challenged Dilnot’s peculiar definition of fairness, which is that housing wealth should be protected. Labour’s challenge is different to that posed by the Conservatives’ 2017 manifesto proposal, which failed to address the problem that some unlucky people would lose the capital in their homes, and have nothing to pass on to their children. A wealth tax would mean that the risk would be pooled: everyone with housing wealth would pay something, and they would all have a little less to pass on to their children.

Given that Labour’s proposal for a wealth tax in 2015 fell heavily on its face, it seems to be time for a bit of lateral thinking. The party is right to insist that new sources of revenue need to be opened up: in particular, that some sort of charge on wealth is needed if public services are to be sustained without an undue burden on the working age generation. The problem with the care proposal in the Conservatives’ 2017 manifesto was that it was a charge on an unlucky few, rather than a general levy on all those facing the risk of losing housing wealth. The solution to this problem is not to design the whole system of long-term care finance around the protection of housing wealth, as Dilnot did. The missing item in the Conservative manifesto was not the cap, but an insurance scheme for those who want to protect their equity in their homes.

The logic of housing equity insurance is quite simple. The main beneficiaries of the expansion of public long-term care provision are those with something to lose: the equity in their homes. Who do we want to tax to fund long-term care? Wealthy people: meaning, by and large, people with substantial equity in their homes. These dots can be joined up. If the problem with the Conservatives’ proposal was that unlucky people would lose their equity, the solution is to offer protection against that risk with housing equity insurance. Such a scheme is not difficult to devise, and it could have the useful feature that, since the insurance is of housing equity rather than care itself, those with more valuable houses to protect should pay a higher premium. The scheme can be voluntary: those who don’t believe in inherited wealth can reap a reward for their enlightened views.

No doubt this idea has snags that I have not thought of. But it has one great merit, which is to tackle the underlying politics of the long-term care debate. There are good arguments for turning to housing wealth to provide funding for care, but as the debate is currently structured, housing wealth seems untouchable. The cap has become firmly lodged in the policy debate even though it is fundamentally iniquitous. If the argument could be reframed, a solution is possible.

Some years ago, David Runciman dissected the politics of inheritance tax reduction in the US [1]. He pointed out that the wealthiest people, who would benefit the most, had proved skilful in finding frames and slogans which deceived the middle classes into thinking that their interests lay with the rich. Progressive politics has to learn to play this game too. ‘Tax breaks for rich murderers’ was Runciman’s suggestion for pushing back against the ‘death tax’. Unfortunately, some well-meaning people were suckered into talking about the ‘dementia tax’ at the last election, and these things are difficult to row back on. ‘Caps for rich home-owners’ does not have the same ring to it, but that is the policy we seem to be locked into now.

[1] Runciman, D
(2005) 'Tax Breaks for Rich Murderers', London Review of Books Vol. 27
No. 11, 2 June.