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Local authority buying power may force up care home charges

Mon, 13 Dec 2010

Local authorities may be driving up the cost of privately funded care home places and forcing other homes out of the UK market by paying less for assisted places for the elderly, according to research published today by the University of East Anglia.

The public sector uses its importance in the market to buy assisted places, for people eligible for state-funded care, at low prices. To break even or cover costs, care homes must increase the price for private 'self-funders', or be forced out of the market.

In a paper published by the ESRC Centre for Competition Policy at UEA, Professor Ruth Hancock and Professor Morten Hviid argue that those in the 'squeezed middle' - people no longer willing or able to pay the increased price but not eligible for support - will be the big losers. Those who can still afford to self-fund will also have to pay a higher price. The study also suggests policy issues in relation to possible reforms to the care funding system.

"Local authorities purchase care home places on behalf of a large group of people based on a means test of their income and capital assets. People excluded by the means test are self-funding. The more the price is increased for a privately funded place, the more buyers will drop out of the private market as less people can afford the higher price," said Prof Hviid, professor of law.

The results in the paper also have relevance for the recommendation in the Government Efficiency Review carried out by Sir Philip Green that "Government must leverage its name, its credit rating and its buying power".

"An important lesson from the care home market is that where the public sector purchases alongside private buyers, urging the public sector to use its buying power may lead to unintended consequences for the price that private purchasers pay," added Prof Hviid.

"Under the current means tests for residential care, local authorities can use their buyer power without destabilising the care home market too much. But if the system is reformed so that more people are entitled to some public support with their care home fees, local authorities may have to pay fees which are closer to the market rate. That will cost them more. The Dilnot Commission which is considering reforms to care funding system needs to recognise this," said Prof Hancock, professor of the economics of health and welfare.

Exercising their buyer power enables local authorities to spend less on care home places, and so more on other services, or to buy more places. The cost of this is borne by self-funding care home residents and the authors question whether they are the appropriate group to be paying for this.

The paper, entitled Buyer Power and Price Discrimination: The Case of the UK Care Home Market, uses a theoretical model to investigate and test the effects of an increase of price for privately funded places, the effect a large 'squeezed middle' will have on the market and possible solutions to reduce this.