Fair cost of care: what is it and will it fix the problems in the social care provider market?

The fair cost of care policy did not make many headlines when plans for social care reform were revealed last autumn, but it is arguably more significant to how the social care system operates than the cap on care costs. Natasha Curry explains what the policy is, what it will take for it to be successful, and the extent to which it might fix the sector’s problems.


Published: 15/06/2022

When the government announced its plans for social care reform for England last autumn, the cap on lifetime costs and a more generous means test grabbed the headlines. But bundled up with the announcement was something entitled “fair cost of care” – a policy that is arguably more significant to the way that the social care system operates than the cap on care costs, and which could play a vital part in what the future holds for the sector.

This summer is proving to be a busy time for councils, as they have until mid-October this year to demonstrate to the Department of Health and Social Care that they are undertaking the necessary groundwork ahead of implementation. As councils and providers grapple with the complexities of putting fair cost into practice, we have produced this explainer in which we set out: what the policy is; how it is being implemented; what challenges lie ahead; and whether it is likely to fix the long-standing problems in the market.

What is the fair cost of care policy?

The fair cost of care policy is intended to address the widespread practice of councils paying providers fees that do not adequately cover costs. This situation – a consequence of shrinking council budgets – has given rise to an unfair situation whereby people who fund their own care (self-funders) routinely pay higher fees than councils pay for those who are eligible for public funding. Providers have become reliant on charging self-funders a so-called “cross-subsidy” that effectively subsidises their council-funded clients. In residential care, self-funders can pay as much as 40% more for exactly the same care as peers who are funded by their council.

The fair cost of care policy aims to get rid of the cross-subsidy by giving self-funders the right to access the same rates that councils pay from October 2023. In order to mitigate the risk of destabilising providers by removing the cross-subsidy, the government is encouraging councils to “move towards” paying providers a “fair” rate. This process is intended to take place gradually over the next few years. Ultimately, it is hoped that local authority rates will have been increased sufficiently so as to render the cross-subsidy unnecessary.

How is it being implemented?

£1.36 billion in total is being made available to support councils in implementing and operating this policy to 2024/25. A key part of the process involves councils and providers agreeing what a “fair cost of care” is locally – in so doing, all parties are intended to “arrive at a shared understanding of what it costs to run quality and sustainable care provision in the local area that is reflective of local circumstances”.

The first tranche of money in 2022/23 amounts to £162 million, 25% of which can be used to fund implementation activities such as developing internal capacity and capability and planning. The remaining 75% (£121.5 million) is intended to be spent on paying higher fee rates. £600 million follows in each of 2023/24 and 2024/25.

As a condition of receiving future funding, councils are required to demonstrate by October this year that they are undertaking preparatory work. This includes completing cost of care exercises which establish the actual cost of delivering care; provisional market sustainability plans; and a report showing that funding is being spent according to the purpose of the fund.

What might stop it from being a success?

While there is widespread agreement that the social care provider market is deeply flawed and the primary ambition of the policy has been largely welcomed, a number of key concerns are arising among councils and providers around the challenges and risks of implementation. These centre on three main questions:

1. Will councils and providers be able to come together to agree a “fair” rate?

Smooth implementation of the policy hinges on councils and providers reaching agreement about what a fair cost is for the services they currently provide. According to DHSC guidance, “fair” means the median actual operating costs and should allow providers to make a “reasonable” profit (including re-investment) or surplus.

This is likely to be a complex process. There are questions around whether the median rate in any given area will be sufficient for all providers, given the range of services provided. Reaching agreement will also require a certain amount of judgement, trust, and a good understanding of providers’ finances. Lack of transparency among some providers is a known issue, and can limit what councils know about these organisations and their financial positions. Currently, councils may not contract with all the providers in their area, so will not necessarily have established relationships with them. Engaging with a potentially large number of providers and building trust may prove challenging within the timescales available.

An added complexity is that costs are not static, and current cost of living pressures make the future look particularly uncertain. Funding is allocated only until 2024/25 and this backdrop of long-term uncertainty may affect how councils and providers approach the exercise.

2. Is funding sufficient for councils to increase fees to ensure providers can operate without the cross-subsidy?

Local authorities and providers alike have expressed concern that the amount of money allocated to the policy is insufficient. Two key factors will determine whether funding is indeed sufficient.

The first is the rates that are eventually agreed with providers and how much higher they are than current council rates. Given that many providers are struggling even with the ability to charge a cross-subsidy, a sustainable rate is likely to be substantially higher than that currently paid by councils. If enough money is not available in council budgets, they may struggle to pay the higher fees or may look to reduce costs by commissioning less care for fewer people.

The second factor is how many self-funders will come forward to access council rates. Cost of care exercises should help to establish estimates of numbers of self-funders that there currently are in a local area, but there will be no certainty over how many will come forward nor how close they will be to the new means test threshold of £100,000. Even more uncertain is how many additional people with unmet needs who currently receive no care will come forward. It is not clear what provisions are being made to prevent a sudden spike in demand from self-funders to access lower council rates on 1 October 2023.

3. Will there be sufficient capacity and capability in councils to implement and effectively administer the new system?

Preparing for, implementing and administering the new regime will require substantial capacity within councils, many of which have shed skilled staff over the last decade. Effective implementation will require good data, sophisticated market analytics skills and an ability to engage with a potentially vast number of different types of provider. Market shaping and commissioning are known to be highly variable between councils.

There is an opportunity to gather good data about self-funders and local needs to help shape services but, with waiting lists for initial care assessments or reviews already thought to be around 245,000, councils are likely going to struggle to meet increased demand for assessments. This demand will come from an increased number of people falling below the upper means test threshold (of £100,000) and from self-funders (who will need a council financial and needs assessment in order to access council rates and meter towards the cap – see box below). Councils will also need sufficient staff to maintain a care account for every individual metering towards the cap.

Providers too will require considerable capacity and capability to engage with cost of care exercises and fee negotiations. The majority of care providers are small and have limited back-office capacity for producing data and engaging in meetings. At a time when many providers are operating with high levels of vacancies (including at manager level), there is a risk that providers may not have sufficient capacity to engage meaningfully in the cost of care exercises.

A note on the social care cap

From October 2023, people who pay out of their own pocket for care will be able to “meter” towards the cap – a limit of £86,000 on what they will pay over their lifetime towards their eligible care.

In order for costs to count towards the cap, individuals will have to undergo a financial and needs assessment by their council. Only costs of care that meet “eligible” needs (as determined by their council) will count towards the cap. People will meter at the rate that the council would have paid if they had been funding them. So, if a self-funder chooses a more expensive provider or buys more care, that excess will not count towards the cap. There will need to be very clear agreements between councils and providers as part of preparation exercises about what level of care constitutes a standard package (e.g. in hours per week) and what should be classed as a ‘top up’.

Providers will also be able to charge top ups for preferred choices such as premium accommodation. It is not yet clear how much freedom providers will have to decide what counts as an optional extra and how much they can charge.

Will the fair cost of care policy fix the provider market?

The fair cost of care policy is a bold element of the reform package that offers an opportunity to set the market for social care on a more stable footing and address one source of unfairness in the system. But it will only be successful if the challenges around implementation can be managed carefully and, crucially, if sufficient funding becomes available over the long term.

The reality of the situation is that the risks around implementation are high. Without sufficient funding, there is a risk that councils will continue to pay fees that render providers financially unsustainable. That may mean that providers have to start to rely on ‘top up’ payments for extra services, which may become a new form of cross-subsidy.

Some providers may choose, or be forced, to exit the market, as happens now. Or councils will be faced with a stark choice: to raise more revenue via council tax and other local levies or make cuts elsewhere to meet the higher fees. They may look to reduce funding for other council services or to reduce the number of people whose care they fund by raising eligibility thresholds (i.e. the severity of need a person must have to qualify for publicly funded care).

This will also impact how quickly self-funders can meter towards the cap because only care for “eligible needs” counts towards the cap (see box). Far from fixing the market, this will just create new constraints on access to care for all.

One of the key issues this policy is unlikely to fix on its own is the shortage of care workers. In the short term, the financial envelope is unlikely to allow employers to increase wages or invest in staff. Without boosting the workforce, it is unlikely that the supply of care will expand sufficiently to address growing levels of unmet need and long waits for needs assessments. Each wait represents someone struggling to get by from day to day and longer delays for those ready to be discharged from hospital. It is important that the government develops a coherent workforce strategy that works alongside the wider sector reforms.

The government’s social care reform white paper promised to deliver a “vibrant, healthy and diverse” market that fuels innovation and enables people to have choice and control over their lives. That vision is good but unlikely to be delivered within the current parameters of fair cost of care. It is a first step towards much-needed market reform, but the challenges and risks of implementation should not be underestimated. If care providers are to genuinely thrive and councils enabled to invest creatively and shape future provision to meet changing needs, it is crucial that enough money is made available not only to stabilise provision in the short term, but also to offer financial certainty into the longer term.