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As the immediate threat to the health service from the pandemic recedes, attention is turning to long-term care. Anyone wanting to be heard in the debate on how to reform the system has to contend with the agenda set by the 2011 Dilnot Commission, which proposed a cap on long-term care costs. In 2017, Theresa May tried to ditch the idea of a cap, and was pilloried for her efforts. But she was right to try: the cap is fundamentally wrong and inequitable, as I have argued elsewhere.

Now that Andrew Dilnot is back on the airwaves defending the cap, it is opportune to explore the problem with economists like Dilnot dishing out policy advice.

The politics of the day

First, a disclaimer: not everything that is wrong with the current debate on long-term care can be blamed on Dilnot. Furthermore, Dilnot might claim that his recommendations reflected political constraints, framed in the report around the claim that people think that it is unfair to have to sell your home to pay for care.

However, this claim could have been looked at a little more critically. If people had been asked whether it is fair that those on average incomes should pay more tax to protect the inheritances of the wealthy, they might have given different answers. The Dilnot Commission adjusted its recommendations to try to facilitate their implementation, but this is a hazardous game. And arguably it is not what the public expect: economists enjoy prestige in public policy debates because they are assumed to be making proposals in the public interest, not cutting their cloth around the politics of the day.

If the cap fits…

In any case, Dilnot did not treat the political will to protect housing equity as a constraint on what could be proposed. In fact, he embraced it. The lifetime cap on care costs was the first recommendation in the Commission’s report and far and away the most distinctive (the second recommendation was to make the means-tested system less mean, which people have been proposing for decades).

The cap fitted well with two standard techniques used by economists in formulating public policy recommendations. The first technique is to identify a ‘market failure’ and propose instruments to resolve or correct this. The second is to partition the public policy problem so that only the parts which economic analysis can ‘solve’ are addressed; other aspects of the problem are left for someone else. Very often, this partitioning means solving an efficiency problem, while the distributional problem of how to stop the rich getting richer and the poor getting poorer is framed as a separate issue to be addressed with other policies.

The cap fitted a market failure analysis perfectly. On page 12 the Commission argued that care costs are “the only major area in which everyone faces a significant financial risk, but no-one is able to protect themselves against it”. People can buy private insurance against some risks, but the private long-term care market has failed to develop. In healthcare, the state pools risks and provides social insurance to everyone, but not in long-term care.

On page 20, the Commission portrayed its proposals as “a type of social insurance policy, with a significant ‘excess’ that people will need to cover themselves. People could take out private insurance to pay this ‘excess’ – the amount up to the cap. Long-term care insurance had failed to develop because of the ‘tail risks’ that arise from a few people incurring very high care costs. The cap would address this, with the government acting as ‘reinsurer’ for the tail risk, enabling private companies to offer viable policies. The market failure of an absent private insurance market would be corrected by shifting a significant amount of risk onto the state.

Inequities

The obvious question is: why have an excess? An excess will inevitably be regressive. Some will be unable to pay it, and will have to rely on the means-tested system. This is why we do not generally have excesses in social insurance. But the market failure frame justifies the excess: it corrects the market failure, and creates space for private provision to thrive. Interviewed on the Today programme on 21 June 2021, Dilnot was asked about those who could not benefit from the cap because their resources are too limited (i.e., they could not pay the excess). His answer was to partition the problem: the means-tested system offered them support. It was lost on him that the aspiration of social insurance for more than a century has been to integrate everyone into a single system, rather than preserving a separate system for poor people, which, as Titmuss famously pointed out, would tend to be a poor system.

But the proposed cap also contains a further inequity: everyone pays the same excess. The owner of a house in London pays the excess and enjoys protection for her equity in a million-pound house; the owner of a house in Sunderland pays the same excess and protects a much smaller amount of equity.

As the BBC’s Adam Fleming observed in the Today segment, this approach to protecting housing equity “is starting to look like a little bit of a posh pledge”, not attractive to those with little housing wealth. Indeed, on page 7, the Dilnot Commission report helpfully illustrates how the means-tested system and the cap would interact to ensure that people with £100,000-£200,000 in assets will have to spend the highest percentage of their wealth on care; beyond that range, the richer you are, the lower the share you pay.

Distributional effects

Asked about the distributional effect of the proposals on the Today programme, Dilnot gave the typical economists’ problem-partitioning response: “If we want to make the overall effect of government fair across income and wealth, the way of doing that is through the tax system.”

Obviously, this answer makes difficult decisions into someone else’s problem. Worse than that, though, Dilnot’s answer implies that efficiency and equity should be separated, as equity concerns lead to inefficient outcomes. But the tax system is not a kind of free lunch that can reduce inequality without presenting its own inefficiencies.

Furthermore, many tax experts agree that we need to find a way to tax property – specifically housing wealth – if the tax system is to counter rising inequality. The Dilnot proposals do the exact opposite: they call for an uplift in general taxation in order to protect housing wealth.

Dilnot could reply that this was the hand he was dealt, but it wasn’t. With a bit of ingenuity, he could have offered solutions to the problem of people having to sell their homes to pay for care that did not have such inequitable consequences. He could have recommended a proper social insurance system and ditched the excess, which would also have created an integrated system instead of maintaining means-testing.

At the other end of the spectrum, Dilnot could have stuck with the current system that people pay for themselves as long as they can afford to, but proposed that homeowners would be able to buy housing equity insurance, with premiums geared to the amount of housing wealth that is being insured so that the richest pay most – a small step towards a property tax.

Instead, he stuck to the economists’ twin tracks: look for the market failure, and let a separate policy address the distributional consequences. A cross-party solution to the problem of funding long-term care cannot be found by taking this direction of travel.