A Comparative Study of Long Term Care Provision in the UK, Germany, Sweden and Japan

Martin Karlsson, European University Institute

Les Mayhew, Cass Business School, City University

Robert Plumb, Cass Business School, City University

Ben Rickayzen, Cass Business School, City University

Research sponsored by The Actuarial Profession

Research Questions

1. How will the British LTC costs evolve under different health scenarios?

2. What would the effects be of implementing the system of another country?

3. What are the redistributive effects of the British LTC system in a comparative perspective?

1. Cost Projections: Model Overview

Projection Model Demography (GAD) Disability Model(Rickayzen/Walz (2002))

Disabled Elderly PopulationBy severity

Mapping Disability-Care setting

Population receivingFormal Care

Population recevingInformal Care

Formal Care Costsby Payer

Implied Tax Rate

Wage Sum

Demography(GAD)

Earnings byAge/Gender(IRS)

Informal Care Balance

Demography(GAD)

CaregeivingPatterns

Supply of Informal Care

1. Cost Projections: Data Sources

1. Disability Data: Rickayzen & Walsh (2002) Disability Projection Model• Multiple State Model based on OPCS survey and GAD population

projections• Three scenarios considered:

1. Pessimistic (A): No trends in the transition rates other than an improvement in overall mortality

2. Baseline (C): ”1 in 10” assumption

3. Optimistic (N): ”1 in 5” assumption

2. Mapping Disability -> Care Setting: Based on The Health Survey for England (2002) and Rickayzen & Walsh (2002)Separate mappings for men and women from three disability states into

six care settings

1. Cost Projections: Data Sources (ctd.)

3. The Economy: Average earnings by age and gender as proxy for productivity

(Inland Revenue [2003]) Population projection (GAD)

400

410

420

430

440

450

460

470

480

490

500

2000 2010 2020 2030 2040 2050 2060

Year

£ B

illi

on

s

Wage Sum

1. Cost Projections: Informal Care

3. Provision of Informal Care: Age- and gender specific caregiving patterns form Family

Resources Survey (Department of Work and Pensions [2001]). Aggregate Amount of Care (hours) provided derived from

Rickayzen & Walsh (2002) Assumptions:

• OPCS 0-3 can provide care

• Recipients get 30 hours per week on average

• People below 20 years do not provide any care

• LTC population Increases by 50 % in 50 years

• Largest absolute increase in informal care

• Largest relative increase in formal home care

1. Cost Projections: Results

0

1,000

2,000

3,000

4,000

5,000

6,000

1996

2001

2006

2011

2016

2021

2026

2031

2036

2041

2046

2051

2056

2061

2066

Year

000'

s

Informal Care

Informal + Formal

Formal Home Care

Residential Home

Nursing Home

• Costs of formal care increase from £ 11 bn (2000) to £ 14 bn (2040)

• Residential home care comprises around 50 per cent throughout

• Share of public spending in total costs increases

1. Cost Projections: Results 2

0

2

4

6

8

10

12

14

16

1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

2050

2053

2056

2059

2062

2065

£ B

illio

n

Nursing Home

Residential Home

Formal Home Care

• The tax rate required drops from 1 % initially to 0.95 % in 2010

• The peak is reached in 2040

• In 2050, the implied tax rate is 1.3 per cent.

1. Cost Projections: Results 3

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

1996

2001

2006

2011

2016

2021

2026

2031

2036

2041

2046

2051

2056

2061

2066

Year

Per

cen

t

Implied Contribution Rate

• Informal Care: The share of younger recipients decreases from one third to 20-25 % (2030)

• Until 2030: Excess supply of care

• Later on a shortage that peaks in 2042 at 4.2 % or 250,000 carers.

1. Cost Projections: Results 4

40

50

60

70

80

90

100

110

120

130

140

2000

2004

2008

2012

2016

2020

2024

2028

2032

2036

2040

2044

2048

2052

2056

2060

2064

Mh

Demand, 65+

Total Demand

Supply

• Optimistic Scenario peaks at £ 12 bn (2037)

• Pessimistic Scenario peaks at £ 20 bn (2051)

• Informal Care: Huge Shortage 2020 onwards with pessimistic scenario.

1. Cost Projections: Sensitivity Analysis

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

1996

2001

2006

2011

2016

2021

2026

2031

2036

2041

2046

2051

2056

2061

2066

Year

Per

Cen

t

Tax Rate N

Tax Rate C

Tax Rate A

2. Comparative Study: Method

The mapping between disability and care setting assumed to be the same in all cases (i.e. No demand responses)

To estimate the means-tested parts of the support systems we use BHPS data on wealth and earnings of the elderly.

We assume that the relative distribution of wealth and earnings among the elderly remains constant throughout the projection period.

2. Comparative Study: Cases

Country Financing Predominant Provider Type

Means-Testing

Level of Responsibility

Benefits Costs (GDP)

Germany Social Insurance, Taxes

Private, non-profit

No National In-kind, Cash

~1.0

Japan Social Insurance & Taxes

Private, non-profit

No Local In-kind ~1.5

Sweden Taxes Public No Local In-kind ~3

United Kingdom

Taxes - Yes Local (National) In-kind ~1 %

2. Comparative Study: Germany

• Social Insurance Scheme Introduced in 1995 to halt income support spending

• Financed by proportional income taxation, 1.7 %• Insurance is administered by nation-wide, semi-public

Care Funds, that compete for clients.• High earners may opt out of social insurance• Spouse and children are also covered• Benefits depend on severity of disability and care

setting and cover roghly half of actual charges• Many elderly, especially in institutional care, still need

income support to cover LTC costs.

2. Comparative Study: Japan

• Social Insurance Scheme Introduced in 2000 • Financed by proportional income taxation (45 %),

insurance contributions (45 %) and out-of-pocket payments (10 %).

• Insurance premiums are paid by people aged 40 and older

• The Insurance is administered by local authorities• Benefits are solely based on need. There are six

different levels of severity.

2. Comparative Study: Sweden

• LTC is financed out of local income taxation (95 %) and out-of-pocket payments (5 %)

• Financing and provision of LTC is administered by local authorities, that enjoy some discretion in their design of local policies.

• The national government takes on a regulatory role and decides on standards for out-of-pocket payments (PNA and maximum charges) and delivery of care.

• The government also undertakes risk adjustment between municipalities.

• Provision of care is mainly public, but there is a growing private sector.

2. Comparative Study: United Kingdom

• Dual System: The NHS and local authorities. Both funded out of taxes.

• NHS is responsible for health care and local authorities for social care.

• Eligibility for free or subsidised care care is based on means testing.

• Government grant not earmarked, but national government gives spending recommendations and regulates means testing

• Local variations in the way rules and assessments are carried out and priority cases determined

The British system is by far the ’cheapest’ (1 %), whereas the Swedish one is the most expensive (2.4 %)

However, Japanese taxpayers end up paying more from the age of 40 onwards

The required contribution rates move more or less proportionately over the projection period

2. Comparative Study: Results 1

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

1996

2001

2006

2011

2016

2021

2026

2031

2036

2041

2046

2051

2056

2061

2066

YearPe

r Cen

t

UK

Sweden

Germany, general

Germany, soc ins

Japan, general

Japan, soc ins

2. Comparative Study: Distributive Effects

In order to compare the ’gainers’ and ’losers’ from different kinds of systems, we have created 18 ’stylised individuals’ differing in Gender Age (20/40/60 in 1996) Income (low/medium/high)

We calculate net present value from different LTC systems by comparing expected contributions and expected benefits.

Real discount rate used is 2 %.

2. Comparative Study: Distributive Effects

Earnings Function Average Wage Pension Replacement Rate (%) Male High Income 1.375*Medium Income 33,000 56 Medium Income

-28,420 + 2,497*AGE –27*AGE2 24,000 56

Low Income 0.625*Medium Income 15,000 60 Female High Income 1.375*Medium Income 28,000 56 Medium Income

-19,567 + 1,921*AGE – 21*AGE2 20,000 56

Low Income 0.625*Medium Income 13,000 65

The Stylised Individuals

The British System is particularly beneficial for young and middle-aged men, whereas the Swedish and Japanese systems seem less attractive for these groups

For older men, the Swedish system offers the best benefits, whereas the German and Japanese system are worse.

2. Comparative Study: Results 2

-25 000

-20 000

-15 000

-10 000

-5 000

0

5 000

10 000

15 000

20 000

25 000

Low Medium High Low Medium High Low Medium High

20 40 60

G

J

S

UK

NPV of Males

For young women of all income groups, the British system offers the best NPV, whereas the Swedish and German systems are the worst.

For middle-aged and older women of all income groups, Sweden offers the best system, whereas Germany and the UK offer the worst.

2. Comparative Study: Results 3

NPV of Females

-25 000

-20 000

-15 000

-10 000

-5 000

0

5 000

10 000

15 000

20 000

25 000

Low Medium High Low Medium High Low Medium High

20 40 60

G

J

S

UK

2. Summary of results

• Costs of formal care projected to increase from £ 11 bn today to £ 14 bn in 2040.

• Informal Care: Large number of recipients. The supply of care could be a problem, which can be solved by men providing such care at the same level as women.

• Most changes occur after 2015• A switch to a Japanese or Swedish system would entail

considerable tax increases. A shift to a German system would also increase the burden on low and medium income earners a lot.

• The UK system is favourable to young and middle-aged male individuals and to young females.