 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

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)

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

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

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

Informal Care: The share of younger recipients decreases from one third to % (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

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

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

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

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 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 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

2. Summary of results Costs of formal care projected to increase from £ 11 bn today to £ 14 bn in 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.