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Calculating the Fair Cost of Care: Why 2022 Might Be Different

Updated: Sep 12

We recently reported on the government's plans for reforming the funding system for adult care. While this strategy is still ongoing, a new element has recently been introduced to supplement the plans. This involves calculating the fair cost of care and is likely to affect care providers, both in the short and long term. Fair cost of care exercises have been carried out in the past.


So why might 2022 be different?



calculating the fair cost of care


The Fair Cost of Care — Background


The Care Act 2014 specifies that:


"When commissioning services, local authorities should assure themselves and have evidence that contract terms, conditions and fee levels for care and support services are appropriate to provide the delivery of the agreed care packages with agreed quality of care."


In order to meet this requirement, local authorities have conducted exercises to establish the fair cost of care.


Historically, there have sometimes been disagreements about the methodologies used and in rare cases decisions submitted for Judicial Review by some care providers. There is a widely held view by many in the sector that these challenges have arisen as a result of increasing demand for care services and the lack of availability of adequate sources of funding.


The government has recently suggested in a paper called Market sustainability and fair cost of care fund 2022 to 2023: guidance that "a significant number of local authorities are estimated to pay below the cost of providing care." While the government gives no specifics about what "a significant number" represents, nor about any individual local authorities that might be involved, they have concluded that a new way of calculating the fair cost of care is needed.


What is Likely to Change?


In December, the government launched the Market Sustainability and Fair Cost of Care Fund, whose purpose is "to support local authorities to prepare their markets for reform...and to support local authorities to move towards paying providers a fair cost of care."


For the year 2022-2023, £162 million will be distributed among local authorities to help them prepare a provisional market sustainability plan. As part of this, they will be required to undertake cost of care exercises for all 65+ care homes and 18+ domiciliary care.


Fair cost of care calculations aren't a new thing, but previously local authorities have been largely left to decide for themselves how to go about coming to a figure. As mentioned above, this has occasionally led to disputes and even court cases by providers who believed that they had been forced into unrealistically low costs.


For the first time, the government is setting out not only the local authorities' duty to carry out these calculations, but also guidance about the methodology to be used as well as an expectation that it will lead to higher fees. This is intended to ensure greater consistency in the calculations used across the country. Among the guidelines issued for the first time are instructions to:


  • provide a complete picture by calculating lower quartile, median and upper quartile costs.

  • base their fair cost on the median from similar providers in the same area, rather than the mean (or overall average), which is more likely to be affected by a few extreme examples.

  • follow a clear method of calculating capital costs.


For care homes, this exercise will need to be carried out for each service the home provides. Broadly speaking, this will be broken down into residential care and nursing care, each further broken down as standard and enhanced needs. Domiciliary care is treated as a single service.


For each of these services, the local authority is obliged to establish the lower quartile, median and upper quartile figures. Although only the median will be used to set the fair cost of care for the service, the other figures will be valuable in providing a fuller picture of the range of costs, enabling the authority to plan services better.


What Are the Implications of the Regulations?


In the short term, the fair cost of care calculations will involve a lot of extra work for local authorities, which is why the government is setting aside extra money to fund this process. However, it will also involve extra work for service providers.


Needless to say, for the calculations to have any value, they must be based on accurate data. This will need to be provided by the care organisations operating in the area covered.


Each organisation will be asked to use a cost of care tool to supply this data. The government hasn't specified a particular tool that local authorities must adopt, but an example of what to expect is Care Cubed.


Data collected will range from general operating costs (excluding interest, tax, depreciation, amortisation and rent), to staff rates of pay and hours worked. In the case of domiciliary care, travel time between clients will also be factored in. This will need to be divided by the total number of residents or clients to calculate the fair cost of care per person.


What Will the Benefits Be?


The main difference in 2022 is that there is an explicit expectation from the government that the new fair cost of care exercise will result in increases in fees paid by local authorities. The guidance states that:


“In 2022 to 2023 local authorities are also expected to start making genuine progress towards more sustainable fee rates, where they are not already doing so. This means increasing fee rates paid to providers.”


The local authority will benefit by being able to develop a robust strategy in its area, and carrying out the fair cost of care exercise will be linked to additional funding. At the same time, because the system is intended to be uniform and transparent, it is hoped that there should be fewer disputes about whether the figures are fair.


The new guidance should therefore result in improvements over previous exercises. One point for local authorities and providers to consider is that the fair cost of care exercise, although more consistent, will be based on existing costs. Some care providers have indicated that it should be based on sustainable costs — for example, on higher wage rates than are currently being paid in the sector, in order to improve staff attraction and retention in the sector. Use of the median costs, rather than the mean, may to some degree alleviate some of these concerns.


The fair cost of care exercise will be supplemented by other aspects of the government's plan, which will be emphasising the professional development of care staff, both residential and domiciliary, as well as increasing the use of digital systems for supporting care.


If you want to find out more about the developments coming in the care sector, and how IT can streamline operations, please feel free to get in touch with us.


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