Elderly care revolution as state-backed insurance scheme announced

Elderly care revolution as state-backed insurance scheme announced Government shakeup planned to cap costs for one in eight poorer pensioners and cut bills for the wealthy by up to a fifth.

Ministers will on Thursday publish plans for a universal state-backed insurance system for elderly care in England, the biggest shakeup in the system of support in six decades which promises to cap costs for one in eight poorer pensioners and cut bills for the wealthy by up to a fifth.

The current postcode lottery of care, which means elderly people in different parts of the country receive widely differing levels of public assistance, will be swept away in 2016 and replaced by a national level of eligibility and the opening of a government-backed "care account" for individuals to pay for care, the government says.

Medical advances and healthier lifestyles will mean the number of people aged over 85 will double by 2030 and ministers argue that a new system is urgently required to replace the local schemes currently running.

What the publication of the consultation reveals is a government plan to provide a social insurance scheme – with an excess set at £72,000. Essentially elderly people will pay "premiums", priced depending on their wealth and whether they are looked after at home or in a care home, to ensure their costs for assistance and accommodation will be capped at £72,000.

"No one wants to face an unknown future. This overhaul of the way care is paid for gives people the certainty and peace of mind we all deserve," Norman Lamb, the care minister, said.

Every council in England will also be required to offer loans to cover care costs and ministers suggested people's pension pots could be used to pay for care.

The Department of Health said many more would benefit as a result of a rise in the means test threshold to £118,000 from £23,250, with at least 100,000 people set to receive some form of financial support as a result of the change by 2025/26.

Critics said though that the new system could lead to legal battles over assessments of wealth and need and there were questions about how local authorities could pay for it.

The coalition and the opposition have been trading blows over how to pay for an ageing population, one of the most intractable challenges in politics, since the publication of the Dilnot commission report three years ago which argued that care costs should be capped.

The poorest are already supported by the current threadbare social care system. The DH said those who will be helped by the new plans will be those close to the poorest group, and the 125,000 "self-funders" – people who have been assessed as qualified for care but are considered too wealthy to get help.

At present these self-funders spend between £40 and £140 a week more than the £500 a week that local authorities pay on average for residential care and "hotel costs" – essentially food and accommodation. Under the new scheme all those eligible for care will be able to demand care at the £500 rate, in effect cutting care bills for well off people by about a fifth.

Elderly and vulnerable people will also be able to borrow money from local councils at a nationally agreed interest rate to pay for residential care before they go into a care home – but will have to pay it back when they die. At present 40,000 people have to sell their home to pay for care before they die but the deferred payments scheme due to start in April 2015 is aimed at preventing that.

A limited version of the loan scheme runs in England at present and about 8,500 people have borrowed about £200m at 0% interest.

There appears to be a concerted push to create a market in new saving products. The government raised the possibility of people's pension pots being used to meet the cost of paying their care home bills. Lamb said he expected the financial services industry to develop a range of pension and insurance products to help people meet the cost of care.

"I was hearing last week for example about the possibility of a product which you could take out long before there may be any risk of care needs, which could be at quite modest cost because you are pooling the risk, but which would pay out a sum of money to help you get to the cap, which is a very attractive proposition," he said.

"Until now, no financial services organisation can offer anything of that sort because there is no cap there."

On the prospect of pensions being used to meet the cost of care he said: "There's something quite attractive in just having one pot of money saved for your old age, whether it's for your financial security or your care needs."

However critics say that the new system risks spawning US-style litigation as people challenge the councils' assessments of their wealth and need.

James Lloyd, a former Downing Street policy adviser under Tony Blair and now director of the Strategic Society Centre, warned that as "middle-class families discover that they can use their sharp elbows to get better care for their loved ones we will see massive disputes between households and local authorities over the levels of care provided, the cost and whether someone has been assessed properly".

Lloyd pointed out that the issue was highlighted by the joint committee on the draft care and support bill which warned that "the introduction of a capped cost scheme, which will result in many more people being assessed and entitled to a personal budget, is likely to lead to an increase in disputes and legal challenges. We are not confident that ministers have yet fully thought through the implications for local authorities of these changes."

The funding crisis in local government also means that there is little money to meet the aspirations of the government scheme. Last year the Local Government Association warned that the rising cost of adult social care could "soak up" almost all of council spending by 2020.

One local authority source told the Guardian: "Councils are not banks. The current system is cash-starved so we are not sure how we will pay for all of the government's plans".

The Dilnot commission's preferred figure for the cap was £35,000, but the government opted to almost double this. Under the current system elderly people only get free elderly care if they have assets of less than £14,250. Under the new thresholds they could face bills of about £400 a week in contributions.

Lamb said: "These reforms bring reassurance to millions of people by ending the existing unfair system so no one need face unlimited care costs or the prospect of selling their home in their lifetime. Now we are unveiling proposals for how the new system will operate and what it can do to help people plan and prepare for future care costs – and over the next three months we'll be seeking people's views on making it a reality.

"No one wants to face an unknown future. This overhaul of the way care is paid for gives people the certainty and peace of mind we all deserve." The Guardian