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2014 Conference Presentation

Markets/regulation EnglandUnited Kingdom

2 September 2014

Explaining the fees gap between funding types in the English care homes market

Steve Allan, The University of Kent, United Kingdom
Julien Forder, The University of Kent, United Kingdom


Background: Demand for residential care in England (and also other countries, e.g. USA) has two main streams: one, private payers paying out of their own pockets; and two, publically-supported payers who cannot afford to (fully) fund their own care. It is widely assumed, at least in England, that publically-supported places are at or below marginal cost due to the market power of public commissioners and consequently self-payers will pay a higher price since cross-subsidisation is necessary for care homes to survive (Hancock et al., 2013). In addition, Forder and Allan (2014) showed that public commissioners were concerned about price which had a negative effect on quality in the nursing/care homes market. Alternative economic reasons could also explain the difference in price paid, for example price discrimination. Nyman (1989), Forder (2000) and Mukamel and Spector (2002) have examined price mark-ups in nursing homes. A similar empirical strategy would ideally be used to untangle the causes of price differences across payer types. However, a lack of data on private payers precludes this form of analysis across all English care homes.

Aim: This paper examines the causes of price differences across payer types by looking at the Local Authority (LA) level, where, broadly speaking, public commissioning decisions are made. First, we consider the theoretical modelling/implications of differential prices by payer type. Second, we attempt to determine the effect that both public commissioners and competition have on the difference in average price paid by private and public payers, the ‘fees gap’, using data for 2008 and 2010. Our hypotheses are that the greater the LA market power, and the lower the level of competition, the larger the fees gap.

Data and methodology: We estimate the average private price paid within each LA using data on overall average prices, the number of publically-supported residents and average public price, taking into account NHS-funded nursing care payments and out-of-area placements (one LA funding a care home resident located in another LA). We control for outlier costs and LA-funded resident proportions, and missing price data. We explore the implications of different assumptions regarding the generation of fee data and use multiple imputation (20 imputations) to replace excluded fees gap values in our sensitivity analyses. There is no definitive measure of LA market power so proxy variables are used to construct a power index through Principle Components Analysis (PCA). Competition is measured as the average level of all individual care home’s HHI in each LA. We control for quality, demand and average care home characteristics. We estimate both pooled and panel Ordinary Least Squares (OLS) regressions.

Results: Market power significantly increases, and competition significantly decreases, the fees gap, confirming the hypotheses. Whilst LA market power plays a large role in determining the size of the fees gap, the effect of competition is even greater and suggestive that price discrimination is an important factor in the price differences across payer types. These results are likely to be of relevance for other countries with dual public/private demand streams for residential care.

Acknowledgements: This presentation is based on an independent report commissioned and funded by the Policy Research Programme in the Department of Health from the Economics of Social and Health Care Research Unit (ESHCRU). ESHCRU is a joint collaboration between the University of York, London School of Economics and University of Kent. The views expressed are those of the authors and may not reflect those of the funders.

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