Buyer Power and Price Discrimination: The Case of the UK Care Homes Market

NON TECHNICAL SUMMARY Background In the UK, over 400,000 people aged 65 and over receive long-term care in a care home, and this is projected to more than double over the next 50 years. Local authorities purchase care home places on behalf of a large group of people based on a means test of their income and capital assets. People excluded by the means test are self-funding. The care home market consists of a large number of relatively small private or not-for-profit providers. Local authorities, using their buyer power, may be able to procure assisted places from these providers at a price below the market rate. Low prices paid to care homes could force care homes out of the market resulting in a shortfall in capacity; and care homes might have to charge higher fees to self-funders to subsidise publicly-funded residents. There may therefore be induced 'price discrimination' in the care home market. Methods We provide a theoretical model of the care home market to establish the key effects of potential buyer power. A microsimulation model is used to quantify key findings from the theoretical model. Key findings Under the theoretical model, if the local authority negotiates a price which is below average costs then, to break even and cover costs, the care home must charge all other users a higher price. The larger is the discount negotiated by the local authority, or the larger is the number of places procured by the local authority, the higher must be the private sector price for the care home to stay in business. People who are no longer willing or able to afford a care home place in the private market but remain ineligible for local authority support lose as a result. This is the 'squeezed middle' who can afford the market (no price discrimination) price but not the higher private rate that care homes charge when local authorities exercise their buyer power. Other self-funders have to pay an inflated price to keep the care homes financially viable so also lose. Simulation reveals that the first round (unchanged demand) effects of modest price discrimination, local authority costs are about 8% lower than in the absence of price discrimination, costs met by local authority-funded residents are lower by 3% but self-funders pay 11% more. At these fee rates, the squeezed middle amounts to just 0.01% of the total. If local authorities depress the …