1. Price discrimination in the UK care home market: does it exist and does it matter? Ruth Hancock, Health Economics Group, School of Medicine, Health Policy and Practice, UEA Catherine Waddams, Morten Hviid, Centre for Competition Policy, UEA With thanks to OFT and Hieu Tran Preliminary: please do not quote

2. The issue Two groups of care home residents: –Self-funders have income and capital above the qualifying levels for state support with the care home fees –Local Authority supported residents receive a contribution from the LA towards the fees, after an assessment of care need. Contribution = their income less a £20 pw personal expenses allowance LAs negotiate (dictate?) fees for supported residents Some care homes charge self-funders higher fees for identical service Popular opinion views this as unfair on self-funders

3. Aims and methods Aims –To gauge the extent of price discrimination (PD) in the UK care home market –Preliminary assessment of predictors of PD –To consider the first round effects of removing PD –To ask : how would we assess the welfare consequences of PD? Methods –Analysis of OFT 2003 survey of care home providers with fewer than 4 care homes to gauge extent of PD –Use of a microsimulation model (CARESIM) to analyse 1 st round effects of removing PD

4. OFT 2003 survey of care homes 610 care home providers across UK, of which 583 have only one home, of which 567 accept LA-funded residents Of the 567, 116 (20%) charge self-funders more than LA-funded residents Mean fees where self-funders charged more (and fees information available): SF: £450 LA: £375 i.e. 20% diff % of residents who are self-funders: No price discrimination: 25% Self-funders charged more: 33%

5. CARESIM (Dynamic) microsimulation model of care charges Simulates care charges (and relevant tax/benefit liabilities/entitlements) for sample of 6,000 65+s from Family Resources Survey Probability of receipt of different forms of care based on Personal Social Services Research Unit long-term care financing model Can analyse changes to care charging rules, price of care etc.

6. Probit model of price discrimination (OFT data)

7. First round effects of eliminating PD: care home residents aged 65+, 2007 prices (CARESIM)

8. Welfare effects of price discrimination in care home market Is it (3 rd degree) price discrimination? Suppliers price- take in LA-supported market. Do they fix price in self- funders market? What is the counterfactual? Self-funders have lower consumer surplus under PD than if they faced a lower price LA-supported residents are (largely) unaffected by price – a price rise simply increases the cost to the LA (i.e. tax-payer) [except if LA increases the need threshold for LA-supported care to ration supply] Price discrimination compared with competitive market reduces consumption efficiency – but market is not competitive (low income consumers are subsidised) Effect on total supply?