Understanding the Shortfall Between Market Sustainability and Improvement Fund Rates and the Fair Cost of Care for Older People Residential Services

The Market Sustainability and Improvement Fund (MSIF) was announced at the autumn statement in November 2022. The primary purpose of the fund is to support local authorities to make tangible improvements to adult social care services in their area, to build capacity and improve market sustainability. Over the three-year period, MSIF represented a £1.77 billion injection into local authority budgets (£162m in 22/23, £562m in 23/24, and £1.05bn in 24/25). However, despite these efforts, significant discrepancies remain between the average rates paid by most local authorities for older person care (MSIF rates) and the actual cost of providing care to older people.

Recent findings highlight a growing shortfall, with a £2.24bn gap between the average MSIF rates for 2024/25 and the forecasted Fair Cost of Care (FCoC) and increase in the last 12 months of circa £400m, indicating an alarming trend where care providers are increasingly unable to cover the actual costs of delivering essential care services.

 

Moving Away from the Fair Cost of Care

The inability of many local authorities to pay the fair cost of care has eroded funds, reserves, and resources needed to sustain the care sector.  By determining the “actual” cost of delivering care, the Fair Cost of Care (FCoC) exercise was conducted by the previous Government to establish the rate at which both state- and self-funded residents could access care following the implementation of Section 18(3) of the Care Act 2014 (which has since been abandoned). Every local authority was required to produce a Market Sustainability Plan, setting out the current rates paid, the FCoC in their locality and their strategy to bridge the gap between the two.

Through analysis of local authority Market Sustainability Plans, Care England revealed a £1.5bn FCoC funding gap for older persons’ residential care in 2021-22. To maintain the ability to monitor local authorities’ progression toward the FCoC, Care England produced a forecasted FCoC to understand what the continued fair cost of care would be, by implementing a minimum inflation calculation on the original calculations published by local authorities for the financial year 2021/22 when the exercise was first conducted.

Care England compared the FCoC for the two most recent years against the reported average rates local authorities submitted as part of the MSIF. It is important to note that we acknowledge that local authorities have increased their rates, by up to 6% this year on average. However, as noted by William Laing, the impact of National Living Wage increasing of 9.8% in April 2024, and CPI at circa 3.8% for non-staff costs, and higher interest rates, it would have needed a 7.5% average uplift for a real terms standstill. There has also been a freezing of the Employers National Insurance rate which further adds to the NLW cost incurred by care providers. It is our concern, that despite marginal increases, these rates have not kept pace with the escalating costs truly required for care provision:

Key National Findings

• 2022/23 Shortfall: The difference between the MSIF rates and the forecasted FCoC amounted to £1.97bn.

• 2023/24 Shortfall: The gap narrowed slightly, with the shortfall between the MSIF rates and the forecasted FCoC decreasing to £1.86bn, a reduction of over £110m from the previous year as a result of the MSIF funds afforded to local authorities. This suggests that the introduction of the MSIF made some progress in addressing the funding gap.

• 2024/25 Shortfall: Despite the initial improvement, the shortfall widened, with the gap reaching £2.24bn, a £400 million increase from the previous year, which highlights that efforts made toward closing the gap were insufficient, resulting in a significant disconnect between what local authorities can afford to pay and the actual cost of care provision.

Note: the number of residents used to simulate the 22/23 gap was used for the subsequent years and does not account for increased occupancy which is likely to have increased the difference shown in 24/25.

The national analysis of the funding gap between MSIF average rates paid by local authorities and the FCoC also reveals a widening deficit across both residential and nursing care sectors from 2022-2025. Throughout this period, while residential care services have experienced steady increases in shortfall levels, nursing care services have shown an even steeper rise in funding shortfalls.

While the shortfall varies for the different service types across England, no region remains unaffected by these widening deficits.

It is important to note that these figures are indicative, and the fully calculated shortfalls are unknown as the fair cost of working age adult care has not been calculated by government. As per reporting requirements for the MSIF, local authorities are only required to provide a blended average of nursing and residential care, meaning that the distinction between service types (enhanced and standard) is also unquantified.

Additionally, while MSIF rates represent the average cost for all care packages placed by local authorities, this average is skewed by the inclusion of higher-priced, more recent placements. Many legacy placements – which represent a large share of care recipients, especially in working age adult care services – continue to be funded at significantly lower rates and often do not receive the necessary uplifts to align with the costs associated with newer placements. Care England members report that legacy rates fall below both the MSIF averages and the FCoC, creating a misleading impression of overall funding adequacy. The funding gap for care for people with learning disabilities and autistic people is substantial and again unknown, as excluded from the FCoC exercise.

The figures outlined relate only to the basic cost of providing care, with no consideration of inflation, the resources required to address ongoing workforce challenges or increase capacity to meet the growing needs of an ageing population. Because of this, there is reason to believe that the estimations of a £2.24m gap for older person residential care is a conservative figure, which, if added to the homecare deficit reported to be £1.76bn and the unquantified gap for working age adults, the total gap between the average fee paid by local authorities and the actual cost of providing care will be significantly higher than £4bn.

Implications for Providers, Local Authorities, and the Care Sector

The widening shortfall between the MSIF and the FCoC is not merely unsustainable, it is pushing the adult social care sector and local authorities alike to a breaking point. Care providers are bearing substantial financially challenging deficits, pushing resources and reserves to the brink. They are grappling with rising operational costs while struggling to maintain the same quality of care.

Local authorities face a similar strain. Despite their critical role in funding and overseeing care services, they receive insufficient funds from central government to meet the actual costs of care. Balancing growing demand, rising costs, and budget cuts has left local authorities with limited options, forcing them to make difficult choices that impact care quality and result in their inability to meet their legal Care Act duties.

Exacerbating this, their budgets are established incrementally, often based on the assumption that previous budgets adequately covered all legal obligations – relying on the notion that past budgets accurately reflected the actual needs of the community, as noted by CFRC. As a result, each year’s budget is deemed sufficient based on the previous year’s figures, which were themselves adjusted to fit that budget. This pattern continues, trapping funding at historical levels thus masking the funding of unmet needs of society.

Consequently, while striving to support both providers and the community, many local authorities are unable to set rates that reflect the FCoC, impacting providers heavily reliant on these rates due to high proportions of local authority funded placements.

For providers who depend on local authority funding to cover essential care, the current funding model creates an unsustainable financial equation: absorb rising losses or face potential closure. This threatens the capacity and stability of the care sector, putting some of the most vulnerable members of society at risk of losing access to vital services. Local authorities, facing funding shortages beyond their control, are equally at risk of reaching their limits, compounding pressures on the entire social care infrastructure.

Without immediate action to address this funding gap, many providers may look to exit the market entirely. Notably, 39% of providers are currently considering this course, and the CQC’s latest State of Care report confirms a national reduction in the number of care homes. This reality further intensifies the existing pressures on the NHS, where 45% of discharge delays are already due to patients awaiting care home or homecare placements, and would destabilise care provision across the country. The ability of the sector to deliver high-quality, safe, and personalised care, a core goal shared by providers and local authorities, is now in serious jeopardy. Addressing the funding gap is essential to support both the care providers and the local authorities tasked with ensuring fair access to indispensable services.

 

Policy Recommendations

The consequences of inaction are significant, impacting both individuals who rely on care and the overall health and social care system. The government must seize this crucial opportunity to prioritise adult social care, ensuring its resilience, quality, and sustainability for future generations.

Redirecting resources from the NHS to adult social care would yield substantial benefits. By investing in a fully functioning social care sector, the pressures on the NHS would be alleviated, enabling the government to achieve their healthcare targets by more effectively reducing hospital waiting lists and facilitating timely discharges. This strategic shift in funding would establish a strong foundation in adult social care, enhance the quality and sustainability of care across the nation, and directly lead to improved outcomes for the NHS lead and substantial cost reductions in the long term.

Key Recommendations:

• Implement Policy Changes to Begin Bridging the Gap: Local authorities currently lack the means to cover the actual cost of care. Closing this funding gap will require a significant increase in central government funding. Beyond this, we recommend that the government provide local authorities with greater flexibility to raise funds locally by removing or increasing the cap on the social care precept. Additionally, zero-rating VAT for the sector would add an estimated £30-£50 per week to each care package, injecting significant funds to improve care levels relatively quickly without further straining local authority budgets.

 

• Conduct a Sector-Wide Fair Cost of Care Exercise to Identify the Full Gap: It is essential to repeat the Fair Cost of Care exercise on a broader scale, accurately quantifying the shortfall in fees paid across all adult social care services to include working age adult services. This comprehensive assessment will help inform necessary adjustments to funding and ensure providers receive fair compensation for the services they deliver.

 

• Introduce Multi-Year Funding Settlements Aligned with Inflation to Close the Gap: Care providers and local authorities struggle to operate effectively under the burden of inconsistent and short-term financial settlements. We urge the government to implement multi-year (minimum of a rolling three years), inflation-adjusted funding commitments for local authorities, specifically ringfenced for adult social care. These settlements should reflect the increasing costs associated with care, including workforce wages and the likely costs associated with the changes to the Employment Bill and Fair Pay Agreement, utilities, food inflation, and CPI. This approach will prevent future funding shortfalls and provide the stability necessary for providers to invest in quality care and service expansion longer-term to support an aging population.

 

According to the State of the Adult Social Care Sector and Workforce in England 2024 report, adult social care contributes £68.1 billion to the economy, up 13.2% from the previous year. The most recent Skills for Care and KD Network Analytics report, The Value of Adult Social Care in England (October 2021), shows a return on investment (ROI) of 175%, meaning that for every £1 invested in ASC, £1.75 is returned to the economy.

If the government is serious in addressing the crisis in social care, it must act decisively and implement these recommendations to secure the future of the sector, protect vulnerable individuals, and ensure that the substantial economic contributions of adult social care continue to be realised.

Notes

• The Number of residents estimates used within the analysis are at 2022-23 levels, and kept this figure for all financial periods covered in the analysis.

• FCoC assumes an uplift based on 70/30 NLW uplift and Sept CPI uplift percentages.

• The MSI Fund rates used are the ones published as of October 2024. Meaning that the rates for 2022-24 are the final averages local authorities reported, however, the averages for 2024/25 are provisional and subject to change.

• This analysis excludes the following authorities, due to a lack of complete datasets: City of London, Isles of Scilly, and Redbridge.

• This analysis assumes that the FCoC level is accurate from 2022/23.

• The FCoC rates were for 2021/22 and 2022/23 remained largely the same, with the exception of a minority of local authorities who adjusted their reporting.