DHSC Fair Cost of Care Fund and Charging Reform policy note

This note was shared by the Department of Health and Social Care (DHSC) to provide clarification on the Market Sustainability and Fair Cost of Care Fund policy by highlighting key aspects of the published guidance and responding to technical questions particularly around data, alongside updates on some of the charging reform policies, contained within the Implementing the cap on care costs: revised draft operational guidance which are intrinsically linked to the Fund, including Section 18(3) and first party top-ups.


We have been reflecting on the feedback and questions we have received over the past few months as local authorities work towards submitting your Fair Cost of Care returns. Having now received their full returns, working closely with Trailblazers has been invaluable learning for the Department.

In light of that important insight and in response to questions we have received, this note is intended to provide clarification on the Market Sustainability and Fair Cost of Care Fund policy by highlighting key aspects of the published guidance and responding to technical questions particularly around data, alongside updates on some of the charging reform policies, contained within the Implementing the cap on care costs: revised draft operational guidance which are intrinsically linked to the Fund, including Section 18(3) and first party top-ups.

Defining 'moving towards'

  • Our policy expectation is that local authorities make as much progress as possible towards the fair cost of care identified locally in your exercise within this Spending Review period.
  • Our policy guidance talks about “moving towards” because we recognise that this is a journey. Although we expect local authorities to move towards paying a fair cost of care, we know local authorities will be starting from different points, with some further away from the fair cost of care than others.
  • This means some local authorities will reach the fair cost of care for their local area in this Spending Review period, whereas others are on a longer journey and will not. Our policy expectation is therefore that you make as much progress as possible.
  • We are working closely with the LGA and ADASS to ensure the department has a well-informed understanding of what these starting positions look like from a regional perspective.
  • Local authorities have flagged challenges in making commitments on how much they can move towards paying providers a fair cost of care before wider budgets are set. For this reason, and in direct response to local Government engagement, we have adopted a two-stage approach to market sustainability plans. Your provisional market sustainability plans, due 14th October are an opportunity for local authorities to assess the impact current fee rates are having on their market and potential future risks, particularly in the context of adult social care reform. They will serve as a vehicle for setting high level strategic choices in how funding will be used to address these sustainability challenges. Final market sustainability plans are due to be submitted in February 2023. This two-stage process was intended to enable you to produce a costed plan outlining how funding in future years will be spent in line with key actions, after local government budgets have been finalised.

The relationship between the actual median costs that local authorities identify in cost of care reports and the local authority fee setting process

  • We know the median actual operating costs from which local authorities arrive at a fair cost of care in their area will not reflect the costs of each individual provider in their local area.
  • We recognise also that outlining median figures for the broad service types within scope (standard residential care, residential care for enhanced needs, standard nursing care, nursing care for enhanced needs and domiciliary care) may oversimplify what is a complex picture of care and support needs.
  • The outcome of the cost of care exercise is not therefore intended to be a replacement for the fee setting element of local authority commissioning processes or individual contract negotiation.
  • In practice we will expect actual fees to be informed by the fair cost of care, which is the median value rate local authorities will be moving towards. Fee rates will also continue to be based on sound judgement, evidence, and through a negotiation process, as is the case currently. As such there will be variation in the rates providers are paid to reflect the quality and level of service. Ultimately paying a fair cost of care does not mean that all providers are paid the same rate, but rather the fair cost of care is the median value which fee rates will be “moving towards”.
  • The Fair Cost of Care guidance therefore states that: “as many local authorities move towards paying the fair cost of care, it is expected that actual fee rates paid may differ due to such factors as rurality, personalisation of care, quality of provision and wider market circumstances”.
  • Local authorities may find it useful to refer to this wording in their cost of care reports when published, to reinforce the message with local markets.

Supporting local authorities’ strategic market shaping decisions

  • We recognise that charging reform represents a major change for the sector, which may require local authorities to make active market shaping decisions.
  • The purpose of both the provisional and final market sustainability plans is to give local authorities a vehicle to fully consider and set out their strategy to achieve a sustainable market and address the challenges and opportunities of these reforms in your specific area.
  • We expect that the provisional and final market sustainability plans will, to an extent, be iterative as issues and risks become clearer, including those relating to wider charging reforms and their impact on the market. This could for instance mean that provisional market sustainability plans may include less detail on the current self-funder population, with the authority setting out plans to more fully analyse this section of the market and therefore the potential impact of the extension of Section 18(3) ahead of submission of the final plan.
  • The Fund itself has been designed flexibly to recognise different local authorities will have different challenges. It should be used to address specific issues and risks that you have identified in your market sustainability plans, including the distance from paying a fair cost of care for different service types. We have therefore allowed for flexibility in how funding can be spent across the 65+ care home market and the 18+ domiciliary care market, including in extra care settings.
  • Ultimately the goal is a sustainable market, which is defined in Market Sustainability and Fair Cost of Care Fund guidance as “one which has a sufficient supply of services but with provider entry and exit, investment, innovation, choice for people who draw on care, and sufficient workforce supply.” That may look quite different from current provision. This policy is designed to help you manage the transition, and local authorities have been given the autonomy to use the fund to increase fee rates in a way that best reflects the strategic direction.

Interpreting survey data

  • We recognise that local authorities are best positioned to interpret the data you receive from your provider market, and that the data local authorities are receiving may not easily translate into the breakdowns we have supplied in our Annex A reporting template. We are also aware of the other practical challenges of handling data; whether that be due to the profile of the relevant providers for this exercise not marrying up to the profile which local authorities commission from, or because the rates paid to individual providers vary from individual packages, as just two examples.
  • We want this process to allow for local authorities to use their best judgement on ensuring cost lines are not inflated or deflated, on account of COVID-19 expenditure and grant activity for example, but rather reflect the actual operating cost of delivering care.
  • Cost of care exercises should reflect actual operating costs as opposed to desired fee rates. Where local authorities identify information which seems to constitute an outlier, they should scrutinise these in collaboration with the provider. It is important to challenge unusual values and give providers the opportunity to explain, refine and correct data, as the outlier may be a misunderstanding of the cost line, or reflect higher operating costs, and resolving the issue may increase the effective sample size and quality of the report. However, it may be necessary to remove or amend unexplained data from your analysis before calculating results. In these instances, we expect to see the rationale clearly outlined in cost of care reports.
  • We have amended the Annex A reporting template to enable you to be flexible in your approach to calculating cost lines. The template now allows for you to choose your own approach to:
  • o How to most appropriately handle missing values and zeros; o Whether subtotals should be the sum of the underlying detail row medians, or whether another approach should be taken, such as calculating the overall median for that subcategory.
  • For this reason, we have revised the Annex A template found on the Market Sustainability and Fair Cost of Care Fund guidance landing page to remove the requirement that subtotals should be the sum of the underlying detail rows, although local authorities can still choose to do that if appropriate.

Publication of exercises

  • Our grant conditions require that local authorities publish their cost of care reports and final market sustainability plans to ensure transparency.
  • Cost of care reports should include, but are not limited to, the contents described in Annex B: cost of care reports contents, and therefore explain: how the cost of care exercises were carried out; how providers were engaged; the lower quartile, median and upper quartile for costs collected; how the resulting cost of care for the local area has been determined, including the approach taken for return on capital and return on operations.
  • Local authorities will be asked to publish cost of care reports after the 14 October submission deadline. We will be in touch in due course with publication dates but want to reassure you that we will give you as much notice as possible, once confirmed.
  • Local authorities are not required to publish the provisional market sustainability plans submitted alongside cost of care exercises in October.
  • Final market sustainability plans are due to be submitted in February 2023. Once we have confirmed this date, we will also confirm when we expect these to be published thereafter, recognising the pressure local authorities face over the winter period.
  • Both cost of care reports and final market sustainability plans will need to be published on your GOV.UK webpage, clearly labelled and in an easy to find location.

Review of local authority returns

From 14 October onwards, DHSC will be reviewing local authority returns. This review process is designed to assure the Department that local authorities have complied with the reporting requirements outlined in the Market Sustainability and Fair Cost of Care grant conditions.

To support DHSC to understand the approach a local authority has taken to conduct their exercises, and as set out in the published guidance, three key principles will be considered:

  1. Consistency – whether returns are consistent with DHSC templates and core requirements set out in Annex A, B and C alongside the grant determination letter; whether reports are internally consistent; whether returns are consistent with those of other similar local authorities.
  2. Transparency – whether exercises are evidence-based; whether the approach to key cost lines has been set out; whether plans demonstrate a considered analysis of sustainability challenges and clear strategy to address these in line with the fund objectives; whether market analyses have been undertaken at an appropriate level of detail.
  3. Partnership – whether providers have been given sufficient opportunity to participate in both cost of care exercises and market sustainability planning. Provider engagement should be evidenced in cost of care reports by outlining response rates of the exercise as a percentage of those invited and engaged with the market. A reminder that up to 25% of the funding in 2022 to 23 may be spent on engaging with providers.

We will be reviewing returns in three stages. Where a local authority’s returns have complied with our Fund’s conditions, we will confirm this in writing and the local authority will not progress to the next stage of the review process. The three stages are formal review, formal follow up, and application of grant conditions.

In the formal review, cost of care exercises will undergo analytical review within DHSC, and the process that local authorities have gone through to arrive at the fair cost of care calculations in their cost of care exercises will be considered alongside the assessment of the local market in the provisional Market Sustainability Plan. Local authorities will be contacted with either confirmation that we are content with submissions or to follow-up where we have questions about whether exercises sufficiently align with our guidance.

We aim to inform local authorities of their position by the end of November.

Where we have questions over local authority exercises, we will hold formal follow-up sessions which will give local authorities the opportunity to clarify or evidence the contents of their returns. DHSC will bring a list of areas for discussion alongside potential action points. This is intended to be an iterative and co-produced plan to help the local authority meet the expectations of the Fund. We will work alongside local authorities to put action plans in place and support local authorities to deliver them. These virtual sessions will take place throughout early December.

The length of time we work with local authorities on their action plan will vary, but we anticipate these could continue to run for the rest of the financial year, ahead of local authorities beginning to increase their fee rates.

As set out in the grant determination letter, in the event that a local authority is in breach of the grant conditions, which include failing to sufficiently engage with the support made available and/or requests for further information, payments in 2023-2024 or 2024-2025 may be reduced, suspended or withheld.