It will also call for a guarantee of free care for those in old age and a national commission to deal with what they see as inconsistent and poor- quality care.
The draft report, which is expected to be handed to the Government at the end of January, says there should be a division between "hotel" costs (accommodation) and nursing care costs.
This means that when people enter care homes they would have to pay only for their accommodation, reducing the chances that they would be forced to sell the family home to pay for their care.
The commission was set up in December last year by Frank Dobson, the Secretary of State for Health, who asked it to find a "fair and affordable" way of funding long-term care. It is expected to say that a minister is needed to monitor the need for continuing change. A national care commission would also use benchmarks and a strengthened inspection regime to deal with poor- quality care in both private and council homes as well as ensuring that inequalities across the country are ironed out. "The care commission could look at standards at a wider level. It would be an all- encompassing body," said the source.
The most radical part of the package would be the guarantee of free care for the elderly. Under the present means-tested system, which is highly unpopular, all those with savings of less than pounds 10,000 have their nursing- home fees paid for by the state. Those with savings of up to pounds 16,000 have to pay for part of the fees while those with higher savings pay the full cost. This has led to many elderly people being forced to sell their homes.
Under the commission's plans, hotel costs would remain means-tested but nursing and personal-care costs would be free whether a person is cared for in their own home or in a residential or nursing home.
By having to pay only "hotel" costs, elderly people would be far less likely to lose all their assets, as can happen under the present system. According to a source close to the commission, the change would cost the Treasury between pounds 800m and pounds 1bn each year.
Of this, pounds 380m would be required as new money. "The rest is already in the system and would just need to be redistributed," said the source. "The Treasury is not going to get whacked with a huge bill."
But a minority on the commission believes that the cost of such an approach would be far too high. Added to that, those who would gain the most advantage are the better off, because the poorest are already covered by the means- test system. The result is that government officials thinkthere will be a "substantial minority report" - or at least a "strong note of dissent", when it is finally delivered.
A spokeswoman for the charity Age Concern said it had always argued that health-care costs should be free for the elderly and added that it would like to see a commission with overriding responsibility for community standards. But she added that the charity would prefer to see the interministerial group taking responsibility for old people rather than one "grey tsar", which "could see old people labelled in one particular way".