The £2bn question:

Will Osborne agree to fund reform of elderly care?

Treasury could obstruct proposals to reform funding of social care

Health chiefs raised fears last night that the Chancellor, George Osborne, could veto proposals to overhaul long-term care of the elderly because of their £2bn-plus cost to the public purse. They warned that hospitals could face a crisis in the pressure of caring for an ageing population and that there would be more "terrible" instances of neglect and abuse of the vulnerable pensioners.

Moves to salvage a system which forces many older people to sell their homes in order to afford huge bills will be detailed today by the economist Andrew Dilnot. He will propose a cap of between £35,000 and £50,000 on the amount people have to pay towards their care in their last years – with the taxpayer picking up the balance. His proposals would leave the Treasury with an estimated bill of more than £2bn – cash that would have to come from taxation or cuts elsewhere in Whitehall. Either move would be extremely unpalatable as the Government presses ahead with austerity measures.

A Liberal Democrat source has predicted that Mr Osborne will strangle the proposals "at birth" – a fear reflected privately by senior figures in the health and charitable sector. Treasury sources insisted they would not kick the Dilnot plans into the long grass and were keen to go ahead with reform – but stressed that they would act only on the basis of consensus with other parties and groups representing the elderly.

Andrew Lansley, the Health Secretary, warned there were many practical problems to be resolved before the Government could present its final recommendations, although he said he would accept the proposal for a cap.

Mike Farrar, the NHS Confederation's chief executive, described today's publication of Mr Dilnot's plans as a "make-or-break moment" both for health and for social care. "The enormous pressures that are facing social care will spill over into the NHS unless there is action to shore up the whole system," he said. "We need a solution. Otherwise there will be a financial crisis, patients and carers across the country will suffer and the cost to the taxpayer will be greater."

He challenged political leaders to take difficult decisions now to ensure the public knew how much they needed to contribute towards their social care.

Andrew Chidgey, head of policy for the Alzheimer's Society, said the charity had seen reports suggesting Mr Osborne and Treasury ministers were baulking at the cost of the plans. He added: "If politicians fail to tackle this vital question of public interest it will be a betrayal of millions of people."

Treasury sources said last night there was no question of ducking the hard questions set out by Mr Dilnot and acknowledged the extra cost of care would have to be found through taxation or cuts to other services. One possible alternative is that it could be found in the next public spending review. They said Mr Dilnot's recommendations contained many positive features, notably the new protection for middle-class families above the assets threshold.

But they stressed a new stable system for social care had to be agreed on all sides and welcomed an offer yesterday from Ed Miliband, the Labour leader, to participate in all-party talks on the issue. They argued that consensus was essential to reassure insurance companies offering policies to cover care costs that an incoming Labour government would not rip up the new system.

The Dilnot recommendations are expected to suggest a sliding scale of between £35,000 and £50,000 on the limit pensioners pay towards their care. They would be urged to take out insurance to cover that expense. At the moment, bills can exceed £100,000 for prolonged periods in residential care.

At present, people with assets totalling more than £23,250 have to contribute towards their care; that limit is likely to be raised to around £100,000.

The report is understood to recommend that free care levels be calculated on the basis of rates paid by local authorities. That means families could have to pay the balance if an elderly person is living in a more expensive residential home and that care bills might only be picked up when the threshold of £35,000 to £50,000 of care is reached at council-set rates.

Mr Lansley said the Government would give the Dilnot blueprint a "very positive response" and treat it as the "basis for engagement".

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