Competition in the Adult Care Service Market

The vision of a flourishing mixed economy in social care is looking somewhat tarnished, amidst private sector protests that local authorities are abusing their purchasing power. The United Kingdom Home Care Association claims that many local authorities are imposing uneconomic contract prices and bullying providers into accepting unfair terms which include the imposition of a £75 penalty for missing visits, which sum allegedly represents the profit margin on 300 – 600 visits. The Association claims that this behaviour contravenes the Competition Act 1998 and threatened to refer the matter to the Director General of Fair Trading when the Act came into force in March 2000. What became of that threat is not known to us.

The DH has recently (October 2001) announced a new compact and injection of funds into the sector to stabilise the market and help with bed blocking (Building Capacity). As to care home fees negotiation, the Agreement does not mince words:

‘Providers have become increasingly concerned that some commissioners have used their dominant position to drive down or hold down fees to a level that recognises neither the costs of providers nor the inevitable reduction in the quality of service provision that follows. This is short sighted and may put individuals at risk. It is in conflict with the Government’s Best Value policy. And it can destabilise the system, causing unplanned exits from the market. Fee setting must take in to account the legitimate current and future costs faced by providers as well as the factors that affect those costs, and the potential for improved performance and more cost-effective ways of working. Contract prices should not be set mechanistically but should have regard to providers’ costs and efficiencies and planned outcomes for people using services, including patients.’

The agreement recommends that commissioners should produce medium term plans up to three years ahead, describing the services they intend to purchase and in what quantities. Block contracts or investment should be used to reward a provider for establishing a new service, or preserving good quality services.

The application of the Competition Act

The Competition Act outlaws abuse of a dominant position in the market, and one can be as guilty of this through insisting on buying at an artificially low price, as one would be if one were to be selling something at an artificially high price. It is with this in mind that this topic explores whether local authority commissioning could be unlawful under the Competition Act.

The relevant market

The care market is comprised of local authorities, the voluntary and private sectors on the provider side, and local authorities (on behalf of individuals) and privately contracting consumers on the other.

However, the legislative framework inherently distorts the market structure preventing the inter-relationship between suppliers, purchasers and service users from being fully analogous with the usual type of commercial operation made the subject of a competition enquiry.

The crucial features are that the local authority is both consumer and large scale provider, and contracts with the private and voluntary sector in discharge of a statutory duty, under a fiduciary duty and looking towards the government’s Best Value expectations (now a statutory duty in any event under the latest Local Government Act). It also exercises its functions as a statutory monopolist purchaser on behalf of those in need with less than £19,000 to their name. This means that any local authority will be likely to be purchasing more than 25% (and possibly more than 50%) of the residential/nursing home market in a given area, and probably over 50% of personal domiciliary care for vulnerable people in their own homes (though much less than 50% of ordinary property-related domestic work such as cleaning etc).

On the homecare side, the market is further ‘distorted’ (though this can hardly be bad for the private sector) by the fact that many authorities have grant-funded voluntary organisations to set up and offer domiciliary services at low cost, to which clients are referred in order to make private arrangements, where the service can be obtained more cheaply than under the authority’s own charging policy.

A further distorting feature is that authorities are not allowed to sell services or places in their own provider homes to the public in return for a payment, so they are not truly ‘in’ the market. Service provision followed by a statutory or discretionary charge is not the same as a sale to a buyer.

The Competition Act

The Act prohibits ‘undertakings’ from entering into anti-competitive price fixing agreements and from conduct which amounts to an abuse of a dominant position which may adversely affect the market. The two prohibitions (‘the Chapter 1 and II prohibitions’) are based on Articles 85 and 86 (now 81 and 82) of the EC Treaty.

Is a Local Authority an ‘Undertaking’?

Over 2 years ago a junior Department of Health Minister apparently expressed doubt as to the applicability of the Act to local authorities. However, the official OFT view was that local authorities could potentially qualify as undertakings. DGFT guidelines stated that the word undertaking’ will be interpreted broadly to include any legal persons capable of carrying on commercial or economic activities relating to goods or services.

It could be argued that the authority is NOT engaged in economic activity because the commissioning which goes on is simply an aspect of exercising statutory welfare functions in the public interest – providing accommodation or arranging homecare.

Given that one of the expressly relevant considerations for the competition authorities, when assessing whether a position is a dominant one, is the existence of a ‘statutory monopoly’, an obvious counter to that assertion is that the mere fact that a monopoly is statutorily derived cannot automatically exclude a statutory entity from being an ‘undertaking’.

European case law has suggested however that a distinction could be drawn between the mere exercise of public law powers on the one hand, (in which capacity, a state authority would not be regarded as an undertaking – see Corinne Bodson v Pompes Funebres des Regions Liberees SA [1989] 4 CMLR 984) and the conduct of commercial activities related to those powers, in which respect a state authority could still count.

One of the relevant statutory functions in play here is the duty under s21/s26 of the National Assistance Act 1948 (‘NAA’) to ‘make arrangements for providing care and attention’ once certain statutory and local discretionary criteria have been met. Two arguments are possible. It could be said that although the duty is statutory, discharge of it is expressly worded so as to allow commissioning from independent contractors, and hence that it is therefore an economic activity. This is the analysis we favour as being the most likely. ECJ jurisprudence holds that the functional concept of ‘undertaking’ covers any activity directed at trade and goods or services irrespective of the legal form of the undertaking and regardless of whether it is intended to earn profits. On this view the local authority is engaged in economic activity when it enters into commercial contracts with private sector suppliers. Section 26 NAA specifically allows the duty to be discharged by way of arrangement with the private or voluntary sector. The contractor acquires legally binding rights and duties in ordinary contract law (in comparison, say to the internal contracts made between local authorities and their DSOs or between Health Authorities and NHS Trusts) and not in public law, as has been emphasised in ex p CHOICE.

It is arguable, though, that since in relation to domiciliary care, the wording of the relevant provisions (s30 National Assistance Act) is such as to render the contractor the agent of the authority, the contract adds nothing to the duty in play, which is, essentially, to provide the domiciliary care. In this sense, the contractor, whilst from the private or voluntary sector, is merely contracted in, to assist in the authority’s own discharge of a providing function.

Then again, the contractor’s role falls short of actual delegation of the function and this could be important because European law (Diego Cali and Figli Srl v Servizi Ecologici Porto di Genova SpA [1997] 5 CMLR 484), suggests that it is only formal delegation of public power to the private sector that excludes the private sector entity from the definition of an undertaking. Then again, the question in that case was whether the contractor escaped being an undertaking, not whether a public authority choosing to contract in order better to carry out its own statutory function was an undertaking.

Anti-Competitive Agreements

Section 2(1) of the Act prohibits decisions or concerted practices or agreements between undertakings which :

(a) may affect trade within the UK, and

(b) have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom, unless they are exempted or excluded from the Act.

Section 2(2) provides a non-exhaustive list of examples of the sorts of agreements caught by the Act and includes those which directly or indirectly fix purchase or selling prices or any other trading conditions, or which limit or control markets and impose obligations which have no connection with the subject of the contract.

The DGFT guidelines suggest an agreement will have no appreciable effect on competition if the parties’ combined relevant market share does not exceed 25%. For reasons explained above, local authorities’ market share would generally meet this criterion, on a regional or council-boundary related basis.

Most local authorities have indicated their maximum cost ceiling in advance of negotiations, at a small percentage above last year’s fees, and then gone into the market to ‘negotiate’. It is obviously easier to do so ‘successfully’ if other authorities in the area are holding to similar price increases. Economic necessity and the absence of any governmental guidance on how to set ‘usual cost’ under the Choice of Accommodation Directions 1992 may have driven this trend, but ECJ jurisprudence suggest that prohibited agreements may be express or tacit and need not be legally binding in order to count as price fixing agreements. The distinction between concerted practices and agreements is imprecise but would include the ‘gentlemen’s agreement’ and any other form of practical co-operation. Collusion between smaller authorities to operate regional price-fixing policies could constitute a concerted practice, in our view.

Abuse of a Dominant Position

The important issue under s18(2) is whether a dominant undertaking is using its position in an abusive way which has the effect of restricting the degree of competition which it faces or whether it is exploiting its market position unjustifiably. Once a finding of dominance is made, a wide range of conduct may constitute an abuse which would otherwise have been permissible.

In Continental Can, [1972] CMLR 960, the ECJ established a two-stage test for analysing an undertaking’s market power.

Firstly, the relevant market should be defined and this comprises the product or service and the geographic area affected.

Secondly, the undertaking’s dominance therein should be assessed.

The test for the product market, when it is the seller suspected of abuse, focuses principally on whether other substitutable products can be identified. On the demand side, in relation to residential care, there is simply no prospect of other purchasers of the service wielding economic muscle, because whilst those in need could theoretically switch from local authority ‘arranged’ provision and make their own arrangements, the whole point of local authority provision is that it is for people who cannot afford to enter the market under their own economic steam.

In addition, the quality assurance that is supposed to be obtained through the local authority’s inspection and homes registration role is a highly differentiating factor: at the moment, no independent regulatory body exists to monitor private sector residential home care standards, to which the privately contracting consumer could refer. This will change in April 2002 however, when the National Care Standards Commission starts to function.

On the home care side, agencies not dealing with local authorities tend to specialise in either domestic work or personal care, and it is hard to get a joined-up service from any one entity. There is a less easily identified statutory monopoly on the domiciliary care purchasing side, with respect to a particular sector in society. The statutory duty to meet needs is owed only to those for whom the authority has assessed it is ‘necessary’ for it to intervene to make arrangements, but there is no minimum or maximum financial limit below which Parliament has decreed that intervention will always be ‘necessary’.

Of course it could be said that the private sector supplier need not contract with the authorities if the price offered is out of line with reality. But, by definition, most service users are to some extent physically or mentally incapacitated and lack the capacity or resources to search out and negotiate with alternative suppliers.

Statutory needs assessment, together with the formulation and implementation of a personal care plan which must be honoured until lawful re-assessment, regardless of budgetary crisis or even willingness to pay the assessed charge by the client to the authority (ex p Barryand Hambidge No.2), might be regarded as an integral part of the local authority ‘product’- aspects which do not apply in a contract with the private sector.

From the point of view of the ultimate service user, this wider product definition to include quality control and statutory entitlement points to local authority arranged provision as a service with no substitute from competing private sector suppliers.

Geographic Market

There is no need for a dominant position to be in respect of the whole or a substantial part of the UK; and a relatively small part of the UK could constitute a market. Thus local authority boundaries would be sufficient to meet the criteria.

In United Brands the relevant geographical market was identified ‘with reference to a clearly defined geographic area in which the product is marketed and where conditions of competition are sufficiently homogenous for the effect of the economic power of the undertaking concerned to be able to be evaluated’.

European case law has also identified the following factors to be taken into account:

(a) an absolute or substantial market share (assumed likely if the market share exceeds 50% – see AKZO Chemie [1993] 5 CMLR 215);

(b) statutory monopolies and other legal regulation.

We think it is plain for the reasons set out above that the authorities enjoy a dominant position; the more so when one considers the special features of a local authority arranged placement.

Are authorities abusing a dominant position?

Section 18 (2) provides a non-exhaustive list of examples of abuse:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions

(b) limiting production, markets or technical development to the prejudice of consumers

(c) applying dissimilar conditions to equivalent transactions with other trading parties thereby placing them at a competitive disadvantage

(d) forcing the other party to accept supplementary obligations which according to commercial usage, have no connection with the contract.

Are local authorities imposing unfair purchasing prices? In United Brands, the court held that ‘charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied is an abuse’. It would therefore seem to follow that charging an excessively low price which bears no relation to the economic value of the product is also an abuse.

Unfairly low prices can be an abuse but the evidence to support such a charge must be sufficiently specific. Laing & Buisson’s market surveys of ‘real’ fees increases against the RPI would be instructive, and the percentage of homes still in business even more so. UKHCA asserted that authorities ignored the 5% to 10% increase in the basic costs of providing home care when calculating fixed prices and that the pressure to either downgrade quality or close down is exacerbated by the 48-hour working week, the minimum wage and the increase in employers’ national insurance contributions. New and higher care standards particularly regarding passenger lifts, room sizes etc. will all take their toll too.

A further factor in the equation in the residential market is that there is often a difference in the price at which accommodation is offered to public sector and private consumers. In some cases, the higher fee simply reflects the economic value of the accommodation and care, or the fact that volume/bulk purchase from the local authority is properly relevant to the price because of the guaranteed room take-up. However, there is little doubt that the higher fees are sometimes a means of subsidising the lower level local authority rates which have been imposed on the home owners. On the other hand it might just be that these price differentials simply reflect unfair advantage-taking on the part of the private sector providers, where relatives may be glad to pay more for the sake of their consciences in relation to the care of parents and other loved ones.

Authorities used to point out that demand for residential care is falling at present, resulting in a currently overcrowded market. It could perhaps be said to be justifiable for actual commercial factors, such as that one, to inform local authority contracting policies, especially in view of their fiduciary duty in relation to public expenditure. But the number of homes closures in the last year makes us doubt whether it can be said that the market is over-crowded any longer, which will mean prices will be bound to increase.

Exemptions

Paragraph 4 of schedule 3 disapplies the prohibitions to undertakings entrusted with the operation of services of general economic interest. If the authority constitutes an undertaking, it might be possible to see the commissioning as being done in the context of the operation of the service of providing care for those who cannot afford it, and that might be thought to be in the general economic interest.

Secondly, Paragraph 7 contains a ‘public policy’ exception to the Chapter I and II prohibitions which the Secretary of State can confer for ‘exceptional and compelling reasons’. There is as yet, no indication as to whether the power would be exercised in relation to social services contracting.

If it were, it might be considered to be at variance with the principles expounded in the White Paper ‘Caring for People’ and Policy Guidance to the National Health Service and Community Care Act 1990. One of the key policy objectives was to promote a mixed economy of care which would lead to greater choice for service users. Paragraph 4.16 reflects government recognition that smaller organisations may be more financially vulnerable in terms of overhead costs and it might be inferred local authorities’ contracting policies ought to take this into account. Further, LAC (94)12 clearly expressed the Government’s intention for independent private sector providers to play a full part in the provision of non-residential care services.

Conclusion

Since Social Services departments have severely constrained budgets, it might be thought that they have no alternative other than to negotiate the lowest price suppliers will accept and that the real answer lies in increased central government funding. However, home owners and care agencies could argue that the funding issue cannot be a relevant factor in an objective assessment of whether an authority’s conduct amounts to abuse of a dominant position – the statutory duty means that it must be funded, and some other discretionary function of the authority must be put on hold (see ex p Tandy for judicial endorsement of that approach).

In reality, given the economic importance of the endorsement which comes from being an approved local authority contractor, private sector businesses would not survive without dealing with the authorities, and their closure would be contrary to the whole idea behind a mixed economy of community care, and also bad for those consumers who do wish to contract privately.

Theoretically, low fixed-prices ought to force a supplier to operate more cost effectively, but where they are excessively low, they can potentially drive suppliers out of the market and discourage new entrants. In the end, the fewer entities there are in the field, the harder it will be to get a service, and the greater the cost will be, for both statutory and private consumers.

It may be relevant that the maintenance of a DSO or an LA-owned residential care home by an authority is often important in a political context to the councillors, in terms of sustaining the authority’s local employer role.

There must come a point where market forces and the existence of statutory duties combine to oblige authorities to pay a realistic price to those without the services of whom they could not discharge their duties. If private consumers and local authorities become susceptible to higher contractual fees demanded by a smaller number of suppliers the effect on the market will have been restrictive and anti-competitive. The authority might be compelled to pass on increases to its statutory service users in the homecare charge, which can hardly be politically desirable. This would not be possible on the residential side, because of the national mandatory framework for residential care charging. Therefore short-termism will not even assist authorities’ budgetary control.

In our analysis, one answer to this complex problem is to focus on the legal obligations in the Choice of Accommodation Directions, regardless of the competition framework. These Directions assume that each authority will set a ‘usual’ cost for the purposes of assessing whether an individual can enter the home of their choice, and be funded by the local authority, or whether the individual must find a relative or friend or charity to make a third party ‘top-up’. The Guidance accompanying the Directions insists that the usual cost cannot be set so arbitrarily low that everyone routinely has to find a top-up before they can feasibly access the residential accommodation which they need. The Guidance also insists that the usual cost should be set by reference to what the authority ‘normally expects to have to pay’. Merely setting a price (related say to DWP benefits rates) and saying ‘Take it or leave it’ may not be sufficient in law to comply with the statutory commissioning function against the background of the statutory role of ‘last resort’ for care. Some of the home owners’ associations who have tried this form of challenge in court have been rebuffed on the basis that the matter of contract price or terms had nothing to do with the public law duties of the authorities, but others have succeeded in at least raising the question whether the authority was negotiating unlawfully in a public law sense (see Coventry County Council ex p CHOICECleveland County Council ex p WardCleveland CC ex p Cleveland Care Homes Association on the one hand and Cumbria Professional Care Limited on the other). Thus the matter is not free from doubt, and needs clarifying.

 

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