Philip Mickelborough The Fair Price model – why and how Philip Mickelborough to Lancashire Care Association Conference 22 th November 2011

Philip Mickelborough Laing & Buisson / Joseph Rowntree Fair Price for Care Model Existing ‘Fair Price’ model covers care homes for older people L&B is developing a separate tool for younger adult services Similar principles apply to both

Philip Mickelborough Why is a Fair Price model needed? It’s because local authorities have such strong monopsony purchasing power. “Local authorities have tended in recent years to rein back baseline fee rates under budgetary pressures …. This has fed through to care home fee inflation close to or below RPI, and below wage inflation. The results of Laing & Buisson’s latest baseline fee survey show a further tightening of the squeeze on care home fee levels for the financial year, as cash-strapped local authorities have sought to contain costs by using their powerful bargaining position vis a vis independent sector providers.” CARE OF ELDERLY PEOPLE MARKET SURVEY 1997 (Laing & Buisson) Plus ça change!

Philip Mickelborough How dependent is the sector on council funding? Sources of funding for care homes for older people, UK: Local authority52% Self-pay40% NHS 8% Big variations by geography, with a clear North – South divide How will this change in the future? There’s a trend to self-pay, but this could be reversed by government policy eg if government accepts the Dilnot proposal to raise the upper assets threshold to £100,000).

Philip Mickelborough The local authority fee squeeze - history First fee squeeze - the mid-1990s to the turn of the century, fees tracking RPI Benign period 2002/03 to 2007/08. Much spare capacity had exited the market and the Labour government was spending freely. Fees grew in real terms and care home providers’ margins were rebuilt Second fee squeeze began in earnest in 2010/11, became tighter in 2011/12. Local authority baseline fee rates have fallen by an average 3.9% in real terms over the 2 years after taking account of cost inflation The two factors which lead local authorities to squeeze care home fees hard are: - spare capacity (high occupancy rates), which means that local authorities can place residents easily; and - public spending constraints, which create an imperative to seek economies The care home sector is faced with both at present – and for the next few years…

Philip Mickelborough Occupancy rates – all UK independent sector homes for OP

Philip Mickelborough Why is there under-occupancy? It’s NOT that the volume of demand is dropping. - In fact, demand for local authority, self-pay and NHS combined is rising! - Rather, a fundamental structural problem is that old stock is not exiting the sector as fast as new stock is being created - Poor quality stock is not being driven out of the market, and this is acting as a drag on fair fee levels

Philip Mickelborough A mountain to climb According to research undertaken by L & B for Bupa, local authority fees are currently (2011/12) £40 - £70 per week below the mid-point of the ‘Fair Fee’ range: Mid-point Current LA fees ‘Fair Fee’ Residential care (non dementia)£464 pw £502 pw Residential care (dementia) £464 pw £531 pw Nursing care £573 pw £637 pw Local authority paid care home fees would have to rise by between 5% and 8% per annum over a period of three years in order to reach ‘Fair Fee’ levels.

Philip Mickelborough How can ‘Fair Price’ model help? It may be an uphill struggle, but fair price models are an essential first step to: - Persuading central government to issue ‘fair fee’ guidance - Persuading local authorities, or ADASS, to adopt ‘fair fee’ policies - Mounting legal challenges Legal challenges may be viewed as a last resort, but there have been some recent successes (eg Pembrokeshire), and the recent judicial review in Sefton offers new opportunities for challenge The L&B fair price model has been rigorously tested over the last decade and found to be robust

Philip Mickelborough ‘Fair Price’: Summary of changes Laing & Buisson has recently refined its ‘fair price’ methodology NURSING CARE EXAMPLE (North West) £ per week (Ceiling) Original (2011/12) Revised (2011/12) Staff costs£383£383 Non-staff costs £87 £87 Repair & Maintenance £35 £35 Accommodation (7% return on capital) £91 Operator’s profit (13% mark-up on revenue costs ) £66 Total return for Accommodation and Operation £157____ (12% return on capital) £662£662

Philip Mickelborough ‘Fair Price’: Issues of Contention Our experience with undertaking large numbers of ‘Fair Price’ exercises over the last decade, for care associations, local authorities and lawyers, is that: a) most of the costs are non-contentious. They are what they are and it’s difficult to argue otherwise b) the contentious issues, such as they are, always boil down to three: - return on capital (12% in the model, but has been argued as low as 6%) - the ‘capital cost adjustment factor’, which suggests a differential of about £90 between the ‘ceiling’ fair fee (for care homes meeting all the former National Minimum Standards) and the ‘floor’ fee (for care homes on the borderline of acceptability). Local authorities often argue they should pay the ‘floor’ fee only - less frequently, staff hours per resident per week (20.5 carer, 7.5 qualified nurse and 6 domestic and catering for nursing care, but it has been argued that these are too high)