Healthcare Business: Just when you thought there was already too much regulation in the adult social care system…

Full of Christmas cheer, the Department of Health published its consultation document, Market Oversight in Adult Social Care, on 1 December 2012.  Following the demise of Southern Cross, there is a heightened concern within Government that the current system is insufficiently robust to deal with major provider failure in the adult social care sector.  The consultation document sets out the Government’s proposals in relation to market oversight that are aimed at minimising “the risk of a negative effect on the health and well-being of care users in the event of a provider failing financially and ceasing to provide services.” The consultation, which runs until 1 March 2013, applies to residential and home care services in England.

A fundamental question is whether such a regime is needed at all given that a significant number of providers have exited the market since the community care reforms were introduced twenty years ago without incident, even with such a challenging closure process as applied to Southern Cross.  However, the view is that the public are entitled to greater reassurance in relation to the risk of major provider failure than is currently possible and that state regulation is the mechanism that should be deployed to achieve that aim.  Essentially the intention is that an early warning system would operate to avoid another Southern Cross melt down type- scenario.

Local markets

The good news is that the Government is not proposing to apply this additional oversight to all adult social care providers. The Consultation document refers to small care providers with fewer than three care homes making up 43% of the care home market and small home care services which constitute 60% of the market. The view is that local authorities can manage continuity of service with this level of provider within local markets.

Which providers will be captured by the regime?

The Government’s aim is to capture those providers that are above a “risk threshold” as they pose a greater risk of continuity of care because of their:

  • Size and scale (possibly linked to turnover or the number of people receiving services);
  • Regional and sub-regional geographical concentration (market share), or
  • Highly specialist services with a wide catchment area of dependency.

The information test

If providers meet a certain risk threshold, the proposal is that they should be required to supply financial and other information (such as robust plans in case they fall into distress) to a nominated regulator: either Monitor or the Care Quality Commission.  The model is described as light-touch and the information would be similar to that required by investors and management boards. Possible metrics could include:

  • Debt to earnings ratios;
  • Occupancy rates;
  • Capital investment in fabric and facilities;
  • Number of homes embargoed by local authorities;
  • Turnover of registered managers; and
  • Compliance with CQC’s essential standards of quality and safety.

Importantly, the Consultation document stresses that “information would need to be provided to the regulator in confidence and the regulator would have to respect the commercial sensitivity of such information.”

The regulator would risk assess the information and in exercising that function would form a view about the sustainability of a provider’s business model.  That is as far as it would go for most providers falling within the scheme. However, a reasonably small “sub-set of the providers who posed the greatest level of risk would then be required to develop scenario-based contingency plans.”

An expert regulator

There is a realisation that for this regime to work there needs to be an expert national body capable of analysing financial data and what can be complex business models.  The body will have to be “adequately resourced with corporate finance and business recover expertise.”  A betting man might place money on Monitor acquiring this role given that it is assuming a market oversight responsibility for NHS provided services.  The argument for giving it to CQC is that finance and quality are inextricably linked and it would make no sense to separate out these two regulatory functions. A wider issue is whether Monitor and CQC should continue to operate distinctly.  However, merger is not on the table at the moment (although the Mid Staffordshire Inquiry may have something to say about this issue when its Report is published in the early part of 2013).

Recovery and Resolution Plans

Unlike the NHS, the Government is not proposing to establish a special administration regime for the adult social care providers who fail.  The Consultation document makes it quite clear that the Government will not support a failing private business at taxpayers’ expense.   Instead the focus is on contingency planning aimed at recovery (the recovery plan) and, if that fails, the resolution plan based on “mechanisms to allow a smooth transition to new ownership and continuity of quality care once the organisation is no longer able to continue its operations.” The Consultation document states that “very few providers are expected to enter” this end-game phase, which begs the question why a regulatory scheme is needed in the first place. However, the assumption is that the operation of the early warning system will reduce the risk of failure.

Supplier of last resort

A controversial element being considered as part of resolution planning is establishing an open concordat among larger providers where they agree to step in and manage care services during the “transition phase”, in the event that one of their competitors exited the market. This proposal seems to sit uneasily with the proposition that it is precisely the larger providers that present a higher risk to the system.  However, the proposal is that this arrangement would allow for “temporary management” of failing care services by other large providers that would not impact on the assessment of bids to take over the services, nor impact on the rights of creditors.

Beyond the rhetoric, this proposal raises real “nuts and bolts” issues about how it would work in practice. How could a perceived failing provider be forced to accept a provider of last resort?  What if there was resistance to the proposal? In addition, there would be technical issues relating to insurance, accountability and liability if another provider stepped in.  The view of the banks would also be crucial. One could argue that current administration arrangements are a sufficient remedy, with the ability of an insolvency practitioner to appoint specialist advisors including management companies.  As with so many things in life, the devil is in the detail in terms of the workability of such a scheme.

Conclusion

It is ironic that a Government that says it is committed to tackling the red tape challenge is proposing to add some more tape to the system.  The Consultation document does refer to the “one in, one out rule” which suggests that some other, even more obscure aspect of regulation may be abandoned when introducing this additional tier of regulatory market oversight.  We will wait to see if that happens.  The real issue, however, is how far such a system can make a difference to market stability in circumstances were underfunding by the state is coupled with ever increasing regulatory demands on the sector. The practical benefit of such a system may be questionable, however much it appears like a sensible proposal. It should also be considered alongside the Department of Health’s intentions to provide market oversight of NHS funded services given that many larger adult social care providers will also be providing services to NHS funded clients.

At Ridouts we will be reporting on the outcome of the Consultation in a future article in Healthcare Business.

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