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24 Jan 2012
John Adams, VODG general secretary

Economic regulation; the red tape challenge

The UK's annual care bill totals £23 billion. Easy, therefore, to understand the case for tighter economic regulation of social care but, as VODG has already argued on this blog, while the end seems logical, the means are less clear.

John AdamsMonday saw the deadline for responses to the latest consultation (PDF on external site, size not known) on regulation of health and social care. Current proposals appear to be that credit rating agencies assess whether hospitals are financially robust enough to treat patients.

The VODG isn’t alone in questioning quite how a credit rating agency is a fit and proper body to vet health and social care providers. As reported last week, these are the same agencies that failed to predict the credit crunch and are currently embroiled in heated debates about the downgrade of eurozone countries.

As previously set out on this blog, the government plans extending the authority of health regulator Monitor to include the care sector and create a single system for licensing and registration run by Monitor and CQC (currently CQC regulates standards, the Department of Health (DH) which has policy responsibility and local authorities offer provision and public funding of social care).

While CQC is at its most embattled, underlining the need for regulatory reform, we argue against blanket economic regulation. A recent report from the King’s Fund suggested flaws in the Monitor expansion plan including the risk the regulator becomes confused about its aims and the fact Monitor has no experience of social care.

Under the reforms Monitor will have new functions including, promoting competition, regulating prices and licensing providers. The basic idea is in a competitive market, competition drives up quality and efficiency. Licence conditions would place restrictions on providers, such as gearing levels and securitising debt against specific assets. But the details require fine tuning, for example, the licensing threshold; if you have five residents funded through Continuing Health Care (CHC) funding will a licence from Monitor be required?

Other issues include the DH/Monitor needing to agree the level at which a dominant market share is reached – 40 per cent, as the Office of Fair Trading suggests, or less? The care sector is increasingly dominated by a smaller number of large providers. Southern Cross had a market share of around nine per cent at a national level, but up to 30 per cent in some parts of the North East. So how far, as the Public Accounts Committee has noted, would Monitor intervene in regional and local markets, given the DH’s perspective is a national one? The government has also yet to decide what action to take if providers get into financial difficulties.

Regular readers will also know of VODG’s concerns about the lack of distinction between different types of providers in the context of regulatory reform. There is no guarantee that not-for-profits will never experience operating difficulties, but it is clear that that the financing structures, motivation, constitutional and governance arrangements of not-for-profit providers are different to companies that are principally accountable to share-holders, or to private equity investors. Many of our members are charities founded in 19th century philanthropy; their raison d’etre is to support beneficiaries, not profit as an end in itself, and they have successfully operated without economic regulation for decades.

We need distinctions between different types of providers - by scale, geographic concentration of services and operating or constitutional structures – Monitor, for example, could licence only providers with, say, a turnover of more than £50 million.

The risk is that on the back of Southern Cross, the Government will simply lump all providers together as if they are a homogenous group. But one size does not fit all in social care, and that goes for the providers requiring regulation as well as the people they care for.

In addition, many VODG members operate business models, offering a wide range of activities – some subject to regulation some not, some funded under contract to local government or the NHS, others by different income streams or paid for through fundraised income. In this diverse operational and financial context, what if buildings gifted to charities are subject to historic covenants, what about restricted versus general income? Will Monitor review all balance sheets annually, or only those of new entrants?

Something else that will muddy the regulatory waters is the drive towards personal budgets. The government’s target is that by April 2013 all eligible service users will be offered personal budgets, something that will have obvious repercussions for the care market.

In addition, this is yet more red-tape from a government that has said it wants to see less centralisation and bureaucracy. Providers face significant cuts in fee levels and tight operating margins, now is not the time for the potential administrative burden of more regulation. We already have CQC, NICE, and local government contract monitoring - which often overlaps with CQC inspection functions. We need an effective and lighter touch regulatory system, not a heavier hand.

Returning to the latest proposals to involve credit rating agencies in health regulation, the banking collapse proves that economic regulation doesn’t necessarily come with a cast-iron guarantee of effective risk management. Why should it be any different in the health and social care market?

* This blogpost is based on an article that first appeared in the current issues of Care Management Matters magazine.

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