Competition Act 1998 - Elderly Client Adviser

Feature

posted 1 Jan 2000 in Volume 5 Issue 2

Competition Act 1998:

The Impact on Local Authority Social Services Contracting

The principles expounded in The White Paper, "Caring for People" and National Health Services & Community Care Act 1990, Policy Guidance, are premised on the creation of a flourishing mixed economy in social care. It was proclaimed that the development of private sector residential and domiciliary care services alongside local authority "in-house" provision would promote 'consumer choice', enable social services departments to contract on favourable financial terms and create pressure for maximum efficiency and effectiveness. Local Authorities were empowered under the NHS&CCA and s.26 of the National Assistance Act 1948 to discharge their statutory duty to provide social care through contractual arrangements with the private sector. However, the political vision now appears somewhat tarnished amidst private sector protests that many authorities are abusing their near monopolistic purchasing power which it is claimed contravenes the Competition Act 1998.

The United Kingdom Home Care Association claim that private sector suppliers are being forced out of business because many authorities are imposing uneconomic fixed contract prices and unfair terms which allegedly include the imposition of a £75 penalty for missed home visits - representing the profit margin on between 300 and 600 visits. One local authority cancelled all existing contracts with one provider when they refused to accept an excessively low price for new contracts. Many authorities have purportedly ignored the increase in the basic cost of providing residential and home care services when calculating fixed prices. 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. The UKHCA has threatened to refer the matter to the Director General of Fair Trading when the Act comes into force in March 2000.

The Competition Act

The Competition Act 1998 prohibits 'undertakings' from entering into anti-competitive price fixing agreements and conduct which amounts to an abuse of a dominant position which may distort the market structure so as to impact adversely on consumers' interests. The Prohibitions are based on Articles 85 and 86 (now 81 and 82) of the EC Treaty. Section 60 of the Act sets out principles which provide for the United Kingdom authorities to handle cases in such a way as to ensure consistency with Community law (unless the court is driven to a different interpretation by some provision in the Act).

The interfacing raft of local authority statutory duties underpinning 'market' relationships creates anomalies which fundamentally distort the concept of a 'competitive' market structure. The complex issues involved cannot be conclusively addressed without detailed economic and legal analysis. However, this article aims to summarise the key themes which the DGFT would have address on a referral, viz:

(1) Whether, in discharging statutory welfare functions, an authority could be deemed to constitute an 'undertaking; and

(2) If an authority is assumed to be an undertaking, whether contracting policies potentially:

(i) Breach the Prohibition on 'anti-competitive' agreements.

(ii) Constitute abuse of a dominant market position.

(iii) Fall within the scope of Act's exclusionary provisions and thus remain unaffected by the Prohibitions.

Is the Local Authority an Undertaking?

DGFT guidelines state that the term 'undertaking' will be interpreted broadly to include any natural or legal persons capable of carrying on commercial or economic activities relating to goods or services. This approach reflects the 'functional' concept of an undertaking adopted by the European Court of Justice which has held that Articles 81 and 82 cover 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.

Although the definition is broad, European case law is unclear and there has been doubt as to whether local authorities and analogous bodies qualify as undertakings. Case law affirms that the European Court recognises that a public body may act either by exercising public powers or by carrying on economic activities of a commercial nature, and by offering goods and services in the marketplace. In addressing the question of whether the public body is engaged in economic activity, the Court has focused on the nature of the statutory function exercised and whether it would constitute a 'core' state activity operating in the 'general interest' to the extent of justifying restrictions on competition.

There is force in the argument that commissioning private sector supply is simply an inherent part of exercising mandatory statutory welfare functions in the public interest, i.e. functions designed to prevent harm to vulnerable adults. It might be argued that the concept of a 'competitive' supply and demand market does not exist in the context of local authority arranged provision. This is because:

(i) access to the statutory service is controlled by the 'gateway' of social services eligibility criteria.

(ii) where a person meets the appropriate service eligibility criteria, the authority is under a duty to provide the service irrespective of whether the service user has paid fees levied under a statutory harging system. In fact, many service users are either not charged the full economic costs of provision r are not required to pay at all.

(iii) where the local authority contracts for private sector provision, the service user will acquire enforceable statutory entitlements, i.e. statutory needs-assessments, individual care plans, local authority quality control and the right to use statutory complaints procedures.

(iv) in the event of a dearth of independent sector supply, local authorities would be compelled to set up 'in house' services for those entitled to statutory provision. These features are absent from privately arranged services.

On the other hand, it might be argued that, if the statutory features were excluded from the definition of the service, theoretically it ought to be available on the 'market'. However, in practice, the majority of statutory service users have no option other than to rely on state arranged provision as a last resort. Indeed, many might be regarded as 'captive' consumers because they are physically or mentally incapacitated and would be incapable of searching out, negotiating and contracting for social care.

A junior Department of Health Minister has expressed doubt as to whether a local authority would fall within the definition of an 'undertaking' but the Office of Fair Trading has taken the view that, in principle, nothing is ruled out and that a local authority potentially falls within the definition of an undertaking.

Anti-Competitive Agreements

Section 2(1) prohibits agreements, decisions or concerted practices between undertakings designed to restrict or distort competition which may affect UK trade. Guidelines state that an agreement will have no appreciable effect on competition if the undertakings' combined relevant market share does not exceed 25%. However, on any measurement, local authorities have a market share well in excess of this level and are therefore within the scope of section 2. 'Gentlemen's agreements', collusion between authorities to operate regional price-fixing policies, or other forms of practical co-operation through trade, professional or local government associations would constitute a concerted practice. Guidance also states that even unwilling parties to agreements can be liable. However, where unequal bargaining power is used as a tool to prevent negotiation and the only options are acquiescence, business closure or bankruptcy, it is unlikely that an aggrieved, unwilling private sector supplier would be held liable. It is not readily apparent that authorities are contravening this Prohibition.

Is the Authority Abusing a Dominant Market Position?

There are two main stages in addressing this issue. It must first be established that an undertaking does, in fact, hold a dominant market position. If it does, it is then necessary to determine whether the undertaking's conduct constitutes an abuse of its position: i.e. does the conduct actually or potentially distort the market structure so as to impact adversely on consumers' interests? Section 18(2) provides a non-exhaustive list of examples of 'abusive' conduct which include:

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

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

Stage 1: Analysing Market Power

DGFT guidance adopts the two-stage test established in Continental Can [1972] CMLR 960:

(i) The 'relevant market' should first be defined which comprises:
- the product or service; and
- the geographic area affected

(ii) The degree of market power in the relevant market should then be assessed.

Relevant Market

The test for the product market is difficult to apply to mandatory welfare provision as it attempts to identify 'competing' undertakings by measuring the extent to which consumers react to an increase in the price of one product by switching to similar or identical products. A monopolist market will be characterised by products or services for which there are few or no substitutes. On the demand side, a user could theoretically switch from local authority arranged provision to privately arranged services if available at a price they were prepared to pay but the problems associated with this have already been identified. Product differentiation was briefly discussed in the section on undertakings and there can be little doubt that the local authority is in a dominant market position in relation to both definitions.

With regard to the geographic market, United Brands [1978] 1 CMLR 429 identified this:

'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.'

Thus there is no need for a dominant position to be in the whole or substantial part of the UK and local authority regional boundaries would be sufficient to meet the criteria.

Degree of Market Power

Relevant factors in assessing the degree of market dominance will be:

(i) Where the undertaking has an absolute or substantial market share which is likely if the market share exceeds 50%: AKZO Chemie BV v Commission [1993] 5 CMLR 215. But, high market shares are not themselves prohibited and do not necessarily indicate a competition problem.

(ii) Statutory monopolies and other legal regulations. Clearly, in its capacity as both provider and purchaser, a local authority does occupy a dominant market position.

Stage 2: Assessing Conduct

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'. By implication, it follows that forcing a supplier to accept excessively low purchase prices which bear no relation to the economic value of the product, may also constitute an abuse. Evidence to support an allegation of unfairly low prices must be sufficiently specific. UKHCA contend that many authorities have ignored the 5 to 10% increase in the basic cost of providing domiciliary care when calculating 1999 fixed prices. In the private residential care sector, during the two years ending March 1998, fees to homes rose by only 1.8% while the retail price index rose 3.1%. Many providers consider that fees are insufficient to provide an adequate return on capital and act as a disincentive to quality. 1999 costs for residential care rose by up to l5%, with few local authorities increasing fees by more than 2.5%. The sector apparently made zero profits in 1998 and many owners face the prospect of bankruptcy. However, the fall in demand for residential care is creating an increasingly overcrowded supply market, a factor which will inevitably constrain prices. Conversely, the demand for home care services is set to increase dramatically, particularly in the light of government policy which emphasises the need for independent living in the community.

If private sector suppliers were forced out of business (without a corresponding fall in demand or at a time of increased demand), private consumers, the voluntary sector (as purchasers) and local authorities would be susceptible to excessively high fees demanded by the reduced pool of private sector suppliers. In the absence of increased central government funding, an authority might be compelled to pass on a proportion of the increase. In some cases, the higher fee charged to the private consumer simply reflects the economic value of the accommodation and care, whereas in others, it is a strategy for subsidising the lower local authority fees paid to the home. Reduced private sector supply would undermine choice for both statutory and private consumers.

Government guidance acknowledges that small organisations may be more vulnerable in terms of overhead costs, the inference being that the Government intended contracting policies to take account of this to ensure continuity of supply. But, at the time this was issued there was a shortage of private sector suppliers and the imposition of uneconomic fixed fees would have prevented entry into the market. An authority has a fiduciary duty not to incur unnecessary public expenditure and it may be argued that an authority engaged in commercial contracting transactions, albeit for social care services, is entitled to respond commercially to market forces, i.e. pay prices which reflect deficit and surplus supply.

Exclusionary Provisions

Schedule 3, paragraph 4 excludes undertakings entrusted with the operation of services of general economic interest, but this is unlikely to apply to social services commissioning functions. Paragraph 5 excludes agreements and conduct necessary in order to comply with a legal requirement. Some authorities are concerned that the 'Best Value' requirements of the Local Government Act 1999 (which comes into force later this year) will potentially conflict with competition law. The LGA creates a general duty to secure continuous improvement in the way local authority functions are exercised, having regard to a combination of economy, efficiency and effectiveness (of which 'quality' is an essential aspect). Section 16(1) enables the Secretary of State to modify or exclude the application of other legislation which prevents or obstructs compliance with Part I of the LGA. However, if local authorities are deemed to be undertakings, ministerial intervention to disapply the Prohibitions might be perceived as being at variance with the present Government's policy of promoting public and private sector 'partnerships'. Furthermore, the objectives of the Acts are not necessarily irreconcilable. The primary object of competition law is to eliminate conduct which 'distorts' the market and adversely affects consumer interests. Thus it potentially constrains the 'abusive' conduct of purchasers and suppliers, which may operate to complement the 'Best Value' requirements.

Conclusion

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. If authorities are forced to set up 'in-house' provision as a result of a shortage in private sector supply, the cost would generally exceed that of private sector provision, chiefly because of higher staffing costs. These costs are often directly attributable to unionised employment with higher rates of pay, and better conditions of service and training. There is no doubt that most social services departments are operating within the confines of cash-strapped budgets. However, in the longer term, it might be more cost effective if they were in a position to adopt policies other than those based on 'immediacy' or a 'survival' market mentality. The solution to this problem lies with central government and increased funding.

The UKHCA has valid concerns but, at this stage, it is not possible to predict with certainty whether a referral to the DGFT would be successful. At first glance, it might appear that the social services commissioning function does constitute a commercial activity which is potentially caught by competition law. However, the statutory character of the local authority provision (which is unavailable on the open market) fundamentally flaws the concept of a 'competitive' model. This lends support for the proposition that, on balance, an authority is unlikely to be defined as an undertaking.

Sheila specialises in community care law with Wellers Solicitors and is a Trustee of Greenwich Advocacy Services for Older People.

(These are the author's views and are not intended to represent those of the firm)