Fee increases that are CMA compliant and keep up with costs
The CMA’s guidance on care home contracts provides that care home contracts are likely to be unfair if they do not provide a clear, objective way of determining annual fee increases. The difficulty for providers is that they cannot predict accurately what elements of their costs will rise in any given year, and by how much.
The Care Provider Alliance (CPA) has published resources to help providers comply with the CMA guidance, including fourth model clauses regarding annual increases. The first is a fixed price for the duration of the contract. The second is a fixed increase each year. Both of those are unlikely to be commercially sensible in most cases because they fail to address the risk of costs increasing faster than fees. The third model clause increases fees annually by reference to a particular index (which can be chosen by the provider). The difficulty here is that some costs may increase by more than that index, which again means margins will be narrowed.
The fourth model allows providers to use more than one index, and also allows the provider to give different weight to each index based on the proportion each element makes of total costs. The example in the model clause (and it is just an example) is that staff costs make up 65% of total costs with the other 35% assigned as ‘non-staff costs’. In the example, 65% of the total fees each year will increase by the NMW and 35% by CPIH, one of the measures of inflation.
This comes the closest to making commercial sense because it recognises that different costs may rise by different amounts. However, it is still flawed because the drafting assumes that the proportions will remain constant over time. That is very unlikely to be the case in reality. For example, if there are inflationary wage pressures (say due to Brexit and NMW), staff costs may become a higher proportion of providers’ total costs. The annual increases will therefore not provide for the full increase in staff costs, again eating away at the margins.
One possible solution is to break up costs into components, as suggested by the CPA’s fourth model clause but instead of attributing weights to each, each component will change annually to reflect the corresponding index. The total fees will then be the sum of each adjusted index. Using this model means that the proportions of costs each year are taken out the equation. Each component will change to reflect the full increases in costs so providers’ cost inflation will be provided for in full. The model still provides the clarity and certainty required by the CMA. Indeed, this model is simpler to understand.
Getting this right is important for all providers but particularly for those whose placements last for several years when it’s essential that fees keep up with costs.
The CMA has become a powerful enforcer so it’s vital that providers have contracts that comply with its guidance whilst at the same time making commercial sense. Annual fee increases is just one example of this. Please contact me for further information.
Jonathan Landau, Barrister
Telephone: 0207 406 7532
Mobile: 07980 897 429