Care North East Newcastle, R (on the application of) v Newcastle City Council

The Claimants are members of the committee of Care North East (Newcastle), an unincorporated association representing care home providers operating in the region controlled by the Defendant which is a Local Authority. There are currently 51 care homes operating in the Defendant’s area and the Claimants represent 15 of the 21 care homes currently recognised as Grade 1 quality, there being four grades. There were 25 care home providers in the city and 1017 of their residents were supported by the Defendant. Residents in care homes can pay their fees personally, or through relatives, or they can have their fees wholly or partly funded either by their Primary Care Trust if they are primarily in need of nursing care, or by the Local Authority if they are not. This dispute centres on the rates which this Local Authority is prepared to pay care homes in its area for residents which are wholly or partly funded by them. The care homes are graded according to quality in four grades with Grade 1 being the highest quality. There are also variations in payment depending on whether the establishment is a nursing home or a residential home (the former requiring some medical or qualified nursing staff). Supplements are also paid when the residents are categorised as “EMI” (Elderly Mentally Infirm) as such patients will clearly need more care than those who are not. Some residents start out paying their own fees but as their capital declines become entitled to have their fees wholly or partly paid by the Local Authority.

The Claimants seek to challenge the Defendant’s decision on 26^th March 2012 to fix the rates payable to care home providers for 2012-13 and require the providers to sign a contract agreeing to the rates by 30^th April 2012 in default of which no new placements would be placed with them. The grounds were amended during the course of proceedings but eventually the Claimants had permission to proceed on four grounds brief details of which are as follows :

The legal framework

By section 26(1) arrangements under section 21(1)

By section 47(1) of the National Health Service and Community Care Act 1990

In the exercise of its social service functions, a local authority is required to act in accordance with such directions as may be given by the Secretary of State under section 7A(1) of the Local Authority Social Services Act 1970. An authority must also, by section 7(1) of the same statute, “act under the general guidance of the Secretary of State.” Both directions and guidance have been promulgated in relation to the foregoing statutory provisions.

The relevant directions are contained in the National Assistance Act 1948 (Choice of Accommodation) Directions 1992, issued on 23 December 1992. The core obligation of a local authority arises where it has assessed a person under section 47 of the 1990 Act and has decided that accommodation should be provided pursuant to section 21 of the 1948 Act. By paragraph 2 of the Directions the local authority shall, in those circumstances,

Statutory guidance was given by the Department of Health in local authority circular, LAC (2004) 20, issued on 14 October 2004. The object of the guidance is set out in a summary at the beginning of the circular:

“This guidance sets out what individuals should be able to expect from the council that is responsible for funding their care, subject to the individual’s means, when arranging a care home place for them. This guidance is intended to describe the minimum of choice that councils should offer individuals. Even when not required to act in a certain way by the Directions… councils should make all reasonable efforts to maximise choice as far as possible within available resources.”

Paragraph 2 of LAC (2004) 20 deals with preferred accommodation. The cost referred to in the 1992 Directions is dealt with in paragraph 2.5.4 of the circular.

“One of the conditions associated with the provision of preferred accommodation is that such accommodation should not require the council to pay more than they would usually expect to pay, having regard to assessed needs (the ‘usual cost’). This cost should be set by councils at the start of a financial or other planning period, or in respect to significant changes in the cost of providing care, to be sufficient to meet the assessed care needs of supported residents in residential accommodation. A council should set more than one usual cost where the cost of providing residential accommodation to specific groups is different. In setting and reviewing their usual costs, councils should have due regard to the actual costs of providing care and other local factors. Councils should also have due regard to best value requirements under the Local Government Act 1999”.

Reference was also made to paragraph 3.3 of the circular, which is in these terms:

“When setting its usual cost(s) a council should be able to demonstrate that this cost is sufficient to allow it to meet assessed care needs and to provide residents with the level of care services that they could reasonably expect to receive if the possibility of resident and third party contributions did not exist”.

Directions given under section 7A(1) of the Local Social Services Act 1970 are plainly mandatory. Statutory guidance under section 7(1) is not mandatory, but an authority can depart from it only for good reason and following a considered and cogently-reasoned decision. In R v London Borough of Islington ex parte Rixon [1997] ELR 66 Mr Justice Sedley (as he then was) said:

“ While “guidance” does not compel any particular decision ….especially when prefaced with the word “general” ,in my view Parliament by section 7(1) has required authorities to follow the path charted by the Secretary of State’s guidance ,with liberty to deviate from it where the local authority judges on admissible grounds that there is good reason to do so. “

Besides formal statutory guidance, the Secretary of State can also issue general or non-statutory practice guidance, to which a local authority is also required to have due regard: any departure from such guidance must be justified. This proposition was confirmed by Lord Justice Moses in R (Kaur) v London Borough of Ealing [2008]EWHC 2062Admin which was quoted with approval by His Honour Judge Raynor QC in R ( Sefton Care Association ) v Sefton Council [2011] EWHC 2676 ( Admin) as follows :

“Formal guidance issued under section 7(1) of the 1970 Act is to be distinguished from general practice guidance issued by the Secretary of State (see Cross on Local Government Law, paragraphs 21-02, 03). However a local authority is obliged to have due regard to non-statutory guidance and would have to justify any departure from it (see R (Kaur) v Ealing LBC [2008] EWHC 2062 (Admin) at paragraph 22 per Moses LJ.) For reasons which will appear, I am satisfied that the distinction between formal statutory guidance and general practice guidance is of no significance in this case.”

Non-statutory guidance is relied on by both parties in this case in the form of a document entitled Building Capacity and Partnership in Care. It was issued in October 2001 by the Department of Health, and bears the subsidiary title An Agreement between the statutory and the independent social care, health care and housing sectors. Building Capacity contains several references to the need for consultation and collaboration between commissioners and providers of care. The setting of fees is dealt with specifically in paragraph 6.2:

“Providers have become increasingly concerned that some commissioners have used their dominant position to drive down or hold down fees to a level that recognises neither the costs to providers nor the inevitable reduction in the quality of service provision that follows. This is short-sighted and may put individuals at risk. It is in conflict with the Government’s Best Value policy. And it can destabilise the system, causing unplanned exits from the market. Fee setting must take into account the legitimate current and future costs faced by providers as well as the factors that affect those costs, and the potential for improved performance and more cost effective ways of working. Contract prices should not be set mechanistically but should have regard to providers’ costs and efficiencies, and planned outcomes for people using services, including patients.”

By paragraph 6.7 commissioners should ensure that they have in place

“fee negotiation arrangements that recognise providers’ costs and what factors affect them (as well as any scope for improved performance) and ensure that appropriate fees are paid.”

Correspondingly, by paragraph 6.8, providers should ensure that they

The Factual History

In 2010 the Defendants proposed a further three year contract intended to expire on 31^st March 2013. The Defendants told the Claimants that they would no longer contract on the basis of the PWC model. No increases in fees were offered although the Defendants argued they could have reduced fees due to the fall in interest rates. Some providers were prepared to sign a contract on this basis for two years but the Claimants were in dispute with the Defendant about rates and refused to sign the agreement.

Just prior to this the Defendant had commissioned a report from KMPG to identify efficiency opportunities throughout its operation. They identified bulk purchasing and supply chain renegotiation within the residential care sector as a potential efficiency opportunity. The evidence KPMG gathered suggested that through co-operative working, smaller providers could collectively save in the region of £380,000. There was an inbuilt assumption that larger providers would already be benefitting from such economies of scale and therefore would not necessarily be interested in participating. The Defendants proposed to work with providers to help renegotiate better prices proposing that the provider could keep the first 0.5% of savings with any further savings being shared equally. KPMG suggested this might produce efficiency savings of 1.5% in some cases but there was insufficient interest amongst providers. The Defendants revisited the issue of efficiency savings in 2011.

The Claimants had proposed that the 2007 PWC model should be re-run with updated data but the Defendants were not prepared to agree to this as they had determined the rate for 2010 without reference to it. The Claimants proceeded to instruct PWC to re-run the model using up to date data from their own members and a report was produced. The Defendant eventually agreed to meet half of the cost. There was no increase in fees paid by the Defendant under the terms of this contract until it was due to be reviewed in April 2012.

The Defendants then introduced quality of service as an element of pricing and from October 2011 agreed to pay Grade 1 care homes at Grade 1 rates for the first time although no actual increase was made to the rates generally. During 2011 however the Defendants began so seek efficiency savings from the providers individually. Providers were asked if they were able to offer any reduction against the banded rates then in payment and a number of providers did so. The reductions eventually agreed varied between 0.5% and 3% with the average being just over 1%. No particular efficiencies were actually identified by either party and quality standards were not relaxed or changed. These discounts were resisted by some providers, granted reluctantly by others and without complaint by others.

The next development was in October 2011 when the Defendants decided to cease new placements to those providers who had not signed the contract from 2010. This clearly placed some financial pressure on the providers and all except one signed the contract. There is a dispute as to the legal effect of this decision. The Defendants say the recalcitrant providers signed the 2010 contract belatedly; the providers say they signed a short-term contract from October 2011 to 31^st March 2012. The distinction is not important as the contract in either event would expire on 31^st March 2012. Some of the recalcitrant providers agreed to give efficiency savings but at least two of them limited the savings they were prepared to offer either by time or amount. I will return to this issue later.

The decision to fix the fees for 2012/13

A report was prepared by Ms Baillie for a meeting of the Directorate Management Team (DMT) on 15^th December 2011. The report recognised that the overall budget was for a nil inflationary increase against a background history that there had been no fee increases since 2009 when rates were fixed in accordance with the 2007 PWC report. The report conceded that providers were facing increasing cost and it was important to maintain a sustainable market. It was emphasised that consultation would be important to ascertain providers’ views. A provisional suggestion was made for a two year contract with 2% increases in each year but with the previous agreed efficiency savings to be carried forward into the new contract. In the event this recommendation was not pursued.

A report was then prepared for the meeting of the Procurement Committee on 16^th January 2012 to seek authority to commence negotiations with the 26 providers. It contained much of the background information contained in the earlier report to the DMT but also the following passage:

“7.1.8

The budget for 2012-13 assumes that rates are frozen at the current levels. Negotiations should seek to ensure that the budgeted position is achieved. If an increase is required this will need to be reported as part of the section 151 budget monitoring process and covered temporarily by central contingencies. Compensatory savings must then be identified on an ongoing basis.”

This clearly showed that whilst an increase in fee rates was not out of the question it was not desirable.

A further meeting of the DMT was arranged for 17^th January 2012 and in advance of that meeting Ms Baillie had worked on a desktop analysis using the PWC model and prepared a report which contained the following relevant extracts:

“It is important to note that the final decision on the contract offer will not be made until the council has considered the views of providers. Consultation with providers will commence mid-January and will conclude at the end of January. A report outlining the final offer will be brought to DMT in February for sign off, following which it will go to Procurement Committee for permission to award.

A number of Local Authorities have recently been subject to successful Judicial Review challenges regarding the freezing of care home fees. In a recent case, the Council lost due to its failure to consider the actual cost of care, and consult Providers, in reaching its decision on fees. Cases of this type show that the courts require councils to consider all relevant factors when setting fees. Councils cannot simply rely on reduced budgets to justify fee decisions and must fully consider the effects of fee levels they are proposing to set.

Such cases highlight the importance of consultations with Providers. Whatever conclusion we reach about the fees for a new contract, we must give consideration to all relevant factors, including Providers views, equality issues and the actual cost of care. “

The report therefore stressed the importance of consultation, but more with a view to avoiding litigation than any other motive.

The report continued:

“In order to determine what would be an acceptable level of payment going forward, we have drawn on the “fair price for care “modelling commissioned by Care North East applicable to January 2010 (Price Waterhouse Cooper report -27^th May 2010). The Council acknowledges the rising cost of overheads and also the impact of inflation, and takes the view that the major issue in the model is return on capital. The authors of that model consider that 15% is a fair return on capital. The Council does not consider that it should, as part of its proper discharge of its duty to taxpayers and those entitled to protection, pay care homes monies which would enable them to earn a return at this level.

Whilst we do not accept that Council Tax payers should bear the cost of the PWC model’s proposed rate of return on equity, we do accept there are some specific areas for further attention within the residential and nursing care market …”

The report then identified two problem areas, rates for EMI in residential homes and ceiling rates for Grade 4 homes.

The report went on to explain the methodology that was used in the desktop analysis:

“In order to assess the return on equity that providers are currently achieving - and to help us determine whether and where uplifts may be required for financial year 2012 /13 - we have included inflation on staffing costs at 3% and on non-staff costs at 5% together with an overall 2% efficiency saving, which we believe should be achievable within providers’ businesses. Opportunities for efficiencies within residential care businesses were independently identified by KPMG, during their overarching efficiency work for the council in 2009/10.

The modelling had been prepared on the assumption that 55% of costs related to staffing, 25% to non-staffing and 20% to capital financing. Return on equity was determined by applying the 15% return to one third of the capital costs per bed. These assumptions were broadly in accordance with the PWC methodology.

The report contained a spreadsheet the purpose of which was to examine what the effect on care homes would be if either the current rates were amended in accordance with the assumptions shown above or alternatively 2% uplift was applied generally. Grades 1, 2 and 3 were considered separately in each of the four sub-categories of : residential care; residential care EMI; nursing care and nursing care EMI. There were therefore 12 categories considered. Using the modelling which included stripping out all the return on equity, 3% uplift on staff costs (55% of total ), 5% uplift on non-staff costs ( 25% of total ) and 2% efficiency saving ( on 100% of total ) homes were placed into one of three columns in each category: those operating at less than cost; those achieving a return on equity of 0-5% and those achieving a return on equity of more than 5%. Having placed each of the homes in whatever column was appropriate for each category of bed, both on the current rate as amended and a proposed 2% increase the following proposal was made:

“The analysis above clearly shows that an individualised approach is needed to determine the appropriate rates for 2012/13. We will seek to do this in line with the following basic principles:

•

Providers who have delivered reasonable efficiencies should not be expected to operate at less than cost. Indications within this analysis will be used only to direct our enquiries ; individual discussions with providers will enable us to determine whether a home is indeed operating at this level of risk , and what action could be taken by either party to rectify this

•

Operation at up to 5% return on equity may be acceptable ; again individual discussions will enable us to establish whether this is the case

•

Operation at 5% return on equity or above is acceptable in the current climate.

As a guide a 2% uplift applied across the board would cost the council an additional £400k pa over and above the 2011/12 costs. Uplifts will only be offered where both the analysis and providers’ own information suggests this is appropriate.

Another meeting of the DMT was convened on 1^st March 2012 after the consultation was completed. The report proposed a modest increase for Grade 3 residential care beds to £408 and an additional £15 per week for residential care EMI beds. In the event the DMT proposed extending the EMI increase to all EMI beds. The Procurement Committee met on 19^th March 2012 and had the benefit of the DMT recommendations. The spreadsheet was updated and showed that if an additional £15 per week was paid for all EMI beds this would lift each care home out of the category where there were suffering an actual loss into an area where they had a return on equity of over 0% or over 5%. Only two homes remained in loss due to the deficiency for Grade 3 homes and no change was proposed. The Procurement committee accepted the recommendations. The committee also agreed to put back the start of the new contract until 1^st May 2012 because of time constraints and delegated the decision whether to cease future placements in non-contracted homes to a council official.

The providers were told on 20^th March to expect a contract offer the following week and on 26^th March 2012 the Defendants wrote to all the providers with a contract and pricing schedule with the letter containing the following paragraph:

“As highlighted in my last correspondence, in order to be included on the Council’s Kite Mark of Approved Providers from 1^st May 2012 you are required to return signed copies of the contract, along with pricing schedules to the Council no later than 20^th April 2012.”

The contract was for one year only with increases to all EMI beds of £15 per week but no other increases. No provision was made for future increases. Some of the providers signed the contract and pricing schedule without demur; others refused but later signed it under protest pending the result of these proceedings in order to continue to receive new placements.

Consultation

I have reviewed the minutes of the meetings which took place with the providers individually. I will deal with the meetings which took place with the Claimants later. It is clear from the minutes that providers were told that the Defendant proposed to maintain the same rates for general residential care but required more information about staffing levels for EMI beds. Although the template does not record any other questions being relevant, comments are recorded in some of the meetings about, for example, residential care rates generally. The Claimants submit that minutes of five of the meetings record expressions of dissent or disappointment, three further meetings express concern, no discussion is recorded in five of the meetings, two of those indicate a willingness to sign the contract and only one says it is “ok about fees” although a later email appears to record that provider was “disappointed”. My examination of the records supports this submission. The records are not consistent with what was reported to the DMT on 1^st March 2012:

“the consultation findings generally support our view that generalist residential fees are sustainable at their current rates for the next financial year”

Or what was reported to the Claimants at a meeting on 22^nd February 2012

“a significant number of providers have indicated that [zero increase to fees in 2012-13 ] would be an acceptable provision”

There were four meetings between the Claimants’ representatives and officers of the Defendant the first taking place on 11^th January 2012. It was clear at the first meeting that Mr Beckett for the Claimants expressed strongly his concern that fee rates had fallen very badly behind the actual cost of care. He indicated that another committee member Mr Keith Gray had updated figures from the 2010 model which could be discussed with council officials. Mr Beckett made it clear that his preference was for reliance on an independent model to determine the actual cost of care and this could then be indexed annually. This was prior to the consultation period but a meeting did take place on 31^st January 2012 between Ms Meronik, a note taker and three members of the Claimants committee. It is clear from the minute that she commented that while there were issues on residential EMI, general residential was generally above cost. She made it clear that the Defendants did not think that it was fair for the Claimants to achieve either 12.5% or 15% return on equity but no indications were given to the Claimants of what the Defendants actual proposals were or how they were planning to populate the PWC model. The Claimants made it clear that increases could be staged over a number of years as long as reasonable rates could be agreed.

There was a further meeting on 13^th February 2012 when Ms Baillie pointed out to the Claimants that the Defendant was attempting to understand the true cost of EMI care; that consultation was still ongoing; and no offers had been made as yet. A further meeting was arranged for 22^nd February 2012 at which Ms Baillie advised that the Defendant was using the January 2010 PWC model and had included 3% inflation on staffing costs and 5% on non- staffing costs together with an overall 2% efficiency saving which they believed should be achievable within providers businesses. Mr Gray provided Ms Baillie with figures for costs across all grades of care homes setting out the Claimants’ view of indexation requirements. The previous agreed efficiency savings were mentioned and Ms Baillie indicated that the Defendant would seek to maintain these where the businesses remain viable. There was disquiet expressed by the Claimants about efficiency savings where the difference between the updated PWC 2010 rates and the amount paid by the council currently could be as much as £100 per week. The Claimants complained both about the current EMI rate and the generalist rate indicating both were substantially below actual cost. It is perhaps significant that at none of these meetings did the Defendant indicate that it did not intend to increase non- EMI care at all and was actually modelling the PWC figures having stripped out return on equity completely. The way in which the Defendant populated the PWC model only became clear to the Claimants during the course of these proceedings.

Efficiency Savings

Other evidence was supplied by Nic Gilbert who is a committee member of the Claimants and employed at another provider which is a charity. His experience with the Defendants was very similar. He had agreed to make one payment of £3500 in March 2012 for efficiency savings in the financial year 2011/12. The Defendants made the deduction on a weekly basis and continued to do so long after the discount of £3500 had been collected. By June 2012 he complained that the Defendants had already deducted £1420 too much. He similarly returned the 2012 contract with the pricing schedule amended to remove the weekly discount. This was not acceptable to the Defendants who would not allow his care home to receive new residents until the pricing schedule including the discount was signed. He exhibited documents which supported his contention and it is clear from both these statements that what were previously voluntary “efficiency savings “ which are in effect discounts have become compulsory if the care home wishes to receive new residents from the Defendant.

Analysis

The Claimant’s case is that the Defendants were obliged under Circular LAC (2004) 20

“in setting and reviewing their costs, councils should have due regard to the actual costs of providing care and other local factors”

And under the Building Capacity Agreement:

“fee setting must take into account the legitimate and future costs faced by providers as well as the factors that affect those costs, and the potential for improved performance and more costs effective ways of working”

The Claimants submit that, having decided to use the 2010 PWC model as a way to inform itself about the actual costs of care it was then not open to the Defendant to manipulate the model by changing the assumptions on which the model was based unless those changes were objectively justified. The main complaints relied on by the Claimant are the Defendant’s decision to strip out completely return on equity, to impose figures for inflation that were not accurate , and to impose efficiency savings when no evidence was available that such efficiencies could be achieved.

The Defendants remind me of the comments made by Mr Justice Stanley Burnton as he then was in R ( Birmingham Care consortium and others ) v Birmingham City Council [2002] EWHC 2118 (Admin) :

On the specific facts of this case the Defendant submits that the duty to pay “due regard” to the actual cost of care meant no more than to take it into account. The Defendant had not agreed to be bound by the PWC model but merely used it as a tool along with other factors to inform itself of the cost of care. The complaints regarding inflation rates and efficiency savings are, it is submitted, examples of the Claimants wanting the court to engage in micromanagement of the Defendant’s decision-making process. The stripping out of return on equity was necessary the Defendants submit as the Defendants needed to inform themselves what the return on equity was in the absence of this information being volunteered by providers. It was not unreasonable for the Defendants to conclude that a return on equity of 15% was excessive in the current financial climate.

In order to assess these competing submissions it is necessary to look carefully at the evidence to see what considerations the Defendant did actually take into account before setting the appropriate rates for care. It is clear from the minutes of the meetings related above and the reports prepared that the Defendant knew that the budget had been set on the assumption that rates would not rise and this would be most desirable outcome. The minutes also make clear that the Defendants were aware of the need to have due regard to the actual cost of care and the need to consult with providers before making a decision. The report of Ms Baillie for the 17^th January 2012 DMT meeting effectively sets out the information which the Defendant used to inform its policy. Relevant extracts are summarised at paragraphs 23-26 above from which it is clear that the only source of information was the 2010 PWC report with the controversial assumptions made by the Defendants to produce what they regarded as appropriate figures.

The next potential source of information was the individual and communal consultations with the providers. I will deal with this process in more detail in relation to my assessment of Ground 3 of the Claimants’ challenge but given that the Defendants intended to use the consultation to help inform themselves of the actual cost of care to providers (see paragraph 23 above) it is surprising that they restricted what they were prepared to discuss with providers by the use of the template recorded in paragraph 29. Whilst comments about such issues as the rates for non-EMI care are faithfully recorded if made they do not seem to have found their way into the reports to the decision makers where in the crucial report dated 1^st March to the DMT it is stated:

“ Our initial modelling indicated that the vast majority of social care homes would be operating at above cost if current rates were rolled forward unchanged into 2012/13. This has been borne out in the consultation findings, during which a significant number of providers have indicated that this would be an acceptable position”

It is fair to say that consultation did inform the decision to increase fees for EMI beds and how much extra nursing was necessary in terms of hours with such residents but that had been a specific focus of the consultation, informed by the initial modelling using the PWC report. The conclusion that the retention of current rates for non-EMI care would enable the vast majority of social care homes to operate above cost might at first blush to be a surprising conclusion given that the Defendant knew the rates had remained unchanged since 2009 and were based on 2007 figures.

The report prepared for the 1^st March DMT meeting was crucial in that it informed the decision made at that meeting to put certain proposals to the Procurement Committee which were then carried into effect without change. Whilst the report shows that a number of factors were taken into account in the decision to upgrade payments for EMI care the only real information considered in relation to the decision to make no increases in non-EMI care was the modelling done on the basis of the PWC report. So whilst I accept this was not a case where the Defendant agreed to be bound by the PWC report it was obliged to consider carefully what alterations it made to the PWC model when the result of such modelling was to form such an important part of the information which led to the decision made.

It is therefore necessary to look at the ways in which the PWC model was changed and consider whether those changes were made on reasonable grounds, and, if not, whether those errors were so fundamental to constitute public law reviewable error. The first issue is the assumptions on inflation. The Defendants assumed inflation at 3% on staff costs and 5% on other costs during the relevant period. No source is given for these figures where they first appear in the January 17^th report save that it concedes that minimum wage has risen by 4.83% which suggests that more than one year’s inflation is being considered. The statistics in the original 2010 report were taken between June 2009 and October 2010 and the Claimants have produced figures which suggest that inflation on staff costs should be between 4.83% and 6.45% using the Government’s ONS inflation rates for Care Operating Costs and between 9.60% and 10.02% if using RPI (excluding mortgage interest and taxes). Similarly the Claimants have produced figures for non- staff costs of 8.31% on the basis of ONS rates and 10.99% for RPI. The Defendant complains this comparison is an example of micromanagement which this court should steer clear of. I could accept that argument if the Defendant had chosen a figure based upon some relevant statistical tool. It would then be up to the decision-makers discretion which tool to use but it would appear here that the figure for inflation has been plucked out of the air.

The decision which inflation rate to use becomes more important when coupled with the decision to impose 2% efficiency savings. Because inflation is only applied to 55% of the costs for staffing and 25% for non-staffing compared with a reduction of 2% on all costs the net effect of all three figures is an increase of only 0.9%. The next question of course is whether the decision to impose a 2% efficiency saving was justified. The Claimants complain that efficiencies had already been imposed on providers with the various discounts that were individually negotiated in 2011 which appear to have varied between about 0.5-3%. The Defendants in submissions attempted to suggest that the efficiency savings originally negotiated were justified on the basis of the 2009 KPMG report whereas the 2% inserted into the modelling was a efficiency which could typically be achieved in the public sector. It was suggested to me that this was in accordance with the “ Gershon Review” which was an efficiency review undertaken by Sir Peter Gershon in 2004-2005 about efficiency in the public sector. Just leaving aside for a moment whether it is fair to carry this argument across into the private sector it is clear from the 17^th January 2012 report where this figure first occurred that the justification for it was the KPMG report. The relevant passage is set out in paragraph 25 above and specifically refers to the KPMG report.

Was it therefore a reasonable decision to include 2% efficiency savings in the equation when efficiency savings had been sought and obtained from each provider already? It should be remembered that the height of the KPMG report was that 1.5% savings could perhaps be achieved by some providers with the council’s help on the basis that those savings could be shared. This would appear to justify efficiency savings of 0.75% by some providers only which seems to be less than what was already agreed. It seems to me overly harsh to impose further efficiency savings without any objective evidence that they could actually be achieved and without any indication that standards would be in some way relaxed to enable these savings to take place.

The next issue to consider is return on equity. Mr Beckett the Claimant’s chairman provided a lengthy explanation for what this means to providers in his second witness statement (paragraphs 23-31). Return on equity is effectively the surplus which, after all expenses are paid, which is available to fund repayment of the capital element of debt, to provide funds for re-investment in the business and to compensate the owner for hard work , risk and enterprise. Part of it is profit but it would not be correct to equate it with profit as Mr Justice Beatson said in R (Mavalon Care Ltd and others v Pembrokeshire County Council [2011] EWHC 3371 ( Admin) there were

“indications….that the Council regarded “return on capital “as “profit” when that was not so, and a far more nuanced concept was required”

The issue of return on equity has proved to be a thorny issue for councils in the past. The PWC report worked on the basis of a 15% return on equity whereas other similar reports reported in other cases appear to show a bracket between 12-15%.

Whatever the cause of the problem, the result is that an important component of Hickinbottom J's judgment in the Forest Care Homes case was lost sight of. Also, as far as the link between the fall in market value and rate of return, Mr Skone, or probably the consultants who were advising the Council, failed to take reasonable steps to acquaint themselves with the relevant information as to the significance of the fall in market value. In that sense, the Council fell into public law error. That error can be analysed in one of two ways. The first is that, in the language used in Secretary of State for Education and Science v Tameside [1977] AC 104 at 1065, the Council failed to ask itself the right questions. The second is (see Simplex v Secretary of State for the Environment (1988) 3 PLR 25 and R v Secretary of State for Education, ex p. E [1996] ELR 312) that the decision was based in part on irrelevant factors which the Council took into account as the result of a mistaken appreciation of the position. In relation to both the significance of the fall in market values, and whether the fact the Council did not wish to incentivise new building was a reason for departing from the 12% rate, the decision was based on assumptions which are mistaken. It is, as McCowan LJ stated in Horsham DC v Secretary of State for the Environment [1992] IPLR 81, 92, not enough for a decision-maker merely to have regard to a relevant consideration (in that case the plan) if he misinterprets it.

It is, in this context, also to be noted that there is no positive external support; either contemporaneous to the decision, for example in the PwC report, or subsequent to it, for example in Mr Lovell's evidence, for the adoption of 6% as the appropriate rate of return of capital. Mr Lovell's evidence does not comment on the contents of Christie & Co's letter to Mr Joshi, which states that its view is that the range is from approximately 12 to 16%.

The reasoning in the Mavalon case is not directly applicable to this case as the Defendant neither committed itself to apply the result produced by the model or to include a particular rate of return on equity. What the Defendant did do, however, was to place almost total reliance on the results of its modelling using the PWC 2010 report and where it made amendments to the assumptions in that report those amendments should be objectively justifiable. The Defendants approach to return on equity was to strip it out completely from the figures by working out how it had been calculated in the original report. It then calculated what its other amendments including uplifts for inflation and deductions for efficiency savings would produce for each category of care home across the four varieties of care. The report (paragraph 26) stated that operations at 5% return on equity would be “acceptable” and operations between 0% and 5% “may be acceptable”. It was because the figures for return on equity were negative showing a net loss even without any return on equity for residential care EMI that a recommendation was made for an increase for that category and eventually a decision was made to extend this to nursing care EMI.

In the Forest Care Homes decision the attempt to reduce return on equity by a mistaken approach to capital costs was deemed unlawful. In Mavalon the decision to reduce return on equity from 12% to 6% without any objective evidence to support it was also deemed unlawful. In the present case the Defendants have effectively reduced return on equity from 15% to either 0% or 5% or at least a bracket of acceptability between the two without any real consideration for what effect this would have for a sustainable market in the care homes sector. It is difficult to imagine why anyone would want to run a business with the stress and risks that entails for no return on equity at all. A bank or building society account, even with today’s low interest rates would surely be a more attractive proposition. Whilst the providers were told on consultation that the Defendant did not accept a return on equity of 15% was appropriate in today’s financial climate it gave no indication of what an appropriate return on equity should be. It is hard to justify an acceptable bracket from 0% to 5% as a reasoned choice which has due regard to the actual cost of care from the provider’s standpoint.

I accept that these are difficult times for local authorities who have had their funds cut by central government but still have statutory duties to provide services in many areas where savings are difficult to make. In making the decision to set appropriate rates for care homes the local authority is under an obligation to have due regard to the actual costs of providing care and other local factors. Where a local authority has a difficult decision to make about where to allocate scant resources the court will be reluctant to interfere. Where the local authority has asked itself the right question, has used an evidence-based system to ascertain the actual cost of care and has then made a difficult decision about the allocation of resources the court will support it. In this case however the Defendant has used the PWC report as the means to ascertain the actual cost of care but has populated it in a misleading way, by using figures for inflation which are inaccurate, by making a deduction for efficiency savings which was not justified and by completely stripping out or almost stripping out return on equity which would be bound to have implications for the sustainability of the care homes market. By doing this the Defendant has given its decision makers the impression that the rates being proposed will be acceptable to the market and will enable a sustainable and reasonably profitable market to continue. Had the model been populated with statistics in accordance with its author’s likely views it would have revealed a very substantial difference between the author’s view of the actual cost of care and the rates the Defendant was proposing to pay.

It follows from this conclusion that I find that the Defendant has failed to inform itself of the actual costs to care home providers of providing services before setting its rates contrary to the relevant guidance. I also find that the Defendant either acted irrationally or failed to take into account relevant considerations in both stripping out return on equity and imposing a 2% efficiency saving. The Claimant therefore succeeds on grounds one and two.

Ground Three

In the case of R v North and East Devon HA, ex p Coughlan[2001] QB 213, the Court of Appeal set out what was required if consultation was to be properly undertaken:

The Claimant makes no complaint about the breadth of the consultation in that those who had an interest were consulted. The Claimant complains about the manner or depth or the consultation. Was this a genuine process to provide the consultee with enough information, at an early enough stage, to enable them genuinely to contribute to the consultation process? The template which was prepared in advance of the consultation showed that the consultation appeared to be limited to two issues. The fact that general rates for care would not rise and to enquire about the amount of time spent in caring for EMI patients. The Claimants do not appear to have been told that it was proposed that no increases would be paid for general care beds judging from the minutes. Whilst it seems that the proposals for inflation and efficiency savings were communicated together with a challenge to return on equity of 15% it does not appear to have been part of the consultation that return on equity was to stripped out entirely from the calculations and replaced with an acceptable bracket from 0-5% . This only emerged after proceedings were issued.

It seems to me that the Defendants either have to engage in a genuine attempt to ask providers for information that will lead to discovery of the actual cost of care and then make a decision which gives due regard to that; or alternatively tell the providers what their proposals are, and the reasons for them, and then reconsider their proposals in the light of the comments of the consultees. In this case, as I have found, the views of the consultees were not accurately reported to the decision makers, they were only asked a limited number of questions and the reasoning behind the Defendant’s decision making was not disclosed to them until after the decision was finally made. It follows from these findings that the Claimant succeeds on Ground 3.

Ground Four

The regulations clearly envisage the resident making the choice as to which care home he would like to stay in. The council has an obligation to set the usual rate for that sort of accommodation and provided the amount the care home wish to charge does not exceed the council’s usual rate then the potential resident can be placed in the care home of his choice at the appropriate rate. Whilst there is no provision justifying individually negotiated rates for different care homes I doubt that a freely negotiated discount could be struck down as unlawful. What I think must be unlawful is the Defendant refusing to place new residents with any care home who have not agreed to the discount the Defendant is seeking. The regulations envisage the local authority setting a “usual rate” and provided the care home does not seek to charge the council more than that rate there should be no further obstacle to admission. It is clear from the evidence of both Mr McArdle and Mr Gilbert that they had agreed discounts which were limited in time or amount respectively. When the Defendant refused to place new residents with them in the future unless these discounts were extended it seems to me that the Defendants were abusing their dominant position in the market to drive down fees in the way criticised in paragraph 6.2 of the Building Capacity Agreement recorded above. The Claimant therefore also succeeds on their fourth and final ground.

Remedy

In the present case the Claimant left it until the last possible date within 3 months of the decision being made to issue these proceedings as indeed the claimant had in the South Devon case. In that case however, the case was not actually decided until about 14 months after the decision was taken and the detriment to good administration was therefore obvious. It is probably also relevant that in that case the Claimant failed on the main challenge and succeeded only on the allegation of failure to consult. In this case, if a remedy is granted it will be clearly be detrimental to the good administration of the Defendant local authority as they have set their budget, and if they have to make a new decision, which may result in increased fees for all care homes (not just the Claimants), the money will have to be found from somewhere else, in an already over-stretched budget. Where however the Defendant has made a decision which is found to be procedurally unfair, which was not the product of fair consultation and which in part was enforced unfairly it would offend justice if there was no remedy. It is fair to say that even if the Claimant had issued proceedings within a week of the decision and the case had been heard within a month, it would still have been necessary to reset the budget and find the extra money. In circumstances I exercise my discretion to grant a remedy in this case.

The Claimants are entitled to a declaration that the decision to fix the usual rates to care home providers for 2012-13 on 26^th March 2012 was unlawful and the decision should be quashed. The Claimants are also entitled to a declaration that the Defendant may not refuse to place residents with providers if they decline to accept placements at rates discounted from the usual rates without agreement. The Defendant should be ordered to reconsider its decision fixing rates but I am prepared to hear submissions about how long will be required for that process.