Welcome to the 1st Edition of the Anderson Strathern Healthcare update.  We intend to provide a regular update on developments in healthcare,  with this update focusing on care homes.

Business Commentary
In the care home sector, trading conditions have remained challenging  in 2009. For non specialist care, the key performance driver will be enhancing occupancy levels, as containing costs is unlikely to provide an adequate substitute.

The star system used by the Care Quality Commission (CQC) is starting to influence decisions on where to place service users.  Other national regulators are operating similar systems. We expect this trend to continue. Also, local authorities will routinely include financial penalties in their contracts if a home is given a poor rating (a few are doing so already). Of course many private payers will expect a care home to have more than one star.

A greater correlation between good/excellent service delivery, measured on the star system, and profitability,  will emerge.  There will be opportunities for those whose excellence will create a differentiator.  There will be challenges for larger corporates who lose individual home managers, and who will need robust interim management strategies for the home not to suffer, with the downside risk that ratings can be in place significantly longer than the period a home suffers drift.

Public sector fee increases  averaged around 2.75% in April 2009. Operators have understandable concerns about the impact of the public expenditure squeeze on fee increases going forwards. However, local authorities will have to remain realistic about what they pay for an essential service.

Marketing Commentary
The market for selling and buying care home businesses has remained weak in 2009, because

the large corporates have lacked appetite, as they have had more pressing concerns such as reducing debt;
sellers have had little incentive, as assets have been re-priced across the sector, due to sale and leasebacks by Southern Cross; and
as in other sectors, the availability of finance has also played a major factor.

The market in 2010 may well remain subdued, but transaction volumes will be higher than in 2009. Market sentiment will be improved by receding concerns over the ability of Southern Cross and Four Seasons to service their debt. In the case of Four Seasons this has required a restructuring, but the problem was created when they were bought by Three Delta (backed by QIA) in 2006 rather than through the performance of their underlying business.

The number of available assets for sale will potentially be an issue, and it remains to be seen whether more sellers will emerge, in part driven by the attitude of their lenders, giving rise to further consolidation in the sector.

Availability of finance has improved over 2009, and this will continue to strengthen gradually. Banks that require to reduce their property loanbook are still able to consider lending for care home transactions, as they are lending to business rather than providing property finance. While margins/fees have been re-priced, the overall cost of debt is not unattractive given current interest rates.

Operators have proved their resilience in 2009. The fundamentals underpinning the sector - demographics, essential services, high proportion of government backed income - remain unchanged. Improving sentiment will be the key driver for a return to more normal levels of market activity (2011?).  However, as with other sectors, there are greater opportunities for those wishing to play ahead of the return of more positive sentiment.

The lack of market activity has at least benefited the new regulator, the Care Quality Commission (CQC). Chief Executive Cynthia Bower said CQC has already had around a quarter of its budget slashed compared with the total spending of the regulatory bodies that merged to create it, and she expected more cuts to come.

Conservative Plans
The Conservatives have announced an insurance policy to mitigate against the risk of service users of care homes losing their home and assets to pay for the services they need.  An interesting idea, but if this initiative is  ever implemented one might expect take up to be limited with the policy being bought by a 65 year old at a cost of £8,000.   

Developments in Property/Planning Law
In 2009, sellers and landlords have got used to providing energy performance certificates (EPCs).

The care sector is fortunately immune to the problems raised by the abolition of empty rates relief, which remains vastly unpopular and a drag on recovery in other sectors.

The largest care home operators  require to consider the carbon reduction commitment, which is being introduced in April 2010 and will add to their energy costs by introducing a requirement to purchase allowances. This may well be an issue if electricity costs exceed £500,000 over their group.

While property development remains muted, there have been noteworthy changes to the planning process in both England and Scotland. In England, local authorities will have  discretion to introduce a community infrastructure levy as of 6 April 2010, albeit it will take some time to incorporate the levy within the local development plans.  It is not yet clear whether a similar levy will be introduced in Scotland. A key change however in Scottish planning law sees a requirement for a 12 week consultation exercise with the local community prior to a planning application being lodged if the care home (or extension) is more than 5000 square metres.

Employment Law
Increase in the Minimum Wage

From October 2009 the minimum age was increased by an average of 1.2%:

22 and over increase from £5.73 to £5.80
18-21 increase from £4.77 to £4.83
16-17 increase from £3.53 to £3.57

From October 2010, the top rate will apply to people over 21.

Employees – Duty of Care
In a Scottish case, a teacher working at a special needs school was found entitled to £70,000 compensation from her employer. Damages were awarded for psychological injury as a result of the school’s failure to protect her from unruly and aggressive pupils. 

This principle could potentially apply to healthcare professionals or any other employees subjected to incidents of violence in a work place.

Please click here to read our employment update from September 2009.

Obligation to keep records on Workers’ Right to Work in the UK

The Attorney General Baroness Scotland, the government’s chief legal adviser, has been fined £5,000 for employing an illegal worker as a housekeeper.   

All care home employers need to be aware of their legal responsibilities in relation to checking all employees that work for them.

For further details, click here to read our employment update from September 2009 - Penalties for Poor Housekeeping.

Further information
For further information on this or any other healthcare issue, please contact Neil Farrell, Chris Richardson or your usual contact at Anderson Strathern.

 This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.