In Control – Conversion of In House Services Workstream
What this paper is about
Housing and Support Partnership was commissioned by In Control to assist in the costing and then pricing of local authority in-house services. The context is the shift to Self Directed Support (SDS) and the ability of individuals to decide for themselves how the money available is spent.
The evaluation of the Individual Budget Pilot showed that it is possible the majority of spending will not be on traditional services. Local Authorities with in-house services will have to adapt to operating in a more competitive environment. This includes a market place which determines prices and where they may be a much reduced demand for existing services but more demand for different offerings.
This paper introduces and explains work done in collaboration with three major local authorities. All have a significant volume of in-house services particularly homecare/ domiciliary care and day care; Leeds, Sheffield and Newcastle. The work has resulted in the creation of a number of practical tools – mainly financial models. Total Transformation sites may find these helpful in tackling the same issues and taking decisions about the future of in-house services.
What has been done – what trials are available?
An initial meeting with Leeds City Council decided the priorities. Sheffield and Newcastle subsequently contributed material, models or comments as products were developed and participated in discussion groups.
There are six products:
A tool to cost individual services – this is in the form of series of linked spreadsheets and was produced by Sheffield City Council and then used by Leeds to cost similar services.
Congregate services costing tool. This again was developed by Sheffield and adopts a similar approach. It is designed to cost services which are shared by several people. An example based on costing small day services appears on the In Control website along with some explanatory notes on how to use both the costing tools
“What if” model. This model operates at both a macro ‘client group’ level and at an individual client level. It allows an authority to forecast the broad shape of adult social care expenditure 5 years ahead based on the actual purchasing decisions of individuals buying services or ‘bespoke’ support arrangements.
“Menu based approach to pricing”. In extra care housing there have been experiments where older residents are offered a priced menu of services. They can purchase exactly the package they want and vary this on a daily or weekly basis. A similar approach was subject to limited testing on day services in Leeds
Price comparison exercise. It became apparent that costing and subsequent pricing decisions were sometimes quite different between the three authorities involved on some apparently similar services. A simple method to help authorities make a comparison between themselves was given a limited test. It was concluded that considerable work will be required to define both cost and the precise nature of the service to make this kind of comparative exercise of value. The idea of establishing an inter-authority cost comparison system has not therefore been pursued at this point. However individuals in the authorities have used the results of applying some of the modelling tools to identify why costs vary
Costing/ pricing tool for shared lives (formerly adult family placement schemes). A method of costing long term adult family placements of all types has recently been tested by the National Association of Adult Placement (NAAPS) in conjunction with a number of local authorities in the South East. A note explaining how the proposed system might work and be used to price services has been prepared.
All the financial tools and papers are on the In Control website. What follows is a brief explanation of each element along with some of the thinking and lessons learnt.
Individual and Congregate costing tools
Two costing tools are available. One for an individual service which is fairly straight forward and a second for services which are shared.
The costing tools should be viewed as illustrative examples of some practical approaches. They are not particularly complex or refined. It is likely each authority will need to develop their own versions. Similarly the percentages, costs and ratios quoted are not necessarily appropriate for other authorities who will need to do similar work to derive their own local figures.
A simple approach to costing in-house services would be to take current departmental costs/ budget and work on an average current cost.
Average cost current service:Existing budget or outturn cost
Users/ hours/ other chargeable unit
=
Unit cost
It is argued by Sheffield this approach is not “fit for purpose” in a new SDS market:
Need a “price” not dependent on a fixed volume as in a block contract
A simple average current cost may be irrelevant to “pricing” as latter is now determined by a market
Need to know what service should cost not does cost
Need a “chargeable unit” – the product you are selling
Identify who delivers directly – everything else is at on cost
Identify what in and what out e.g. Directorate? Corporate costs?
Thus the approach in these two new models is to:
Build up cost from actual activity – work done:
Direct + indirect cost (identified overhead allocation)
=
Cost of a defined service
Divided by chargeable unit (the product)
=
Unit cost
Some of the lessons are:
Price is not the same as cost.
The price achievable under SDS is constrained by market.
One of the decisions to take is about the future target market – what market(s) do you want to serve.
Front line staff and some managers struggled to grasp the distinction between cost and price and were unfamiliar with different costing and pricing approaches which include:
- Full cost
- Cost plus
- Marginal cost
- Average cost (of what?)
- Market price – get target price
What is included in direct and indirect costs and overheads is clearly critical to determining the break even price point.
In the case of Sheffield it will be clear in looking at the model that the decisions on overheads encompassed:
Including in the service costing the cost of the immediate line managers. This was derived from current management: front line staff ratios. Thus if a manager supervised 20 front line staff 5% of that managers time would be allocated to the service for each member of staff directly involved in delivering the service
An allocation of departmental overheads is made to each service/ activity as a percentage of that activity – so in the day service example costs increase by about 11% to fund learning disability service overheads
A decision was taken not to allocate corporate overheads beyond this. The argument here was that under SDS volumes are likely to fluctuate. The implication of funding the corporate function by an allocation of these costs to ex-in-house services would be that as (or if) volumes fell the Corporate Department would consequently have to shed staff accordingly. This consequence persuaded the authority not to make such an allocation!!
The costing exercise for each service is one part of taking decisions on the future volume, nature and type of in-house services. It is first necessary to establish the likely or established market price for the relevant service. The three authorities were able to draw on data from existing contracts with external providers. The second step is to compare the market price with the outcome of the cost modelling. If cost exceeds market price the decisions for the authority are:
Cease activity
Carry on regardless/ subsidise
Re-engineer service
Re-examine costs
Re-examine market/ market data
The three authorities to varying degrees have done all of these except carrying on regardless!
In Sheffield the costing exercise has initially tended to prompt questions about how the service could be altered to get something more acceptable in the market. The basic concept of “re-engineering” is:
About changing:
- Process
- What you do
- How you do it
Change how people work
Eliminate non-essential activity
Eliminate cumbersome activity
In simple cost terms re-engineering usually concerns some combination of:
Reducing direct costs – staffing predominantly
Reducing indirect costs – offices/ facilities
Reducing overheads
Increasing volume of activity to reduce average unit costs
Increasing volume to gain specific scale economies OR
Decreasing volume to avoid diseconomies of scale – for example it is argued that large residential services that accommodate too many people with complex needs may well be incurring diseconomies of scale because so much staff time is devoted to managing relationships, avoiding fights and conflicts which are in part caused by forcing many incompatible people to live together.
Considering alternative markets that will support higher costs
The idea of having to talk in terms of “markets” is a new concept to some staff but the results of these costing exercises will bring the question of which market (s) the in-house staff can best serve into focus. In none of these authorities was it assumed all the current, in house services would simply continue.
In the case of Newcastle, having examined costs, compared them to the market and in the knowledge that the authority has in any event to make cost savings (and thus cannot afford to subsidise inefficient services) the decision has been taken to substantially reduce domiciliary care provision, “care at home”, but to maintain or build up services in three areas:
Re-enablement – which will be provided free to all for up to 6 months
Palliative care
Care and support for people with the most complex needs
Authorities may consider:
Market segmentation - serving a subset of broader market, a distinct group with similar needs e.g. people with more complex needsjustify higher prices
Market differentiation: distinguish your product/ mix from competitors e.g. quality, training, monitoring, standards, availability, reliability…
The underlying idea is different prices can be charged in different markets and the example of Newcastle illustrates their target market decisions.
In brief the process for these two activity based models is:
Decide product – chargeable unit
Cost direct salaries inclusive of on costs e.g. NI, pension etc
Allocate % management and administrative time necessary to support front line
Operational costs added
Allow for fact people not actually working a productive 37 hour week e.g. holidays, sickness, when cover may be required
Allow for any “enhancements” e.g. higher rates for weekend working, bank staff
Build in any other direct or indirect costs
Use this total cost divided by an assumed volume to give net cost and take this as initial price
Price x activitygives a budget and staffing for planned level. Test this against market price
Consider grouping services to gain economies if costs calculated exceed market price
Thereafter go through the process described earlier of testing against market data.
Menu based pricing concept
As explained this idea is based on the approach used in some extra care villages. The individual selects what services they want from a list. This is priced according to activity. There may be price bands which services are grouped into to simplify. The advantage of this approach is:
Defines the core service which has less flexibility but enables the service to remain sustainable
Transparent to user
Varies according to cost of activity
Allows for more sophisticated pricing thanexclusively hourly/ daily rate
Simple in principle if group/ band services
A menu based approach to day services was tested to a limited extent. Generating an initial menu to price which is applicable to modern day ‘services’ was the first step.Refining the menu for different in-house day services followed and consideration of how different activities might be organised and priced. Establishing the costs and pricing of the menu was the final step which has not yet been completed satisfactorily.
Some of the pricing issues to resolve flowing from this first attempt are:
Encompassing a shift from traditional building based day services to entirely new community based usage
Pricing services which may be undertaken together with other people and the uncertainty and variability of the groups involved over which costs might be spread
The extent to which the “day service” can or cannot support the individual (where this is necessary) and how additional support is provided and priced.
Different requirements, of different clients, using broadly similar facilities
Implementation issues include:
Testing a menu with current and potential customers
Anticipating actual purchasing behaviour – the ‘real’ market
Pricing and costing issues – non activity costs
The scale of change required to current day service provision
Pace and costs of change
Costing Shared Lives Schemes (formerly Adult Placements)
Shared Lives schemes are a possible option for people with learning disabilities, mental health problems, older people and others. Authorities may currently both organise and manage placements as well as run the placement service.
Based on NAAPS work with authorities in South East. Two cost elements are identified:
Payment to family – the present position is that there is no consistent practice in how people who offer placements are recompensed. The NAAPS proposals are designed to achieve a fairer and more consistent approach
Management cost to LA – this is the authority’s costs of running an adult placement scheme including recruiting, training and supporting families.
It is suggested costs to families have three components:
Cost of accommodation
Cost of care/ support
Cost of day to day living expenses
It is proposed payments to families should be based on:
Basic – derived from family expenditure surveys and similar data the cost of an additional family member is about£220 outside London
Additional payment based on individual support needs – 3 or 4 bands are suggested by NAAPS
To derive the latter NAAPS have developed a method and proforma to reach a decision on banding. The authority would then attach a value to the band i.e. “price” of the care element of an adult placement
The local authority management cost is put around £60 per week, per placement based on the costs of S.E. authorities. This suggested as an initial benchmark for authorities to test their own costs against
NAAPS have kindly provided the cost data used. The table below gives an indicative cost based on both the proposed banding system and on the more traditional client group base.
Average support payment to carers offering long-term accommodation and support / Average management charge for SL schemes / Average SL unit cost (supported living model)Band 1 / 198.62 / 57.91 / 256.53
Band 2 / 238.90 / 57.91 / 296.81
Band 3 / 302.64 / 57.91 / 360.55
Band 4 / 331.03 / 57.91 / 388.94
LD / 198.93 / 57.91 / 256.84
OP / 199.56 / 57.91 / 257.47
PD / 250.84 / 57.91 / 308.75
MH / 159.58 / 57.91 / 217.49
SDS financial sustainability approach
An organisation called iMPOWER with CSIP has developed a “Financial Sustainability Model” to make detailed projections of the implicationsof changes in transformed social care services after SDS. Leeds City Council have populated this model and had some assurancefrom this that SDS is affordable and may even reduce costs. However, the model is very detailed and complex. Leeds City Council asked Housing and Support Partnership to create a simpler “what if” financial model to show the financial result ofthe roll out of personal budgets (PBs) on the authority’s pattern of social care expenditure.
The new, simpler model measures changes in service expenditure from the current pattern to the future pattern - based on how individuals with PBs choose in practice to spend their allocations. It shows the potential financial effectsover 5 year timescale for:
In-house services.
Current externally commissioned services.
The model consists of two linked spreadsheets for individual clients and then client categories. The baseline for the model is current actual spend. To start with the model simply uses assumptions about future spend by three service types.
As people with personal budgets begin to make real decisions in how to use their allocation the actual spending patterns are fed into the model. Overtime the model relies less and less on assumptions and more and more on actual spending decisions so it becomes increasingly accurate.
This “what if” model can be:
Used as a predictive model – how patterns of expenditure may change as personal budgets are rolled out
Shows how expenditure shifts in reality year on year and how change to a SDS system is “driving” the changes in the pattern of expenditure.
Conversion of In House Services Project - Conclusions
Themes – Conversion of in-house services
The work with In Control Partnerships in relation to the conversion of in-house services has focused on some key issues that are particularly relevant for Leeds City Council and some of the other total transformation authorities, in particular costing and pricing in house services and the development of a ‘menu-based’ approach. In undertaking this work it is evident that a wider range of ‘themes’ and issues emerge that need to be considered and addressed in terms of ‘transforming’ in-house service provision in the context of the principles of SDS.
For Leeds and any authority addressing the role of historic, often long standing, in-house service provision, including residential, day, respite and domiciliary services, the following themes and issues are likely to be applicable:
Engagement with both current and a range of potential customers across different ‘needs’ groups to better understand the nature of future demand and preferences for support and other ‘services’.
Developing a ‘menu based’ approach to the service ‘offer’ from in-house services based on the identified future preferences and likely purchasing decisions of current and future customers, including a pricing ‘model’ linked to the menu of options that provides a competitive and flexible approach to future customers but which also reflects service costs.