Last year saw the CMA’s first review of a merger in child fostering services. These businesses place children with foster parents when a local authority cannot place a child using its own in-house service. The merger was cleared on the condition that services were divested in three regions.

Now, with two fostering services businesses (Core Assets and Partnerships in Children’s Services) reported as up for sale, sellers and potential buyers will no doubt be considering whether competition concerns are likely to arise again.

(This blog article was first published in September 2018. Aldwych Partners was subsequently appointed lead competition adviser and secured CMA clearance for our client for the merger of Core Assets Group with Partnerships in Children’s Services. More recent blogs that discuss children’s services include a competition risk assessment for children’s residential care homes (December 2019) and a discussion of the tension between CMA oversight of competition issues in the sector and wider stakeholder concerns (January 2020).)

The fostering services market has several features common to other health and care markets, where Aldwych Partners has worked extensively, but which are quite different to other markets that are typically reviewed by the CMA. This blog reviews these features, and also points to a further unusual feature identified by the CMA in the National Fostering Agency / Acorn Care and Education Group decision which may help secure clearance for upcoming fostering services transactions.

First, the CMA has found that private fostering services are a ‘spillover market’. Local authority demand for private services only arises when the in-house service that is operated by nearly all local authorities is unable place a child. That is, when the local authority wishes to use a private service, the in-house provider is no longer a viable alternative. As a result, the CMA has concluded that private providers compete with each other, but there is no significant competition between these private businesses and the in-house services operated by the local authorities. This type of purchasing behaviour is also seen in NHS mental health, and has similarly led the CMA to conclude that NHS and private providers of mental health services are not significant competitors for each other (see Acadia/Priory and Cygnet/Cambian).

Second, child fostering is a publicly-funded service, and local authorities are obliged to purchase services consistent with public procurement rules. To do this, local authorities, either individually or collectively, have set up framework contracts that private providers are admitted to (based on service quality and other factors). When local authorities wish to place an individual child using a private provider, they will start by approaching those providers on their framework, and perhaps turning to the ‘spot’ market of off-framework providers if no suitable provider can be found on the framework.

Framework contracts are quite common in other health and care services as well, but the significance of framework versus spot purchasing varies. In fostering services, it appears that framework-based purchasing is much more important than spot purchasing (given the focus of the NFA/Acorn decision on how providers compete to be admitted to frameworks). By contrast, NHS commissioners appear to purchase mental health services in the ‘spot’ market more frequently so as to secure the best possible deal. In care homes, the CMA has found that framework contracts play a very limited role in terms of influencing competition between suppliers as older persons, when choosing a publicly-funded care home placement, have a right of choice that is not constrained by local authorities’ pre-existing contracts with private providers.

Third, it might be reasonable to expect that local authorities would be able to exercise a significant degree of buyer power so as to ensure highly competitive prices (and other Ts&Cs) from private providers. However, as with NHS-funded health services, the CMA has not found that this is the case (or is sufficiently the case to clear a merger on its own). A review of foster care in England for the Department of Education published earlier this year is not particularly helpful for this argument describing many local authorities as “the weaker party in the fostering market, not the controllers of it”.

Finally, in NFA/Acorn, the CMA found – somewhat unusually – that one larger competitor would be more significant than two smaller competitors which, combined, were the same size. Fostering businesses were found to “condition its bid [for a framework placement] on how it expects its largest rivals to bid rather than on the expected bidding strategy of each of its numerous much smaller rivals”, and “the capacity of rival [fostering businesses] has a material impact on … bidding strategy”. This points to the possibility of the CMA accepting that there are competition enhancing efficiencies arising from mergers in this sector. That is, a merger between two competitors may actually increase, rather than reduce, competition as a result of increasing the pressure on larger players in the market.