Can care homes be viable businesses?

elderly people in art activity in care homeThe provision of residential care for the elderly when they are no longer able to live independently is understandably an emotive issue.

But it must be remembered that however compassionate care home owners may be, they are primarily running a business.

The UK care home sector is largely composed of SMEs, with a few large-scale providers. They are businesses increasingly beset by financial, employment and compliance problems that are making it difficult for them to survive.

Like all employers, they face the increases in costs to meet the National Living Wage and for NI contributions alongside difficulties in recruiting enough employees willing to work in a low-paid sector not to mention training them. Inevitably, they face other increasing costs, such as energy supplies and food bills, both of which are in any case likely to be higher given the additional needs of frail, elderly residents.

Compounding the recruitment problem is the eventual outcome of Brexit, particularly relating to recruitment of workers from the EU, who make up a large proportion of care workers.

Why is finance such a difficult issue for care homes?

To some extent viability for the SMEs in the care homes sector depends substantially on the rate paid for their services, whether by private customers or by local authorities. Essentially local authorities have been reducing the rate they pay to as little as £350 per person per week while private rates can be well above £750 per person per week. This would suggest that those care homes that focus on private customers are viable while those focused on local authorities are likely to struggle.

It doesn’t help that many care homes are old and were not originally designed for the job, having been converted from a residential property with the consequent burden of maintenance, compliance and upgrading costs.

Much of the funding for small care homes is based on the value of the property rather than the underlying business, which suggests that failure and repossession are inevitable.

On the other hand, larger care home chains have increasingly turned to venture capital for finance, but many of them also derive a proportion of their revenue from local authorities exposing them to possible insolvency.

In 2016 the accountancy firm Moore Stephens found that the number of care home providers going out of business had been increasing year on year fuelled by reductions in local authority fees and rising property costs.

The Local Government Association has calculated that the spending gap in social care is likely to reach £2.6 billion by 2020.

Also, a Manchester University study last year questioned the appropriateness and sustainability of the larger chains using venture capital and amassing substantial debt when revenue is largely from government. It warned that at least one private equity owned firm could run out of money by the end of the year.

The increase in levels of debt is such that a BBC Panorama investigation this week revealed that one in four of the country’s 2,500 care homes is at risk of insolvency.

It also revealed that private care companies have cancelled contracts with 95 councils because, as one company said, they cannot do what is being asked for the money available.

The situation has prompted not only the Care Quality Commission (CQC), the industry’s regulatory body, and Martin Green, the Chief Executive of Care England, which represents independent providers of care, to warn that the whole sector is “at a tipping point”.

So, unless the rates paid by local authorities increase dramatically it seems that the answer to our title question is a resounding “no”.

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