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Sector update: have there been improvements in care home viability?

care home viabilityIt hardly seems any time since I last assessed the viability of the UK’s care home sector, but in the light of recent developments with one of the UK’s largest providers it’s time for an update.
The last blog in December 2018 focused on the implications of the collapse of Southern Cross in 2011. This time it has been prompted by reports this month that Four Seasons, Britain’s second-largest private care home provider with around 320 sites and 22,000 staff, has confirmed it has failed to pay rent on time. It is being seen as a negotiating tactic in order to cut bills, but is this really the case?
Its latest troubles began in 2017 when its owner Terra Firma was unable to pay interest on its debts, most of which are owned by private equity firm H/2 Capital Partners who took control and have overseen the group since then.
The business, which has more than £700 million in debts, appointed Alvarez & Marsal as administrators in April 2019. While the administrators have sought a buyer, it would seem most likely that H/2 will end up cherry picking the best homes and roll its debt into a new vehicle.
An estimated 70% of the care homes in England are small, mainly family-run businesses, while around 30% are owned by overseas investors, according to information published by the LSE in May this year.
In the LSE’s view many of the latter group of owners: “view them as assets for extracting large sums in the form of interest payments, rent and profit”.
In 2014 after the Southern Cross debacle the sector regulator CQC (Care Quality Commission) introduced a new requirement – a statement of financial viability, in a bid to ensure there were no repeats of the situation.
However, it clearly has not worked.
In August this year the insurance provider RMP published an assessment of the current state of care home viability, in which it quoted findings by Manchester University that “the financial models for nearly all the larger private equity-owned care home chains carry significant external debt and interest repayments”.
In addition, it said that spending by local authorities on social care had fallen while at the same time as costs have risen. This rise is attributed to a number of factors several of which are being related to Brexit: difficulties in staff recruitment and retention, restrictions on immigration numbers and, increases of the minimum wage.
Indeed, the GMB Union cites concern from the newly-published Operation Yellowhammer documents regarding the sector: “The adult social care market is already fragile due to declining financial viability of providers. An increase in inflation following EU exit would significantly impact adult social care providers due to increasing staff and support costs, and may lead to provider failure, with smaller providers impacted within 2 – 3 months and larger providers 4 – 6 months after exit”.
The Yellowhammer document, it says, therefore advises planning for potential closures and the handing back of contracts.
Despite these problems, demand outstrips supply in most local authorities, with an estimated current shortage of 65,000 care home beds, while a recent report by Newcastle University finds that an additional 71,000 care home spaces will be needed in the next eight years.
Clearly, funding the cost of care homes is itself in need of urgent attention and support. Call in the restructuring advisors?

Cash Flow & Forecasting Finance General Turnaround

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”.