Guy Hands’ View

10 November 2015

Care homes are struggling – Osborne must act to protect the vulnerable

In 2012 Terra Firma [the private equity firm of which Guy Hands is founder and chairman] purchased Four Seasons Healthcare, the UK’s largest care home operator. The debate over the future of care for the elderly in Britain is a subject about which I feel passionately. It is not just an economic issue but also an issue as to where the UK wants to go with regard to providing care for some of the most vulnerable people in society.

As George Osborne puts the finishing touches to his autumn statement, he has no shortage of challenges to overcome or demands for Treasury cash. The outcry over his planned cuts to tax credits, for example, seems certain to force him to find ways of reducing the pain for vulnerable families.

But this immediate political problem should not overshadow the potentially disastrous collective impact of government policies on another vulnerable group – the many of thousands of elderly people who need residential care. The sector is fast approaching severe crisis, which threatens disruption for elderly residents, will reduce the number of places available in the future and increase dramatically the pressures and cost to the NHS.

It is easy, of course, when considering these problems to pin the blame on the operators. It can be even more tempting when these homes are now overwhelmingly in private hands. But the crisis in residential homes is not the fault of the operators. No sector can avoid severe problems if, over a prolonged period, revenues fall and costs rise. And that’s the economic reality for residential care homes.

Revenues have been hit in two ways. Over the last five years, government constraints on funding have seen the fees that councils pay for care home places fall in real terms by 5%. They are now, independent studies suggest, as much as 15% below the level needed to cover costs and allow investment in improving facilities and services.

At the same time, cash-strapped councils have raised assessment thresholds for eligibility for care funding. It has led to many thousands of vulnerable people being denied places they would have received a few years ago and has increased vacancy rates by around 5%, inevitably further reducing revenues.

This is one side of a depressing balance sheet that has a major impact, not only on the viability of the industry but on thousands of vulnerable people. On the other is an inexorable rise in costs including wage bills, which the national living wage will only accelerate. With payroll being the biggest single cost item for care home operators, the increase in the minimum wage will cost the independent sector an additional £1bn by 2020.

These cost pressures have been exacerbated by a shortage of trained nurses which is putting severe strain on both the NHS and the independent sector. These shortfalls in permanent staff have to be covered by agency nurses, which can be as much as three times as expensive.

It is good news, and shows the government is listening to the concerns of the care sector, that it is considering easing restrictions on qualified nurses coming to the UK from abroad. The solution must be both to train more nurses at home and allow foreign skilled staff to fill health vacancies now.

Faced with such an increase in wage bills, of course, most industries would respond by reducing staff numbers. But providing good quality care is labour-intensive. Cutting staff is not only something the industry does not want to do, but rightly would not be permitted by regulators.

Such financial pressures affect all residential homes, whether privately or council operated. Indeed, they explain why many councils have already contracted care out to the private sector, which can offer the same standard of care at half the cost. It has nothing to do with the way private operators have supposedly loaded their businesses up with debt. Rather than increasing the business’s debts, Terra Firma, for example, almost halved them when it acquired Four Seasons.

The entire sector is feeling the strain, not because of debt repayments but because of what independent studies have shown is an over £100 shortfall each week between the fees local authorities pay and the cost of providing a residential care place. It is a gap, health specialists LangBuisson say, that grows to £150 if nursing care is needed.

These are the pressures that need to be eased. Unless this happens, we will inevitably see fewer places available just when demand is growing. More elderly people who could enjoy their last years of life in comfortable and caring surroundings will instead be forced into hospital, which is distressing for them and expensive for the taxpayer.

We are also going to see, as is already happening, a growing divide in quality between those homes providing private care – where fees have increased by 10% over the last five years – and those largely caring for residents financed by local authorities. It will make it much harder, for example, for businesses like Four Seasons, which offer an industry-leading dementia programme, to remain in the vanguard of improving care.

Continuing to squeeze residential fees will prove to be a false economy and cause anguish for those who need care. Correcting the economics of residential care must be high on the chancellor’s agenda for the autumn statement.

This article appeared in the The Guardian on the 10th November.

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