No respite from looming residential care crisis

Another gloomy report on the state of the care home industry says more than a quarter of homes are at risk of failure because of government underfunding.

The report by Opus Business Services, a restructuring and insolvency firm, reveals a raft of major financial problems besetting care home operators, which at best will lead to compromises in care standards and at worst threatens a significant number of homes with closure or new ownership.

Using data supplied by Company Watch, monitors of corporate financial health, Opus has reviewed the finances of 6,178 care home operators, who collectively run 96% of the UK’s residential care homes caring for around 300,000 elderly and vulnerable residents.

More than one in four (1,718) of operators are at risk of failure, meaning that around 6,000 care homes could need a financial rescue within the next three years if their closure is to be avoided.

At present, Opus believes the number of formal insolvencies is unlikely to rise sharply because most care homes are transferred to new owners by agreement with the creditors, thereby avoiding closure. However, unless public funding improves, it is questionable whether the sector has sufficient management or financial resources to cope with a surge in the number of homes being threatened with closure.

The entire sector earned annual profits of only £209 million, a return on capital of 3.3%.  These figures cover periods before the introduction of the National Living Wage last April. Once that is included, Opus estimates over £400 million will be added to labour costs, threatening to make the sector loss making overall.

The average annual profit per care home earned by operators is only £10,000. This is clearly insufficient to support the investment required to keep up with the rising care standards required by the Care Quality Commission or to justify the operational and financial risk involved. Anecdotal evidence suggests that many operators are looking to exit the sector, making the capacity shortage already being caused by the ageing baby boomer generation worse still.

Surprisingly, only 15% of operators borrow any significant amounts, but this minority have extraordinary levels of debt, equivalent to 121% of their net assets, well outside financial norms. The sector as a whole borrows £4.5 billion.

Worryingly, 751 operators (12%) are ‘zombie’ companies with higher liabilities than the value of their assets. Between them they have ‘negative equity’ of £671 million, a figure which has risen by 53% since March 2014.

There are significant regional variations within the sample. Scotland has the best financial health ratings, while the Midlands has the worst. The South East has the most profitable operators, the North West has the least successful. Wales has easily the most dangerous levels of gearing, while London has the lowest.

Nick Hood, business risk adviser at Opus Restructuring, said: “Care home operators are refusing to accept local authority funded residents because the fees are well below the cost of providing care. Sooner or later, privately-funded residents and their relatives will revolt against having to pay sky high fees to cross-subsidise publically funded residents.

“The residential care sector, which looks after the most vulnerable in society, was barely profitable, even before the impact of the National Living Wage. Our research shows that far too many operators face a serious risk of failure and a deeply worrying number are in negative financial equity. Debt levels for those who borrow are far too high.

“In the Autumn Statement, the government missed its chance to tackle the residential care crisis and restore the £2 billion funding it took away to help plug its deficit. Right now, the UK is sleep walking into a full blown residential care crisis.”

 

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