The annual number of residential care activities businesses – chiefly care homes – becoming insolvent rose by 23% in the 12 months to the end of 2015 compared with the same period in 2014, according to the business advisory firm FRP Advisory.
Analysis of official data from the Insolvency Service shows a total of 72 residential care operation business became insolvent in 2015, the fifth consecutive year of increased corporate insolvencies in the care home sector, and marking a 24 fold rise in insolvencies in the five year period since 2010.
The FRP Advisory analysis reveals that out of all the industry sectors recorded at Companies House, only the residential care services sector has seen a significant and consistent year-on-year rise in corporate insolvencies over the past five years, with FRP Advisory anticipating the trend to continue into this year and next of increasing numbers of care home businesses facing financial stress resulting often in insolvency.
FRP Advisory expects harsher economic pressure on the residential care sector in 2016-17 through a combination of more severe local authority budget cuts; the financial toll on operations from a greater regulatory compliance burden; and higher staff pay and pensions costs.
Chris Stevens, partner at FRP Advisory, the business advisory firm, said: “The care home sector may comprise fewer businesses relative to, for example, retail or construction but its impact on community care provisions is significant given the number of families and services involved with each resident.
“The exponential rise in insolvencies in the care home sector – which numbered just three only five years ago – contrasts to the overall downward trend in the number of corporate insolvencies since 2010 which have declined 35% since the end of 2010 and by 11.4% in for the twelve months to 2015.
“There may still be worse still to come for the beleaguered care home sector due to all local authorities facing overall double digit budget cuts for the current financial year underway and beyond, comprising often cuts of over 20% to their social care provisions meaning operators have limited abilities to increase their fees which currently for many are running below the true cost to the businesses of delivering appropriate care – all placing rising financial pressure on care sector operators.
“At the greatest risk are care home operators catering for purely local authority funded residents where financial stress is most acute. On top of local authority funding squeeze comes the ever weightier burden with increased regulation, often resulting in homes having to fund for both capital expenditure and higher overhead spend to ensure they continue to be compliant with regulators, just as the added pressure takes its toll from the rise in the national minimum wage from April this year – rising further by 2020 to £9 an hour – and the prospect of additional auto enrolment costs.
“The combination of limited funding, extra costs for staff, pensions and increased regulatory compliance may put unsustainable pressure on care home operator margins if levels of patient care and service are to be maintained in accordance with regulatory requirements.”