Care Homes: The increasing cost of care

Does the for profit model work?

Many people are now entering residential care homes with increasing and more acute needs, such comorbidities are requiring more staff resources. When occupancy rates dropped by more than 10% during the pandemic, the sector averted a crisis when it received government financial assistance. This didn’t address the fundamental and systemic issues – it was merely a sticking plaster.

With the cessation of emergency financial support, the existing financial and operational challenges faced by care homes have become even more pronounced. Local authorities have responded by increasing average fee rates in 2023 by up to 8% (depending on region and type of care). However, this falls short of mitigating the 10% increase in the national living wage (NLW) in April 2024

It is therefore no surprise care-home operators continue to say that fees haven’t kept up with the increasing expenses of wages, energy and food inflation, and that residents can only be accommodated if fees are topped up by local authorities or the residents themselves.

As identified by Professor Martin Green, Chief Executive of Care England, despite the Fair Cost of Care initiative, local authorities continue to pay too little and expect a lot. Its sector pulse check 2023, found that 39% of providers are considering exiting the market, which begs the question, does the for-profit model work?

Care home closures and the CQC

The Care Quality Commission (CQC), the industry regulator, shut down 816 care homes between 2011 and 2023, including 804 for-profit facilities. This suggests the outsourcing model is struggling to provide the necessary quality of care for the most vulnerable individuals in society.

Care England has stated that numerous operators have initiated care home closure programmes and are only willing to accommodate publicly funded residents if fees are supplemented by the NHS adding that "the fact that we have lost over 800 care services at a time when the need for social care is significantly increasing is an indicator of the fragility of the sector."

It has been the case for some that homes with a higher proportion of private, rather than local authority funded residents, are more profitable, due to the high fees that private patients pay. These private residents have traditionally subsidised publicly funded residents – but this is not sustainable.

Inflationary pressures and rising overheads

The cost-of-living crisis and inflationary pressures are impacting overheads for the care home sector, with utility and food costs facing the most significant pressures. Property prices have also risen, highlighting the increase in costs of maintaining care facilities, especially if they aren’t purpose-built. It isn’t unusual for capital and operational spend per bed to exceed £3,750 per annum.

For many businesses, the rising cost of servicing debt due to high interest rates, continues to be an additional burden on top of general inflationary pressures. As such, many care home operators have exhausted their cash reserves and burdened their balance sheets with debt, which may be increasingly unmanageable for many.

National living wage increases in April 2024

Staff costs are one of the biggest pressures on the sector. In April 2024, the NLW increased by 10% to £11.44 per hour (previously £10.42). In addition, the threshold to receive the full NLW reduced from 23 to 21 years of age. This represents the largest ever cash increase to the NLW, equating to a £1,800 annualised pay increase for an NLW-eligible individual working full-time.

Care England has advocated for a rise in the minimum wage to £15 per hour for care sector workers. However, salary isn’t the sole staff-related expense that operators must take into account. They also need to allocate resources to train, develop and support staff, especially considering the increasing acuity of patient/resident care situations they often encounter.

Knight Frank, a property firm, advises in their UK Care Homes Trading Performance Review 2023 that average staff costs accounted for 59.4% of revenue in 2023, a rise of 0.8% compared to 2022. Given the magnitude of the recent NLW increases, local authority austerity is likely to add to margin pressures, with average fee increases unlikely to exceed the level of NLW increase.

However, we've seen some local authorities being creative in the way they set fee increases for 2024, by linking them directly to staff pay increases.

Changes to the CQC assessment framework

Scheduled to come into effect in 2024, the new single assessment framework will include a more transparent scoring system. This aims to streamline and simplify the assessment process to improve consistency and help all parties to understand how CQC reached their ratings.    

It will be based on the same five key domains, often referred to as 'key lines of enquiry' (KLOEs). For ease of understanding the definitions of 'quality' care and 'good' service, it will also include one overall set of expectations. High CQC ratings will remain a significant factor in driving profitability.

Practicalities of inspection

Although the new CQC framework is now in use, the full rollout will be challenging. Inspectors must fully understand the new methodology, and considerations should be given to the practicalities of CQC inspection teams undertaking the required volume of visits. This will be of particular concern for care home operators holding low CQC ratings, many of whom are long overdue inspection and hoping that a timely assessment could boost their potential refinancing or transaction ambitions.

The seriously distressed nature of the care sector continues to create uncertainty for operators and funders alike. For now, there do not appear to be any short term fixes, or radical changes coming from the Government. All these issues point to why operators and funders should consider working with an experienced adviser to explore solutions to their specific challenges.

For more insight and guidance, get in touch with your local contact:   

Dan Smith: England and Wales, London
James Hichens: England and Wales, Regions
Stuart Preston: Scotland