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Powered by Guardian.co.ukThis article titled “Care home closures set to rise as funding crisis bites” was written by Graham Ruddick, for The Guardian on Wednesday 11th January 2017 07.45 UTC

Care home operators, trade unions and charities have been telling Theresa May for months that the care home industry is in crisis and needs help.

Last week, May got her sternest warning yet – the chairs of three influential Commons committees urged the prime minister to deal with the “immense challenge” of paying for health and social care in the future.

“We are calling for a new political consensus to take this forward,” Conservative MP Sarah Wollaston of the health committee, Labour’s Meg Hillier of the public accounts committee and Clive Betts, another Labour MP, of the communities and local government committee wrote.

Since the collapse in 2011 of Southern Cross, then Britain’s biggest care home operator, no other major nationwide company has failed. However, smaller firms are failing across the country.

The Guardian revealed late last year that 100 more care home businesses have collapsed since 2010 than previously thought. A staggering 380 have been declared insolvent since 2010, according to the Insolvency Service. The number of failures each year has risen sharply since 2010, when 32 businesses failed. In 2015, 74 were declared insolvent, while another 34 failed in the first six months of 2016, the most recent figures available. The squeeze is being particularly felt by so-called “mom and pop” operators, who may run one or two care homes but account for about 55% of the industry.

Care homes are struggling because of a fall in the amount that councils pay towards fees for residents at the same time as costs are rising, driven by the government’s “national living wage”, which meant that workers aged 25 or over must be paid at least £7.20 an hour from April 2016. This led to an increase in payroll costs of about 5% for most businesses last year. This rise would have been problematic anyway, but local authorities are also reducing how much they pay towards social care after seeing their budgets cut by up to 50% as a result of government austerity measures.

“Some local authorities are paying less than £2 an hour towards the cost of caring for a resident,” says one senior executive at a leading care home operator.

Large companies are also ailing. Four Seasons, the biggest care home operator in the country with more than 400 properties, is the most at risk. It recorded a pre-tax loss of £28m in the three months to the end of September 2016, the most recent financial accounts available.

Guy Hands
Guy Hands, founder of Terra Firma, which now owns the care home operator Four Seasons. Photograph: Bloomberg/Getty Images

The company, which is owned by Guy Hands’ private equity firm Terra Firma, is also sitting on more than £500m of debt, a legacy left by the previous owners. This debt means it pays about £30m in interest to its lenders every three months.

Four Seasons insists it can easily manage its debt burden, but Robbie Barr, the chairman of Four Seasons, warns the industry is “struggling at tipping point”. As well as care home operators collapsing, other companies could simply pull out of the industry. Bupa, one of the largest operators behind Four Seasons, was reported to be looking to sell 200 homes, although it has said it remains committed to the industry.

Stung by accusations that the autumn statement ignored social care, last month, Sajid Javid, the communities and local government secretary, announced that councils could increase council tax by an extra 3% to fund social care. He also said there would be a £240m “adult social care support grant” to help councils with care of older residents.

But Barr is cautious. He says: “It is essential that councils use the powers they have been given to raise the social care precept and pass it on to frontline elderly social care services to help offset the additional costs of the national living wage increase and avoid further pressures on a sector that is struggling at tipping point.”

Secret figures collected by Four Seasons show that although more than 90% of councils increased council tax last year – thanks to a similar 2% precept announced by David Cameron’s government – less than half of these passed it on to care homes through an increase in their fees.

Even if councils pass on the new precept, Javid’s package of measures, worth £900m, will not even cover further increases in wage costs this year. The national living wage is scheduled to rise by 4.2% in April to £7.50, which is larger than the proposed 3% increase in council tax.

The Local Government Association estimates there will be a £2.6bn funding gap in providing adult social care in England by 2020. A report by the Health Foundation, the King’s Fund and the Nuffield Trust calculates the gap would be £1.9bn in 2017 alone.

Izzi Seccombe, chair of the community wellbeing board for the LGA, says: “The care provider market cannot carry on as it is and there is a real danger of more widespread market failure.”

This squeeze is not just leading to the closure of care homes but compromises to the quality of care and an increase in costs for private residents. In a report last October the Care Quality Commission, the industry watchdog, warned that adult social care is “approaching a tipping point”. This conclusion was based on its inspections, tipoffs and external data. Its damaging findings included that half of the 1,850 social care services rated as needing improvement had not changed when reinspected and that 153 were downgraded to inadequate. Furthermore, it said the total number of nursing homes has dropped for the first time in five years and 81% of local authorities have reduced their real-terms spending on social care.

Another consequence of the crisis is that residents paying privately are suffering increases in their fees or top-up payments to make up for the shortfall in state funding. Well over half of care home residents are still either entirely or partly paid for by the state, with council funding available when a person’s savings and assets are worth less than £23,500. However, Age UK found that the number of residents paying their own costs has risen by 28.5% in the last decade and that the gap between private payers and council-funded residents is stark. While self-funders pay between £603 and £827 a week on average depending on the area, councils pay between £421 and £624 a week.

This is one of the reasons why the Competition and Markets Authority announced an investigation into the care home industry last month, a move that could have serious ramifications for the government and the major operators. The CMA said it will probe the “effectiveness of competition between care homes in driving quality and value for money for residents and taxpayers” and also “consider how local authorities and other public bodies purchase and assign care home places”. The government regulator has the legal power to force companies to make changes, as well as make recommendations to the prime minister.

Given the structural issues in the industry, the investigation has been welcomed by the biggest care home groups. Joan Elliott, managing director of UK care services at Bupa, says: “A strong, functioning care home sector is vital if the UK is to meet the growing needs of our ageing population. The new CMA market study is a real opportunity to address the barriers and blockages in the system, in particular how some local authorities set up their contracts, price quality care and pass through government funding.”

With 430,000 people in care homes and more than 11 million people aged 65 or over in the UK, the problems need to be addressed urgently. The country cannot afford to lose another 70-odd care home businesses in 2017, but that looks likely unless the government steps in.

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