Re-framing the funding crisis in adult residential care

22 March 2016

Diane Burns - Lecturer in Organisation Studies, School of Management, University of Sheffield

Joe Earle - Research Associate, Queen Mary University of London

New ‘follow the money’ research investigates where the money paid to financialised care home chains goes

In recent months large care home chains have told a story through the media of an imminent crisis in adult residential care. They say the increase to the minimum wage (to be introduced on April 1st 2016) and underpayment by local authorities for care home beds will cause a collapse of the care system with home closures leading to bed blocking in the NHS.  To avert disaster, the chains have called on government to increase the level of local authority funding made available to care homes.

However, this industry narrative does not admit that financial engineering and debt-leveraged buyouts undertaken by large chains play an active part in destabilising residential care provision. The large chains are prone to recurrent crisis, not simply because of increases to the minimum wage or underpayment, but also because when they are bought and sold they are loaded with debt so their cash flow cannot cover the financing costs.

A new CRESC public interest report ‘Where does the money go?’ uses ‘follow the money’ research to show how the biggest care home chains are using financial engineering through complex corporate structures based in multiple tax jurisdictions to extract cash, while dumping risks and liabilities onto the state. If their story is believed and their political lobbying succeeds, the chains will have privatised gains in this sector while shifting the costs onto care home residents and their family members, taxpayers and the workforce.

Pressure for financial returns means containment of operating costs, often by cutting labour costs which in turn affects care workers and residents. Our ethnographic research undertaken in care homes taken over by large chains, documents the erosion of pay and condition under various corporate owners.  The changes include restricting annual leave, reducing the number of nursing staff, increasing residents-to-staff staff ratios, removing sick pay, moving to cheaper on-line training, removing paid breaks and no longer paying for handover meetings at this start and end of shifts.  All are measures linked to falls in the quality of care provided to residents.

Despite all this, the chains are now blaming government for the sector’s problems and asking for a bailout from the state – namely more money from higher local authority fees. Adding more state funding may be necessary (given the increase in the minimum wage) but won’t necessarily solve the crisis in residential care because the financialised providers are so adept at taking money out of the system.

Part of the problem is the high target rates of return which are built into LaingBuisson’s benchmarking care pricing model, which has been widely reported in the media and accepted in court judgements as a measure of ‘the fair price of care’. This benchmark includes an 11-12% return on capital which is justified as what is necessary to cover purchaser expectations after buying businesses for 8-9 times the value of their earnings.  If the benchmark price is obtained, it would make the business risk free.

This helps to create a situation where chains target high returns by using techniques like debt based financial engineering which might be appropriate in a high risk/high return activity like commodity production or the turnaround of a failing business. But high rates of return have a dramatic impact on costs and price required.  In the Laing Buisson model, a 12% return on capital accounts for £277 of the cost of a nursing care bed charged at £776 per week.

But adult care is, or should be, fundamentally a low-risk/low return sector, particularly when the cost of borrowing is at an all-time low. There is little justification for the state and self-funding residents to pay higher prices in order to avert a crisis when the reason chains are fragile is because of their own financial strategies and because they want to charge prices that covers high returns.  Any increases in their income will be used to repair margins and leak into higher returns for owners.

Four Seasons Health care, the largest chain in the UK, has become the media poster boy of the current crisis in residential care. In September 2015 Moody’s downgraded Four Seasons bonds to junk rating and warned that the chain was struggling under the weight of its £52 million annual interest repayments on the long term bonds that Terra Firma private equity issued when it bought the chain in 2012.

In fact, Four Seasons illustrates larger problems, including the gaming of limited liability to avoid taxes and obscure profitability. Four Seasons care homes are part of a group of 185 companies tiered in 15 levels through multiple jurisdictions including tax havens like Guernsey and the Cayman Islands.  We know the group has paid no corporation tax since 2012 but the structure is so opaque that there is no way of knowing where the money goes.  This undermines accountability over taxpayers’ money in the form of local authority fees, and private fee payers should also protest because it is family capital (in the form of an older person’s house) which is being used to cover the private cost of care.

Our follow the money research also shows multiple charges which have reduced the profitability of Four Seasons and had the effect in 2014 of turning a cash generating business, into a £170 million loss-making business. As well as the external debt reported in the media, there is an internal intra-group debt of £300 million which is charged at 15%, adding £46.7 million to their interest bill in 2014.  Additionally there was also an under explained administration charge of £41 and £45 million in 2013 and 2014 respectively, plus a one-off special administrative charge of £99 million in 2014.

Worryingly for the future, the financialised chains are providing much of the new build of residential care homes. They build new homes in a standard format which fits their business model.  So we have larger homes, offering over 60 single en-suite rooms because that model covers the cost of capital and management overheads.  It is widely acknowledged that such homes are at risk of delivering batched living and institutional cultures. Public debate is urgently needed about whether it is socially desirable to standardise care in this format and how much of this accommodation we can afford, given a rapidly ageing population and diminishing social care budgets.

What are the alternatives? First, the state needs to take the lead in the social mobilisation of low cost finance so that it is not only the large chains which are able to build new care homes.  The state can finance rebuilding at borrowing costs less than 5% return.  The savings this would create could be used to pay better wages and improve the quality of care for residents.

Second, and equally important, the state should sponsor experiments in breaking with the larger care home model and promote social innovation in housing with care. There are several different models of smaller scale builds in countries including the Netherlands and US where multi-skilled workers collaborate to create ‘caring homes’ (e.g. The Green House Project).

Taking these steps will require imagination and a willingness to experiment, as much as new funding. Equally, we also need an urgent debate about the finances of care home chains in order to re-frame the funding crisis in adult residential care and present the full facts behind the crisis.

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