The Pressure is Unrelenting: A Review of the Care Sector Crisis
At one point Southern Cross was considered a failing company, but now many believe that we have an entire sector standing on the precipice of failure, where a crisis is unavoidable and the collapse of residential care could happen within the next five years.
For many, this is not an unexpected, overnight phenomenon. The care sector has been the scene of a slow motion collapse over several years, driven by the rising number of older people requiring care, and a Chancellor focused on tightening the public purse whilst care providers face increased compliance pressures and inexorable rises in operational costs. Many operators are already at breaking point.
That, of course, is not the full story. 2015 saw two ‘game changing’ events with the postponement of Phase 2 of the Care Act until 2020, including the reforms first published by Dilnot, the Commission on Funding of Care and Support, in 2011, and the Chancellor’s announcement of the National Living Wage in the Summer 2015 Budget, which was enacted in April 2016.
The Dilnot Review
The principal danger of Dilnot’s recommendations was the fear of market destabilisation, caused by an erosion of the cross-subsidy from private to public payers, post implementation. This could have resulted in 25,000 care home residents with modest assets shifting from private pay into the ambit of council support as a result of the upper-asset threshold increase to £118,000. Whilst this ‘payor shift’ would have had the most impact in less affluent areas where property prices are closer to the £118,000 threshold, as private fees are typically 40% higher than like-for-like council fees, it could have been the death knell for many operators that cater to a mix of publicly and privately paid residents.
For now, the UK government has ‘kicked the can down the street’, however the long term-funding issues of the care sector remains unresolved. More importantly, without significant government intervention between now and 2020 to reduce the level of cross-subsidy, the sector will be faced with precisely the same pressures and challenges in 2020/2021.
The Influence of The National Living Wage
The decision to postpone the Dilnot recommendations was undoubtedly influenced by the government’s commitment to implement the National Living Wage in April 2016, with the consensus being that the care sector could not absorb both changes simultaneously. The National Living Wage was announced in July 2015, therefore councils could argue that operators were sufficiently forewarned to get their house in order, by restructuring roles, managing resources more efficiently, and/or increasing top-up fees, ahead of April 2016
For some, without additional funding being made available to councils, the National Living Wage represents the final straw, with expectations that its introduction will shave a further four percentage points off the gross margins of those operators with high exposure to public pay. These are the same operators that have already spent several years fighting austerity, rationing care, and restructuring resources in an attempt to ride the storm out and survive sub-inflation fee uplifts.
Current capacity trends are already showing that for the first time, lost capacity from closures exceeded that gained from new openings. This is most prevalent in less affluent areas and is being driven by falling operating margins. With further eroding margins predicted by the National Living Wage, the doomsday scenario of sudden deteriorations in care is imminent, and a wave of home closures and council commissioners are unable to make placements, thus switching the burden back on the NHS at an estimated cost of £3bn per annum.
In his November 2015 Spending Review, the Chancellor announced that local councils would have the power to increase council tax by up to 2% to help fund adult social care – known as the 2% precept. The proposal has been discredited and described as a missed opportunity, leaving the long-term funding of the sector in an uncertain position. Estimates vary widely as to what a full 2% precept would raise across all councils. The majority of the 152 councils that can introduce the 2% precept have now approved it, raising an estimated £372m. However, this is against a backdrop of a £2.5bn cut in revenue support grant funding from the government to run local services in 2016-17. More importantly, cash issues exist now, especially in less affluent areas, meaning the 2% precept will raise the money in the wrong places and exacerbate regional and local inequalities as those most in need are likely to generate the least additional income.
Repeatedly being asked to work harder for less, with increased compliance scrutiny, is not sustainable in any sector. The economic reality for operators has been a prolonged period of chronic underfunding, falling revenues and operational pressure from rising costs. Phase 1 of the Care Act 2015 gave councils a new duty to ensure the sustainability of the care service market, however, there continues to be no central government policy on fair fees, other than to say it is a matter for each council, and no guidance is available as to what constitutes ‘sustainable fee levels’. The sector remains highly fragmented, with no homogeneous approach to fee setting or commissioning strategies across councils in the UK.
Whilst the Chancellor has made more funding available via the 2% precept, the government is unlikely to ever impose mandatory fee guidance on councils. The Chancellor needs to eradicate the public deficit and does not want to subsidize inefficiency by throwing a lifeline to failing, low-quality homes. This would run counter to the focus on domiciliary care alternatives, and it would be highly unusual for central government to seek to exert such a level of control over the purchasing activity of local councils.
Fee freezes are not the full story. Cash-strapped councils manoeuvre eligibility criteria more or less stringently according to the money available and the underlying level of demand. By raising assessment thresholds, thousands of vulnerable people have been denied places they would have had access to several years ago. This not only increases vacancy rates by an estimated 5%, but it also increases operator pressure as residents now have a much higher dependency profile.
The general consensus is that the measures outlined in the November 2015 Spending Review will not be sufficient to meet the growing care needs of an ageing population. The gathering momentum of austerity in public funding seen over the last five years has resulted in the polarization of publicly and privately paid care. This polarization has been driven by the typically high levels of private pay seen in affluent areas, compared to those less affluent areas where providers have a greater exposure to public pay, at often inadequate fee rates. The cross-subsidization of state-funded residents by private payers is now endemic in the sector, with the quantum usually substantial at an average 40%+ private pay premium. It is unsurprising that the manifestation of this polarization is already reflected in the pressure being placed on the profit margins reported by the UK’s largest care operators. This two-tier system is gathering unrelenting momentum. Those operators fortunate enough are already looking to refocus their attention solely on the private-payer market, rather than expose themselves to state funding.
It seems inevitable that the growing market polarization will contribute to the financial failure of some operators. Previously, many of the smaller and financially weaker operators running sub-standard assets have displayed a remarkable level of resilience, due largely to an absence of alternative uses or dramatically reduced asset values. How much longer they can continue to generate acceptable levels of cashflows in the face of an increased compliance burden, rising operating costs and pressure from the National Living Wage, remains to be seen. If many cannot, then those that remain will benefit from the overall capacity loss at a local level. Some level of modernization within the sector feels necessary.
With national capacity reducing for the first time in a decade, it may presage a general ‘shakeout’ of capacity where the nonviable stock (small scale homes with poor physical layout) exits the market, which has hindered sector modernization and undermined the profitability of the remainder. That said, with the churn rate running between 1% and 2% of overall capacity, it will be several decades before the sector is fully modernized and for the ‘future-proofed’ stock to replace the overhang of the traditional sub-standard homes.
The pressure on operators is unrelenting. Social care has been in retreat now for some time. The critical difference is that the industry is now losing its appeal, both as a place to invest and as a form of employment, and that is undoubtedly a dangerous phase in its steady decline. Social care is in crisis and it is a crisis that will rebound on the NHS, if not resolved. Operators simply cannot continue to absorb sub-inflation fee uplifts, increased operational costs, the National Living Wage, increased eligibility criteria, increased user expectations, and the chronic skills shortages whilst measuring up to greater compliance scrutiny. Something has to give, and unfortunately we are already seeing many operators who are considering exiting the sector.