Over a quarter of care homes at risk of failure

November 29, 2016

There is no respite from looming residential care crisis, with over a quarter of care homes at risk of failure due to government underfunding, according to new research.

The new report by Opus Business Services reveals a raft of major financial problems besetting care home operators, which at best will lead to compromises in care standards and at worst threatens a significant number of homes with closure or new ownership.

Using data supplied by Company Watch, which monitors corporate financial health, Opus has reviewed the finances of 6,178 care home operators, who collectively run 96% of the UK’s residential care homes, caring for around 300,000 people.

More than one in four (1,718) operators are at risk of failure, meaning that around 6,000 care homes could need a financial rescue within the next three years, if their closure is to be avoided.

At the moment, Opus believes the number of formal insolvencies is unlikely to rise sharply, because most care homes are transferred to new owners by agreement with the creditors, thereby avoiding closure. However, unless public funding improves, it is questionable whether the sector has sufficient management or financial resources to cope with a surge in the number of homes being threatened with closure.

The entire sector earned annual profits of only £209m, a return on capital of 3.3%. Moreover, these figures cover periods before the introduction of the National Living Wage last April. Once these are included, Opus estimates these will add over £400m to labour costs, threatening to make the sector loss-making overall. It is highly unlikely that operators will be able to raise fees to cover this extra burden.

The average annual profit per care home earned by operators is only £10,000. This is clearly insufficient to support the investment required to keep up with the rising care standards required by the Care Quality Commission or to justify the operational and financial risk involved. Anecdotal evidence suggests that many operators are looking to exit the sector, further exacerbating the capacity shortage already being caused by the ageing baby-boomer generation.

Surprisingly, only 15% of operators borrow any significant amounts, but this minority have extraordinary levels of debt, equivalent to 121% of their net assets, well outside financial norms. The sector as a whole borrows £4.5bn.

Worryingly, 751 operators (12%) are ‘zombie’ companies with higher liabilities than the value of their assets. Between them they have ‘negative equity’ of £671m, a figure which has risen by 53% since March 2014.

There are significant regional variations within the sample. Scotland has the best financial health ratings, the Midlands has the worst. The South East has the most profitable operators, the North West has the least successful. Wales has easily the most dangerous levels of gearing, while London has the lowest.

Nick Hood, Business Risk Adviser at Opus Restructuring, said, ‘Every part of the UK adult care system is in crisis. Private sector operators are withdrawing from contracts for domiciliary care services. The NHS is facing an unprecedented issues with delayed transfers of care because there is insufficient domiciliary and residential care capacity to deal with patients leaving hospital.

‘Care home operators are refusing to accept local authority funded residents because the fees are well below the cost of providing care. Sooner or later, privately-funded residents and their relatives will revolt against having to pay sky high fees to cross-subsidise publicly-funded residents.

‘The residential care sector, which looks after the most vulnerable in society, was barely profitable, even before the impact of the National Living Wage. Our research shows that far too many operators face a serious risk of failure and a deeply worrying number are in negative financial equity. Debt levels for those who borrow are far too high.

‘In the Autumn Statement, the Government missed its chance to tackle the residential care crisis and restore the £2bn funding it took away to help plug its deficit. Right now, the UK is sleep walking into a full blown residential care crisis.’

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