Rise in care homes entering insolvency

May 15, 2018

There has been an 83% rise in the number of care homes entering insolvency, from 81 in 2016/17 to 148 in 2017/18, according to figures from the Insolvency Service, compiled by Moore Stephens.

With many care home places being paid for by local authorities, the sector has been struggling since the Government cut local authority funding during its austerity drive.

Moore Stephens says that times have been made harder still as a number of recent high profile and complex care home insolvencies have caused mainstream lenders to be more cautious of providing low cost funding to the sector.

It has recently been reported that Four Seasons, the care home group which controls 330 care homes, continues to hold debt-for-equity restructuring talks with its bondholders in order to raise the necessary funding that it needs to continue operating. As Four Seasons is the second largest care home operator in the UK, the outcome of these restructuring talks is of great importance to the wellbeing of the sector.

Local authorities in England and Wales had planned to make savings of £824m in their social care budgets in 2017/18 according to the Association of Directors of Adult Social Services, despite demand for these services increasing with the UK’s ageing population.

The Local Government Association says that the care home sector faces a £2.3bn funding gap by 2020 and a Competition and Markets Authority (CMA) report highlighted a £1bn shortfall in public sector funding of care homes in 2017.

The cost of providing a high standard of care has also increased markedly over the years. The National Living Wage rose again in April, to £7.83 from £6.70 just three years ago, placing increased strain on care home companies’ profit margins.

According to NatWest Care Home Benchmarking Report 2016/17, the average residential home now spends 52% of its turnover on staff. Demand is also rising for qualified staff, in particular nurses. This has led to increased use of agency workers.

The rising interest rates expected this year creates further costs for care homes, who will see any floating rate debts secured against their properties increase.

This research raises yet more awareness of the increasingly difficult operating climate in which care providers are operating. Last week:

Lee Causer, Partner at Moore Stephens, said, 'Care homes should be benefiting from the demographics of the UK – an ageing population. But they are not. Care homes are not receiving enough local Government funding to sustain the profit margins necessary to run a successful business. Many companies are finding it difficult to cope with the rising costs associated with the care industry. Without additional income, care homes will not be able to offer the levels of care required whilst remaining solvent.'

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