Funding Cuts and Wage Increases put UK Care Homes at Risk of Insolvency

Insolvency Risk to Care Homes

Financial pressure in the social care sector continues to rise. Over the last year, there has been an 83 percent increase in the number of care home insolvencies, up from 81 in 2016/17 to 148 in 2017/18. Experts have warned that despite an increase in demand, the introduction of the new living wage and public sector funding cuts are putting standards of care and many operators in the sector at risk.

Funding shortfall

According to the Competition and Markets Authority (CMA), there was a £1bn shortfall in public sector funding of care homes in 2017. Such is the extent of the problem that Professor Martin Green, chief executive of Care England, recently described the fees paid by councils to private care providers as ‘paltry’.

With many care home places being paid for by local authorities, the government’s austerity drive is certainly taking its toll. This has been made worse by a number of recent high profile care home insolvencies which have made lenders cautious about providing funding to the sector.

The Rising Costs of Providing Care

As well as a reduction in the level of funding, independent care home providers are having to contend with rising operating costs due to the recent increase in the National Living Wage in April this year. That saw wages for workers over the age of 25 rise from £6.70 three years ago to £7.83. That has put an increased strain on already dwindling profit margins.

Figures from the NatWest Care Home Benchmarking Report show staffing costs in nursing homes run by small and medium-sized businesses have reached 55 percent of turnover. There has also been an increase in demand for qualified staff, such as specialist nurses, which means care homes are having to hire healthcare professionals in the form of expensive agency workers. This is putting a further squeeze on profits.

The Insolvency Risk to Care Homes Has Never Been Higher

In the first quarter of 2018, figures from the Insolvency Service show that the number of care homes experiencing serious financial distress was the highest it had ever been, with 44 businesses becoming newly insolvent. Separate research by Opus Restructuring and Company Watch also found that one in four of the UK’s 2,500 home care providers were at risk of insolvency.

These problems could be exacerbated by the rising interest rates that are expected later this year. If the Bank of England base rate were to increase then care homes will see any floating rate debts secured against their properties grow, potentially prompting further insolvencies in the sector.

Social Care Budgets fall Despite an Increase in Demand

According to the Associate Directors of Adult Social Services, in 2017/18, local authorities in England and Wales had planned to make savings of £824m in their social care services, despite increasing demand from the UK’s ageing population.

This has led to a number of high profile collapses in the sector. Four Seasons, the care home group which controls 330 care homes in the UK, is holding debt-for-equity restructuring talks in a desperate attempt to continue operating. Give that Four Seasons is the second largest care home operator in the UK, the failure of the negotiations could be disastrous for the sector.  

The Government Must act

Commenting on the latest care home insolvency figures, Mike Padgham, chair of the Independent Care Group, said: “The government has to act on the crisis in social care – even if it means we have to better fund care through care taxation. Otherwise, we are going to see more and more statistics like those issued today.

“It is short-sighted not to support social care. A hospital bed costs far more than a care bed – so investment in social care saves the NHS money.”  

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