The Centre for Research on Socio-Cultural Change (CRESC) has released a study suggesting that funding difficulties faced by care home operators are made worse by the business and financing models of the biggest chains.
CRESC, a joint initiative between The University of Manchester and The Open University, claims to analyse social and cultural change using advanced research methods to challenge contemporary myths and offer empirically grounded accounts of change in specific key areas.
The researcher says a broad and growing alliance in the social care sector has been warning of ‘imminent crisis’ and ‘potentially fatal’ consequences since July 2015, when George Osborne announced that the national minimum wage would rise to £7.40 an hour in March 2016 for over 25s, who constitute 89% of the care workforce.
The leading voices in this alliance are the biggest five private providers who operate chains of nursing and residential homes: Four Seasons, Bupa, HC-1, Barchester and Care UK, along with their trade body Care England.
In its latest study: Where does the money go? Financialised chains and the crisis in residential care, CRESC reports: “All of these groups repeat a very similar narrative about the causes, consequences and solutions of an urgent crisis in residential care.”
“This orthodox not enough money framing has been reported extensively (without criticism or challenge) in broadsheets, including the Financial Times and the Guardian, as well as on BBC Radio 4,” CRESC adds.
Since the researcher’s stated mission is to challenge the orthodox, it dug into the financial structures of the biggest chains.
The five largest chains of homes biggest providers operate 19.8% of care home beds nationally, CRESC calculates, although the latest LaingBuisson report puts the market share at 16.5%.
“Three of the big five are owned by private equity broadly defined; another is owned by a consortium of private individuals; and the fifth, BUPA, is a not for profit but operates in a very similar way,” the report states.
“All of these chain providers have developed business models that rely on financialised practices which, when combined, are a matter of public concern and contribute to the unsustainability of the sector,” it judges.
CRESC provides considerable detail to support its argument that financialised practices create considerable risk for the care home sector.
It argues: “Financialised providers buy care businesses with small amounts of their own equity and larger amounts of publicly issued fixed interest debt which has to be serviced by the operating business: this funding mix produces an attractive upside and a limited downside for the new owner. If the deal comes good, the capped returns on debt lever up the return on equity for the owner; if the deal goes wrong, the operating business fails because it cannot meet debt payments and the business passes to the debt holders with the owner losing the equity stake.
“When buying Care UK, Bridgepoint contributed £130 million of its own equity and raised £250 million of debt. When Three Delta bought Four Seasons in 2006 (before it went to Terra Firma in 2012), 80% of the £1.4 billion cost was funded by debt. 31 For the operating business, interest payments on debt are ordinarily a fixed cost which a care home chain will try and pass on to customers (both individuals and the state).
“If the cost of servicing debt cannot be passed on to customers, the businesses’ vulnerability to risks (such as falling occupancy rates and below inflation fee increases) increases and default becomes more likely.”
In addition, CRESC says, “Loading the business with debt provides the foundation for financial engineering to reduce obligations like tax and maximise the value which can be extracted from the operating business so as to benefit the owner.”
“The net result is that the declared profit of operating subsidiaries in financialised chains is not a hard indicator of surplus in one year accrued after necessary expenses. Rather, it is the malleable result of manoeuvring over several years to reduce tax, extract cash and rearrange obligations with an eye to exit,” the report concludes.