We are used to hearing care home operators voice concerns about the approaching National Living Wage. Now financial analyst Moody’s has joined the chorus in declaring that the new wage is “credit negative for the UK’s care home providers as it intensifies financial pressures on a sector already facing significant funding shortfalls and rising closures, particularly among smaller providers.”
In a Moody’s report snappily titled Care Home Providers – UK: New National Living Wage Is Credit Negative for the Sector, Despite Government Action, the credit rating analyst says rising labour costs throughout the sector will create considerable business challenges.
Lenders look to credit rating agencies like Moody’s for guidance on the level of risk for individual businesses and industry sectors.
“While the new living wage only applies to around one-third of UK care home employees, increased use of agency personnel, the need to maintain wage band differentials and employer obligations under stakeholder pension legislation will see labour costs increase across the entire sector,” says Tim Snow, a Moody’s vice president, senior analyst and author of the report.
Staff expenses are the single largest cost item for the care home sector (around 60% of revenues), and alternative sources of funding proposed by the central government (from potential increases in council taxes and additional social care funds) for adult social care are unlikely to be sufficient to bridge the gap (which is still estimated to be between GBP2 billion and GBP2.7 billion in 2019-20) in the face of rising demand for these services.
Many of the larger care home operators, including those Moody’s rates such as Care UK Health Social Care Investments Ltd (B3 stable), have successfully offset, at least partially, the negative effects of limited local authority fee increases through measures that include significant investment in care homes that attract higher levels of private pay patients.
On the other hand, many smaller providers have been failing and Moody’s expects this trend to continue. The greatest pressure will be in parts of the country more reliant on local authority clients, which are also typically councils that raise the least tax.