Government underfunding threatens to put over a quarter of care homes out of business within the next three years, according to a report.
The study by Opus Business Services, a leading restructuring and insolvency firm, reviewed the finances of 6,178 care home operators, accounting for 96% of UK residential care homes.
Nick Hood, business risk adviser at Opus Restructuring, said: “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 publically 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.”
More than one in four (1,718) of 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, the report states.
The report reveals the sector earned a return on capital of 3.3% with annual profits of only £209m covering the period before the introduction of the National Living Wage (NLW), which Opus estimates will add over £400m to labour costs.
Average annual profit per cared home by operators is estimated at £10,000.
The report states: “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.”
Although only 15% of operators were found to have borrowed significant amounts these businesses were found to have “extraordinary levels of debt, equivalent to 121% of their net assets, well outside financial norms”.
Total sector borrowing stands at £4.5bn.
More than 750 operators (12%) are described as ‘zombie’ companies with higher liabilities than the value of their assets.
They have a combined negative equity of £671m, up by 53% since March 2014.
The report finds 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.