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Care homes brace for winter financial headwinds

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In the last two years the UK care home sector has become overburdened by financial, reputational and regulatory pressure, which threatens the survival of many businesses in the industry. The industry had hoped for a summer respite from successive Covid waves. However, many operators already have an eye on the coming winter headwinds: the ever-present risk of a new virus strain, the impact of surging heating and food prices, enduring labour shortages, more stringent health and safety and ESG compliance, rising borrowing costs and even soaring insurance premiums. This accumulative burden poses an insolvency risk for those care homes inadequately prepared.  

Sector’s reputational damage adds to care homes’ financial burden

Covid-19 exposed the care home sector’s lack of preparedness to manage a health crisis. Reputational concerns rose to national attention due to virus outbreaks within nursing homes early in the pandemic, inadequate PPE equipment, and lack of skilled staff absent due to Covid, even to the extent that some staff had to continue to work while ill. It led to declining occupancy levels, despite a nationwide shortfall in beds, as people became hesitant to put family members into care homes. At the peak of the pandemic, there was a real strain between service delivery, residents’ health and safety, and mounting financial costs. While peak pandemic strain has abated – at least for now – the regulator, the Care Quality Commission (CQC), has imposed more stringent inspections to rebuild trust in the sector. It all adds up to higher costs and flat or declining revenues.

Most care homes are hybrid funded by local authority grants and private self-funded residents. Inefficiencies in securing appropriate local authority funding, as well as in debt collection, are commonplace and are primary sources of underperformance among independent family-run care homes. Significant business transformation is often required. However, concerns persist over the long-term future of state funding. It may lead to a further private sector expansion, but also could be a headwind for care homes reliant on the current funding regime.

Falling demand post-Omicron has increased care homes’ revenue pressures when operating costs are soaring. First, staff costs have risen as a turnover percentage, a problem compounded by strict minimum standards in the ratio of care staff to residents. A recently published independent review of charging reforms in the UK social care sector concluded that 4,300 additional care staff were required nationwide, a 39% increase in an already scarce workforce. Falling immigration levels have adversely impacted labour supply shortages due to Brexit and the consequences of the pandemic over the last two years.

Inflation, borrowing costs and insurance premiums

Second, costs are spiralling due to inflation (e.g. higher energy, heating and food prices, and rising wage costs due to the National Living Wage), debt servicing costs (i.e. rising interest rates), environmental, social, and governance (ESG) requirements, and even insurance premiums. Care England, the representative body for independent UK social care services, says insurance premiums have soared between 300 and 400% since Covid, according to a report in the Financial Times. The rise in care home insurance premiums, based on CQC ratings, in part reflects the reduction in insurers’ willingness to underwrite the risk since the pandemic, according to

Becky Newman of Howden Insurance Brokers: “Care homes are still trying to stabilise their businesses due to the pandemic after two incredibly challenging years. Many insurers, fearful of Covid-related liabilities, decided to withdraw from the sector.  Insurers perceived fear of rising claims coupled with a reduction in market appetite has resulted in increased pricing.”

BTG Advisory partners with Howden Insurance Brokers, the specialist insurance broker which provides tailored insurance cover for care homes, supported living and hospices. Care homes are legally required to have insurance to cover buildings, operations, staffing and care standards; without insurance, they cannot be registered and must close. In an environment where care home insurance has thinned, Howden continues to offer expert advice and brokerage service, sourcing flexible and competitive care home insurance policies among available insurers.

Balance sheet distress

Some care home operators’ balance sheets have fallen into distress. Many businesses also increased borrowing during the pandemic to survive and are now over-leveraged and exposed to higher interest rates, while the Government has unwound Covid-era financial support schemes. The net effect of dwindling revenues and rising costs is an operating margin squeeze which, in some cases, is an insolvency risk.

The UK care sector is supported by secular demand drivers – an ageing population and a significant undersupply of available beds. However, many in the sector remain overburdened by financial costs and regulatory compliance expectations. BTG Advisory is well placed to help care homes experiencing financial strain. We can conduct forensic due diligence across the business to identify and plug cash flow leakages, evaluate refinancing options, source new equity and even undertake a solvent business sale. As always, the earlier companies seek an adviser when their balance sheet starts to come under strain, the more options will be open to management. If you would like a comprehensive review of the financial resilience of your care home business, or require new insurance, do not hesitate to get in touch with our team today.

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