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UK care home sector facing acute financial strain as cost of living crisis and high borrowing costs bite

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The UK’s cost of living crisis is heaping more financial pressure onto Britain’s beleaguered care home sector. The winter months are set to amplify the effects of rising prices, inflationary pressures, and skilled labour shortages, stretching capacity while demand reaches seasonal highs.

The UK care sector is fragmented and was already fragile before the pandemic. The sector consists of approximately 7,500 separate providers, with 15,500 homes of varying sizes (1 to 250 beds) caring for around 500,000 older and working-age adults, according to an independent report for the Department of Health & Social Care (DHSC). The combination of increased wages in order to retain staff, increased running costs, and the withdrawal of short-term government Covid-19 support, such as the Infection Control Fund at the end of March 2022, have stretched care homes’ financial resources. These headwinds are undermining the quality of care provision, squeezing care home profitability, and shrinking market capacity as some providers scale back services and, in worst-case scenarios, suspend operations.

The Care Quality Commission (CQC), the independent regulator of health and social care in England, described the sector as “gridlocked” and “unable to operate effectively” in a report ordered by Parliament and published in October 2022. Post-pandemic CQC inspections have increased in frequency and scrutiny in response to grave underperformance issues exposed during the Covid-19 outbreak. Faults typically range from inadequate health and safety concerns, procedures, lack of attentive staff, and inconsistent prescription deliveries to residents to inconsistent care. Resolving all such inadequacies typically increases capex when local authority funding grants and subsidies are rising below the level of inflation 

More than nine out of ten NHS leaders warned of a social care workforce crisis in their local area, which they expect to get worse this winter, according to a recent survey cited in the CQC report ‘The state of health care and adult social care in England 2021/22’. Care homes continue to struggle to attract and retain registered nurses as many have moved to jobs with better pay and working conditions elsewhere in the NHS. Employment agencies are facing the same recruitment challenges. Vacancy rates were above 10%, and staff turnover rates were in excess of 30%. According to the CQC, there are an estimated 165,000 vacancies across the broader adult social care sector. More than one-third (36%) of care home providers reported that workforce challenges harm the service they deliver, according to the CQC’s workforce pressures survey, with 87% admitting to recruitment challenges. As a result, over one-quarter of care homes reported not accepting new residents. Skilled worker shortages have forced some care homes to suspend the provision of nursing care, compounding the prevalence of inadequate care standards recorded at CQC inspections. Almost two-thirds (64%) of local councils have reported that providers in their area had handed back council contracts, impacting 1,829 people in the past four months, according to a November survey by the Association of Directors of Adults Social Services (ADASS). Between March 2021 and August 2022, the number of registered cares homes in the UK reduced by 366, or 2.4%. During this period, care home beds fell by 1,611, or 0.35%, with more than half the national loss (53%) weighted to the South West. Reduced care home capacity is also fuelling a deeper crisis across the adult care sector, increasing the burden on hospitals that cannot discharge patients due to lack of care home capacity. 

The cost of living crisis is adding extra pressure as the soaring cost of energy, food and fuel is hitting care homes very hard. Some providers have reported increasing fuel allowances to staff to avoid losing staff, thus depleting profitability even further. Increasing operating costs have prevented a full recovery in care home occupancy, weighing on profitability. Profit margins as calculated earlier this year by EBITDARM (which captures profits, excluding rent, depreciation and interest charges) had fallen to the lowest levels since the pandemic. Alarmingly, 97% of all directors surveyed by ADASS reported they feel ‘pessimistic’ or ‘very pessimistic’ about the financial outlook for health and social care locally, up from 85% in July 2022. “We are concerned that, if financial pressures continue, capacity in the adult social care market will be further constrained, and this will have a knock-on implications for the NHS – all of which could make for a winter that is likely to be far tougher than anything experienced previously,” concluded the CQC report.

There have been many promises of reform of adult social care in England supported by twelve White and Green Papers as well as five independent commissions, but as yet unfulfilled and no significant structural reform has yet emerged. The most current reform proposals, which focus on capping individual care costs at £86,000 from October 2023, can be viewed here.

For private sector care home providers, the legacy burdens of Covid era loans to financially survive the pandemic still weigh on balance sheets. Many providers are heavily over-leveraged at a time when borrowing costs are still rising higher and are expected to remain elevated for a long time. This has implications for the ability of care home providers to manage rising debt servicing costs and secure refinancing in a recessionary environment that is likely to see a further withdrawal in bank liquidity. These factors, combined with restricted care home occupancy levels due to staff shortages, will continue to weigh on the valuation of care homes for those investors considering a trade sale. In addition, from next April, the main corporation tax rate will increase from 19% to 25% for profits in excess of £250,000. Companies with profits between £50,000 and £250,000 will pay tax at the main rate of 25%, reduced by a marginal relief providing a gradual increase in the effective corporation tax rate.

The UK’s highly fragmented care home sector includes a large proportion of small providers, many of which will already be financially stretched with HMRC arrears and liabilities, which will become more difficult to repay into next year as operating costs increase and revenues dwindle. HMRC offers Time to Pay Arrangements, based on the specific financial circumstances of individual businesses and their affordability. BTG Advisory is well placed to support independent care homes navigate these financial obstacles.

If you are a care home provider, or own care homes in your portfolio, and the business is struggling, do not hesitate to get in touch with us today. BTG Advisory has extensive experience in turning around stressed and distressed care homes and can support your business with the best options to secure new capital (debt and equity), as well as the most effective insolvency options, should it come to that. As always, the quicker you take on independent advice, the greater your options will be. 

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