Care homes brace for winter financial headwinds

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.