Four Seasons’ collapse exposes the UK’s broken outsourcing model

Injecting the care home industry with more cash without addressing its financial structure will merely line the pockets of off-shore investors.

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The collapse this week of care home chain Four Seasons shone a spotlight on the risks of placing the health and wellbeing of vulnerable elderly people in the hands of offshore investors.

Care homes are people’s homes. Four Seasons has 322 of them, which together house 16,000 people. A population the size of a small suburb of Manchester are now unsure whether their current homes will disappear.

If the homes close – and unfortunately it is highly likely that some will, given that Four Seasons has already begun closing homes in an attempt to pay down its £500m debt – residents will likely suffer considerably, and some may die prematurely.

The prevailing narrative around the care home sector gives two reasons for its financial peril. First, the sector does not receive enough funding from local authorities. Second, an increase in the minimum wage for care workers has made the sector financially unsustainable.

Austerity has doubtlessly hit social care hard. But claims about the poor funding of the care home sector are not new. In fact, the care home lobby has repeated such claims consistently for the past 20 years, even at points when local authorities spent much more money in the care system.

And because these claims have been repeated so frequently, the media and policy makers have bought into a number of half-truths. Before pumping new money into the system, these need to be challenged.

In 2017 a detailed financial analysis undertaken by the Competition and Markets authority (CMA) found that far from bringing the sector to its the knees, the introduction of the minimum wage did not affect the margins of the 26 largest care home companies.

In fact, the revenues from the public sector and private payers increased by more than enough to accommodate the 50p hourly increase introduced in 2016.  The government watchdog added that “staff costs as a proportion of revenue shows a downward trend” – the percentage of the money received by the care home industry and spent on staff wages was actually falling.

The CMA also found that 5 per cent of all the money that goes to the big 26 care home firms leaks out of the sector in management fees.  Cash amounting to £200m a year flows directly to private equity operators and other institutions that play no role in providing any form of care.

In addition, many of the big 26 sold off their stock of bricks-and-mortar care homes to levy a cash injection. Now, many large providers are paying a total of £390m each year in rent to landlords – another large chunk of money that leaks out of the sector and doesn’t touch the frontline. On top of this, yearly payments of £177m go to bond holders, banks and other financial institutions to pay off debts that have been loaded onto care home operators like Four Seasons

So even before the big 26 care home operators account for their profits, which range between £60m and £80m in a good year,  nearly £760m a year has already leaked out of the social care sector and into the pockets of those who never meet care workers or care home residents as part of their job.

The media, policymakers and indeed the CMA itself appear to have accepted that all these costs are normal for a care home business. As a result, the logical conclusion is that in order to pay these investors a return on their investment (on top of actually delivering care and paying wages to care staff) the state needs to give the companies much more funding.

The watchdog didn't question why management fees, rental payments and debt servicing charges were all so high. Nor did it question whether the debt-based finance models which underpin some of the larger providers may actually be the cause of the sector's financial woes and their low levels of profitability. 

Instead it simply added to calls for the state to finance care home providers with £1bn additional funding a year.

In the wake of Four Seasons’ collapse, policy makers and the public are faced with a pivotal question. Is it acceptable for international financial investors to extract rents from the care homes that house elderly people? And if so, by how much, and according to what conditions?

Injecting the care home industry with more cash while failing to address its underlying financial structure will merely line the already well-stuffed pockets of off-shore investors.

In fact, pumping greater amounts of money into the current financialised system is likely to encourage the type of risky behaviour by private equity investors which, in the case of Four Seasons, and care home companies like Southern Cross before it, has caused significant anxiety for thousands of older people.

David Rowland is director of the Centre for Health and the Public Interest.

An earlier version of this article incorrectly stated that Four Seasons had 220 care homes, housing 14,000 people. We are happy to make this correction.