With Labour’s election manifesto announcing a lifetime cap on care costs and the Conservatives expected to follow suit, there will be increasing amounts of public money going into care homes for older people. Labour’s manifesto also sets out that it will expect social care providers to be transparent, cap their profits, and pay their fair share of taxes. This pledge is welcome as without it, there will be problems ensuring that any extra public funding is well spent.
Currently, a substantial chunk of the money which currently goes into the privately-owned adult care home sector doesn't go anywhere near front line care, but instead leaks out to investors, private equity firms, and real estate companies that are often based in offshore tax havens. Pour additional funds into the sector, without reform, and there’s a high risk of more of the same.
In September, the Chancellor promised an additional £1.5bn of funding for social care. But in CHPI’s latest report, we estimate that of the £15 billion currently going into the independent care home sector, around 10% leaks out in the form of profit, directors’ fees, debt repayment, and rents, often dubiously calculated and paid to other parts of the same organisation. That’s right – the same amount of money promised by the Chancellor, is currently just leaking straight back out again.
Most of the care home companies examined spent around 80% of their income on directly caring for residents, through staff wages, facilities, food, laundry, and entertainment for residents. However, there were big differences in where the remaining 20% of income was spent.
Based on an analysis of £10.4 billion worth of income across over 800 companies we calculate that the leakage rate for small and medium-sized care home companies is around £7 of every £100 in income received, but for the 18 largest for-profit care home providers (running 24% of the industry’s beds) it is over double that at £15 for every £100 of income.
This big difference is due to the fact that many of the largest for-profit care home providers have intentionally structured their businesses to facilitate taking profits out in hidden ways and so maximise leakage. They have two main tactics – debt, and rent.
Playing with debt
Some of the owners of the larger providers bought the care home company using loans secured against the existing assets of the company (the care homes) and the highly reliable future income streams which they know can be used to pay back any debt. This has been the case during the history of the care home group currently known as Four Seasons.
This debt should be provided by lenders at a low rate of interest; providing services in a market where the number of “customers” (older people) is guaranteed to grow each year and where the state underwrites the whole market is as low risk as it gets.
However, in much the same way that the Glazer brothers bought Manchester United using loans secured against the club (rather than their own cash), and turned the most lucrative Premier League business into its most indebted club, many care home companies are now creaking under the weight of making debt repayments on high interest rate loans.
These are taken out either because the loan is from a related party (thus allowing profit to be extracted), or because the buyer puts in little of their own money to make the purchase and so must borrow more. These debt repayments eat into the resources which should be used to care for the residents of the care homes.
For the 5 largest private equity owned or backed care home providers a staggering £35,000 of debt is loaded onto each care home bed, which means that around 16% of the weekly care home fees received by these companies goes towards paying off their debts, these payments total £102 per bed per week
Across the largest 26 care home providers a total of £261 million of the money they receive to provide care goes towards repaying off their debts. However, out of this £117 million (45%) are payments to related companies (i.e. have the same owners); a known way of avoiding tax and hiding profits.
How legitimate are the rents?
Secondly, in addition to leakage through debt repayments, lots of the money which leaks out of the system is in the form of high rent payments to landlords.
It may come as a surprise to local authorities and the many families which have to fund their own care that a large proportion of the care home companies that they contract with don't actually own the buildings which they operate out of.
Instead many of the care home companies - both small and large – have separated out their businesses into operating companies which provide care, and property companies that own the care home buildings and charge rent to the operating companies.
When the property and operating companies are related to each other – i.e. they form part of the same company group - it is hard to tell how legitimate the rent charged is because it may be artificially high so that profit leaves the care home operating company and goes to the property company which is often based offshore and outside the UK’s tax jurisdiction.
In other cases the property company is sold on to unrelated (often offshore) property investors who will expect rent payments to increase by more than inflation each year. This in part explains why 7 of the 18 largest for-profit companies spend between 15 and 32 per cent of their annual income on rent, totalling £264m a year. This stands in marked contrast to the 8 largest not-for-profit providers, which spend an aggregate of 2% of their income on rent, totalling £25m a year.
It is the high debt burden and rental costs weighing down on the largest care home providers, rather than the limited amount of money going into the system, which is responsible for pushing some of the larger chains to the point of collapse.
Yet a lot of this financial distress is self-engineered. Some of the largest for-profit care home providers have structured their businesses to have high levels of leakage, which makes them appear less profitable than other, often smaller, care home providers. Providing them with more money only perpetuates this high leakage business model.
Management fees and private equity
Debts and rents aren’t the only way money leaks away from frontline care.
In 2016 the overall income of the 26 largest care home providers rose by 4%, but management fees (paid predominantly to private equity funds) had jumped by 9%, to £221m, taking up 5% of their total revenue, according to a market study by the Competition & Markets Authority.
There’s no doubt that more money needs to go into caring for older people to extend access to free care to those currently denied it, to improve care quality, and ensure that there is an adequately trained and properly paid care workforce.
But unless there is greater transparency about where the money goes - as happens in the US - and unless the state restricts the licensing of care home providers to those companies which can meet certain financial tests - including being tax registered in the UK - there is a very real risk that a large proportion of any new money will be wasted, leaking out of the system to offshore tax havens with little additional benefit to care home residents. That is why it is important that across society we acknowledge that any extra funding for social care without reform will also perpetuate those in the industry with opaque and poor value for money business models which are not serving the best interests of their residents.