DD's Care Business Under Pressure Care homes are fighting for their own survival
The Covid-19 pandemic has hit a front-line health sector that was already struggling
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Alex Ralph Friday June 12 2020, 5.00pm BST, The Times
Twenty-four residents of Melbury Court died during one of the worst coronavirus outbreaks in the country. The virus inflected 62 of the 82 residents of the modern, 87-bed care home in Durham — and they were among more than 5,500 across the estate operated by HC-One, Britain’s biggest care homes company, confirmed to have had or suspected to have had Covid-19. Of these, 981 had died.
The numbers lay out in stark terms the public health crisis that has confronted care home operators in recent months — but those operators, from the big privately owned chains, including HC-One, Four Seasons,
Barchester and Care UK, to smaller, family-run companies, are facing twin healthcare and financial emergencies.
Sir David Behan, the chairman of HC-One and a former chief executive of the
Care Quality Commission, the £16.5 billion industry’s regulator, said recently that the sector was “teetering under the pressure”. Care home closures, at a time when Britain already ranks lower than other advanced European economies for bed capacity, are widely feared.
Industry leaders, officials and policymakers have been warning for years that the sector is “on the brink” and that it has been propped-up by private-paying residents in effect subsidising state-funded ones. The squeeze has been blamed on a reduction in government funding, insufficient publicly funded care fees, staff shortages and the rise in the minimum wage.
Those problems have been intensfied by the pandemic, which “has thrown the industry into chaos because of additional costs”, according to William Laing, the founder and chairman of Laing Buisson, a healthcare market intelligence company and consultant to the big operators. Those extra costs include personal protective equipment, agency workers covering staff shortages and deep cleaning. And they come on top of a sharp drop in revenue because of resident deaths and a reluctance by families to have their loved ones in care homes.
“It’s a big question mark,” Mr Laing, 75, said. “How are [care homes] going to survive over the next six months when there has been a big hit on occupancy and it will take time to recover?” He expects a “shakeout” in capacity because demand will be depressed for some time. “If anything, there will be ‘deconsolidation’ if large groups struggle.”
In April, HC-One, in a letter from David Smith, its finance chief, asked its local authority contracting partners for help. HC-One has sought an income protection scheme equivalent to 90 per cent occupancy, its rate before the outbreak, along with various other taxpayer supports. By the end of April, the government had allocated £6.6 billion to support the health and social care response to Covid-19 and £3.2 billion to local government to respond to pressures across local services, a report from the National Audit Office has revealed.
Nevertheless, the industry fears a second high-profile company collapse to follow the slow-motion failure of Four Seasons, Britain’s second biggest operator. That business was owned by Terra Firma, the private equity firm run by
Guy Hands, the renowned British financier, but it appointed Alvarez & Marsal as its administrator in April last year after struggling under the weight of its debts. Four Seasons’ care homes remain open because the operating companies have not been placed in administration.
Leading players in the sector are not the only concern. Last month Knight Frank, the property consultancy, forecast that 6,500 care homes could be at risk over the next five years, resulting in a “national bed crisis” without significant investment. Andrew Parfery, chief executive and co-founder of Care Sourcer, the care comparison site, has warned that 25 per cent of care homes could go out of business in 2020 without a government bailout.
“The care industry in the UK was badly broken before the coronavirus pandemic,” Mr Parfery, 40, said. “Now it finds itself shattered.”
The request for government support has increased the scrutiny of the ownership and structure of Britain’s biggest operators and reignited the debate over the “financialisation” of care. About 84 per cent of beds are provided by the private sector, according to the Institute for Public Policy Research, the think tank, and Future Care Capital, the charity, which found that almost a fifth of the sector was taken up by the five biggest providers, three of which are private equity- funded.
“Such firms often rely on high levels of borrowing, complicated corporate structures and cost-cutting measures such as tax avoidance and low staff pay. As a result, this model can leave them unstable,” their report published last in September said.
It concluded that a “growing reliance on private provision could mean lower-quality care” and found evidence that private providers had less training for staff, higher turnover and lower pay. The think tank has called for policy interventions to “arrest the growth of debt-fuelled private providers in social care”, including the creation of “Ofcare”, a new regulator to oversee the financial regulation of systemically important care providers in Britain.
Nick Hood, a senior adviser at the Opus Restructuring consultancy, said that HC-One operated an opaque corporate structure, with an ultimate parent and 17 subsidiaries in the Cayman Islands and subsidiaries in other offshore locations. It is owned by a consortium of investors: Formation Capital, an American investment company; Safanad, a US private equity firm; and Court Cavendish, a management company run by the tycoon Chai Patel.
“It’s impossible to see, never mind independently verify, the whole financial picture,” Mr Hood said.
“However, under all this corporate jiggery pokery is a systemically vital group of care homes, over ten thousand elderly and vulnerable residents and all the amazing, dedicated staff. So nobody wants HC-One to fail.”
He has estimated that occupancy rates have dropped by about 10 per cent on average across the four big operators, which is costing them £707,000 a day, based on 2018 revenue of more than £600 million each. It is straining their capacity to service £239 million in annual interest costs on a combined £2.2 billion of debt, which Mr Hood estimated was equivalent to borrowings of £38,000 per resident, costing £4,120 a year in interest for each resident.
A study by the Centre for Health and the Public Interest in November of the accounts of more than 830 adult care home companies, including the 26 largest, found “significant levels of leakage” across the sector. For 784 small and medium-sized care home companies, £7 of every £100 received goes to profit before tax, rent payments, directors’ remuneration and net interest paid out, it said. For the 18 largest for-profit providers, the level of leakage is more than double that, at £15 of every £100 received.
Kenneth Mackenzie, chief executive of Target Healthcare REIT, a care homes investor, said that his company was “not a supporter of short-term capital, which is looking to make a great return” and had a “long-term, lowerreturn capital” approach. “We’ve been paying a 6 per cent dividend. We are not a model that is trying to get a [private equity] 20 per cent return on our capital and we think that is appropriate for the sector.”
A spokesman for HC-One said that its “financial structure and company results are well known and are regularly reported on in detail by the national media. We are a committed UK taxpayer and all our income is subject to UK taxes. We also own the majority of the homes we operate, meaning our debt is modest in comparison to our assets.” He added that the company was engaged positively with local authorities, “who recognise the value our homes play in their communities”, while its lenders “have been supportive and recognise the underlying strength of HC-One”.