In a previous blog we discussed the ever increasing number of care home insolvencies and the growing opportunity this presented to Insolvency Practitioners. In this week’s blog we would like to shift the focus slightly and look at the problems smaller care homes face and what defensive strategies smaller care home operators can adopt to buck the current trend. For the purposes of this post, where we use the phrase “smaller care home” we are describing a traditional independent care home operator housing elderly or ill residents with a capacity of 1-40 beds.
It should not come as any great surprise that the single most important but difficult facet in running a successful care home is filling the beds available. Care home operators face stiff competition from larger, more established operators with purpose built facilities. As we touched on in our previous blog they face an ever changing market, where the current trend seems to be moving towards domiciliary care. However, it is not all bad news. Occupancy rates increased nationwide in 2013/14 from 87.2% to 87.6% and depending upon geographic location this increase was far greater. There are stark differences between similar homes in different parts of the country, with a pronounced north/south divide emerging.
Cost of care
Staff costs are the single biggest expenditure a care home will have. Average staff costs amounted to £19,531 per resident in 2013/14 which as a percentage of income is 56.9%. Although staff costs amount to a very substantial proportion of income they can also be a care home’s greatest asset in increasing occupancy which, as was mentioned earlier, is very difficult to do.
Care home property costs have increased sharply over the past few years, moving significantly ahead of inflation. On a per bed basis, overall property costs increased by a substantial 24% during 2013/14 to stand at £2,179 per bed which means that property costs equate to 7.2% of total income. The reason for the substantial increase is increased insurance costs and the costs associated with repair and maintenance of converted care homes.
Regional factors have a considerable impact on occupancy and fees. But, geographic location is something that cannot be changed as care homes are built from bricks and cement and, unfortunately, cannot be relocated to London with its larger percentage of private residents. However, care homes must embrace their geographic location. Assess the local market and regional trends and use it to their advantage.
Funding and policy and the private vs. public debate
With a Conservative Government in power we will see austerity driven cuts of 50% which will reduce the amount Local Authorities (LA) have to subsidise care, putting ever-increasing pressure on LA fees. Further funding reforms are due to come into force in 2016, which will cap the lifetime cost of care for service users.
The reform also brings to the fore the issue of private vs. public residents. Many care homes will have a mix of private and publicly funded residents. As publicly funded residents will now be paying less for their care, private residents are likely to have to pick up the slack with increased fees. This may lead to disgruntled private residents challenging their costs and seeking to bring them in line with local authority rates. This will place care homes under increasing fee pressure and further challenge their profit margins.
It may seem an unusual approach but investment may lead to the road to recovery. Improving the care home by increasing its size and improving facilities and aesthetics may lead to more privately funded residents. It has been found that many poorly performing operators reduce maintenance capex expenditure which can lead to medium and long term occupancy issues. This option may not be available to all operators, especially if a care home is already heavily leveraged. However, it may be worth exploring alternative investment models if practicable.
Operators are often hindered by having management teams that are not sector specialists or sophisticated enough to manage costs effectively and drive new occupancy. Again, this may seem like additional cost, but, if the appointee has the skills to effectively drive a change in fortunes it may be worth the investment even on a short term basis.
Regional factors have a considerable impact on occupancy and fees. In areas such as London and the south east there are a large number of quality care homes as well as a high proportion of residents with the ability to fund their own care. However, areas such as the north east are more challenging.
Operators that are struggling could look to diversify. We have spoken predominantly over the course of two blogs about elder care but this is only one type of care. There are specialist care homes for teenagers with mental or learning disabilities, care homes for dementia sufferers, end of life care and nursing care. All of the types of care require different skills, facilities and staff. However, by analysing the market a gap or niche may be found which can reverse a care home’s fortunes.
 Source: Knight Frank research paper, “Care Homes Trading Performance Review”