While fees paid last year saw a small uplift (though still failing to match inflation) which provided some respite to operators, this year’s findings signal a continuation into a fifth year of a dangerous trend which has seen these fee rates fall significantly in real terms in each successive year since 2010/11.
CCMn’s Annual Survey of UK Local Authority Usual Costs 2014/15 (formerly known as the survey of baseline fee rates) found that UK councils are giving an average fee uplift of just 1.7% - well below the 2.4% needed to keep pace with care home cost inflation.
Of the 143 councils that provided new figures for 2014/15, 73 councils have given below ‘standstill’ uplifts. Of this total, 21 have frozen fees to those paid in 2013/14. One council had made a reduction: Slough.
Thirty-one councils gave fee revisions within the ‘standstill’ band (2–2.9%) while just 17 increased baseline fees at a margin-enhancing rate of 3% or above. Of the remaining 65 councils across the UK, 23 said that they were yet to set new fees despite it being three months into the new financial year- the remaining councils did not respond.
The results of this year’s survey suggest that care home operators across the UK can expect average margins for council-funded residents to drop by a further 0.7%. This translates into a cumulative 5.7% drop for council-funded residents over the past five years (a 0.2% dip last year, following the 0.9% reduction in margins during financial year 2012/13, the 2.5% reduction for the previous year and the 1.4% reduction in the year before that). This means, in real terms, that a typical care home provider serving a council-paid clientele, which would have been generating an average EBITDAR margin of around 25% five years ago, can expect - other things being equal - to see EBITDAR margins drop to below 20% this year.
In a bid to find good news, the survey results show that in the West Midlands a number of authorities have increased fee rates by 5% or more with Solihull standing out as giving comparatively enormous uplifts.
Nevertheless, the overall picture remains bleak.
Adding to the financial concerns being experienced by operator, there has been a tightening of regulations in recent months. Many larger operators reported a rise in embargoes and a further hit to profitability from the summer of 2013, carrying forward into the first half of 2014. As this survey went to press the Care Quality Commission (CQC)?released very early details of new ‘special measures’ for care homes deemed to be failing following inspections. It has been suggested that both care homes and homecare agencies could be subjected to similar failure regimes as those seen at hospitals.
Looking at the opposite end of the standards spectrum, the number of councils that use quality criteria to pay higher fees to well performing care homes and lower fees to poorly performing ones continued to fall.
About 12% of council respondents specifically stated that they make additional quality-related payments or, looked at another way, withdraw payments to homes which do not measure up. The 32 Scottish councils made up the majority of these with their fairly minimal £1.50 to £3.00 per week quality premia under their national COSLA agreement. This compares with three quarters of local authorities that claimed to offer quality premia in 2010.
The major reason for this change continues to be the fact that many of the historic quality payments were based on CQC’s now abandoned ‘star ratings’. Only one council (Redcar & Cleveland) stated they still base fee premiums on star ratings, though the ratings are now more than four years old - and are only just in the process of being replaced with a system which may lend itself to a similar interpretation. A minority of councils have established in-house monitoring frameworks and benchmarking schemes to look at a combination of care quality, environment and staff training/accreditation. This comes in the face of LaingBuisson analysis which shows that from April 2013 to April 2014 there has been an overall rise in the number of care home facilities which met full compliance to CQC Essential Standards from 75% to 79% (as recorded on LaingBuisson’s Care Compliance Monitor tool.
As central government continues to keep a tight grip on grants to local authorities, the prospects for the next financial year (2015/16) are probably, at best, ‘standstill’ in real terms.
Care home operators with high exposure to council funding will have to mitigate the margin squeeze through efficiency savings including staffing. While larger groups including Four Seasons Health Care and Bupa Care Services have succeeded to some extent in doing this so far, the scope for continued savings in the future is limited.
Operators can also seek to bolster margins by repositioning to a privately paying clientele, though again the options are, in practice, limited for most care homes with a wide range of factors at play including location, local economy, age of facility etc.
In a repeat of last year’s results there was at least no major ‘double whammy’ from cuts in placement volumes last year. And this latest survey suggest that the volume of local authority care home placements will continue to be fairly stable over 2014/15, despite the building pressures on local authority budgets.
A quarter of responding councils indicated that they expect no change in the number of older people supported by the end of the year. Around 44% of the councils responding to the survey said that numbers would be lower by the end of the financial year than at the start, while the remaining 31% projected an increase in care home placements during 2014/15.
So when will there be a let up in the remorseless pressure on margins? LaingBuisson’s view is that the sector will experience a market correction mechanism: the absence of new investment in areas of high public pay combined with a 1-2% per annum increase in underlying demand driven by the ageing population, plus exits of smaller uneconomic care homes, will eventually lead to a shift in market power in favour of care home providers.
When will that be? Possibly before the end of the decade. Until then, however, it will be a matter of survival for homes with high exposure to council funding, and the best placed operators to survive are those that have been prudent in the level of gearing they have taken on.