Nicolaus White, from our Healthcare Valuations & Advisory team shares his outlook on the challenges and opportunities affecting healthcare operators.
For over 14 years we presented research papers on care home financial key performance indicators, which considered changes in occupancy, fees, payroll, and non-payroll costs. Recurring themes included: increased barriers to accessing care, private payers subsidising the public purse and a shortage of staff. So, what has changed?
Funding of social care has been widely reported in the press, with the BMA estimating that an additional £7.9bn a year is needed in social care funding by 2024/25, just to keep up with cost pressures and demand. The political panacea was a 1.25% Health and Social Care Levy from April 2023, however this was reversed in the Autumn 2022 Statement. In the meantime, an additional £2.8bn next year and £4.7bn the year after has been pledged to support adult social care. A £500million patient discharge fund has also been set up to help relocate the estimated 13,000 hospital patients, to more appropriate settings. It is difficult to see how this additional monies will fully bridge the funding gap. With successive governments historically tending to reduce the demand on the social care budget, by increasing the barriers to access publicly funded care.
Occupancy, was not surprisingly affected by the COVID pandemic, falling from an average of 85% to 77%. Since then, helped by the return of discretionary private payers, occupancy has improved and continues to do so. However, due to a shortage of staff, several operators we speak to report a pause in taking admissions.
Last year publicly funded fees generally increased, potentially driven by the increase in the National Minimum Wage (NMW). Historically, increases in publicly funded fees have tended to lag behind both inflation and the annual increase in the NMW. At the same time operators have tended to be able to increase self-funding fees each year, often by around five per cent, which has enabled them to maintain margins. Looking forward the question is whether fees will increase in 2023 to help maintain margins against increasing costs including the 9.68% increase in the National Minimum Wage from April 2023.
Staffing is a challenge for all businesses and the care sector is no different. With higher pay in competing, less emotionally demanding sectors, such as retail, the challenges of recruiting good staff persist. Added to this, operators are adjusting to the effects of Brexit, worsening exchange rates, the return of the leisure sector and COVID fatigue. Some encouraging news is that staffing levels in 2022 appear to have recovered after a drop in 2021. However, according to the Nuffield Trust, much of the recovery was driven by a sharp increase in the use of agency staff.
Faced by increased staff costs, some operators have maintained margins by not paying breaks, reducing additional pay on bank holidays and relaxing pay demarcation between roles. Operators are also taking advantage of the relaxation of regulations on sponsoring staff from overseas, who play an invaluable role in delivering care in the UK. A policy also being actively pursued by the NHS, which will undoubtedly increase competition to recruit the best people.
In the current climate operators have highlighted a greater emphasis on staff retention. Which has encouraged many operators to introduce more robust learning and development programmes, as well as providing clearer pathways for career progression - policies which can also help deliver better quality care.
In the short term, it is difficult to see how all care homes will be able to mitigate the financial effect of staffing
pressures. In the longer term, respect for the role social care staff play and equality with their healthcare colleagues would help.
The inflationary pressures on non-payroll costs, especially utilities, is not fully known and is subject to government intervention. For many years non-payroll costs as a percentage of fee income were stable. But with Care England suggesting energy costs will increase by 683%, there are clear pressures on care home margins and the viability of some businesses. Discussions with some operators have raised the possibility of a temporary resident surcharge to offset some of the increase in utility costs.
How has healthcare operations changed?
In many ways not much. The consensus is that self-funding residents subsidise the public purse, recruitment and staff retention are challenging, and maintaining margins unless you can rely on increasing self-funders fees, specialised care or make additional efficiencies is difficult. With the addition of the inflationary head winds, the challenges remain.
The sector has always dealt with these challenges head on. But those smaller care homes focused on local authority residents are likely to be placed under most stress going forward.
Looking forward:After years of dealing with COVID and ongoing staffing challenges the social care sector in England was expected to adjust to the planned social care reforms, which have now been delayed for two years, but as a reminder include:
• A cost of care cap of £86,000: once the cap is reached, care will be funded by local authorities.
• Means testing to be more generous: increasing entitlement to publicly funded care.
• Fair cost of care: local authorities are to move towards paying a fair cost of care.
• Care brokerage: implementing section 18 (3) of the Care Act, the aim is for self-funders to only pay the fair cost of care which may be lower than the current self-pay fees.
Commenters have indicated that the above could have two main effects. Firstly, an increase in publicly funded residents, thereby increasing pressure on social care budgets. This is expected to have the greatest effect in less affluent areas, where personal assets are lower.
Secondly, the fair cost of care and the care brokerage, are most likely to affect those areas where private payers are in the majority. With an estimated shortfall of 4,300 social work staff to implement the policies and 77 per cent of local authorities saying that they are not able to pay for any financial shortfall caused by the proposals, the funding and operational strains on the proposals are already starting to show.
But despite the current challenges and future uncertainty, interest and opportunities in elderly and specialist care remain strong, especially when compared to other sectors. With many established, more agile, locally focused operators looking to acquire care homes from several recent corporate sales, including Four Seasons. This is driven by a growing elderly population and because health and social care is often seen as a non-discretionary spend, leading to well manged care homes, still offering a strong return.
Going forward, caring for our elderly is likely to take several forms, including the expanding retirement housing market. The future challenges facing the sector are significant, but the need to provide care to our elderly population is increasing and opportunities remain. It is likely that those care providers that are fleetest of foot, focus on care delivery and are commercially aware during the economic and legislative head winds will emerge stronger.