Everyone’s agreed that there is a crisis in adult social care and the sector needs more money but no one has looked into where and with whom the money ends up.
A new CRESC public interest report titled Where does the money go? The financialised chains and the crisis in social care shows uses follow-the-money research to show how the biggest chains in the sector use financial engineering through complex corporate structures based in multiple tax jurisdictions as well as political lobbying to extract cash from the sector and dump risks and liabilities onto the state. If successful, the chains will privatise gains in this sector and socialise costs which are shifted onto residents, taxpayers and the workforce.
The report rests on technical financial and accounting analysis and so to make this public-interest issue more accessible we have produced a 12 page citizen’s summary of the whole report and a jargon busting glossary with clear definitions of relevant technical concepts.
The chains have told a story, or trade narrative, warning of imminent collapse in social care (after George Osborne announced increases in the minimum wage in July 2016). This was a highly partial account because it failed to acknowledge the role the large chains played in creating fragility through financial engineering and debt-leveraged buyouts. In reality the large care home chains including Four Seasons, Care UK, Barchester and HC-One are adept at taking money out (cash extraction) and prone to recurrent crisis because when chains are bought and sold they can be loaded with debt and in any difficulty find that cash flow cannot cover the financing cost.
The big chains have over the last 15 years followed short-term financialised business strategies and are now effectively asking for a bailout from the state in the form of more money for higher prices to cover the servicing of large debts. Adding more money won’t solve the crisis though because the financialised providers are so adept at taking money out of the system.
LaingBuisson have developed a Benchmark Cost of Care model which is widely reported in the media and has been used in Court cases to illustrate ‘the fair price of care’. This benchmark includes a 12% return on the cost of capital so that in the case of a nursing care bed charged at £776 per week some £277 is accounted for by cost of capital for land and building (36% of the total cost). If the return on capital was lower then more of the price could go to towards increasing wages or reducing overall cost.
This high return on capital is more characteristic of a high risk/high return industry like tech start-ups or turnaround of failing businesses and is unjustified when social care is fundamentally a low-risk/ low return sector more like the utilities and when the cost of borrowing is at a historical low. If the chains are fragile because of their own financial strategies then there is no justification for the state and individuals paying higher prices to produce higher returns for private providers of capital.
Four Seasons Health care is the poster boy of the current crisis in residential care. In September 2015 Moody’s downgraded its bonds to junk rating and warned that it was reported widely that it is struggling under the weight of £52 million in annual interest repayments on long term bonds Terra Firma private equity issued when it bought Four Seasons in 2012.
What isn’t known is that Four Seasons is part of a corporate structure of 185 companies with many registered in tax havens including Guernsey and the Cayman Islands. The structure is so complex and opaque that there is no way of knowing where the money ends up although it isn’t surprising that Four Seasons has paid no corporation tax since 2012. This undermines accountability over public money (which is a legal requirement) or over where family capital used to fund care goes.
What isn’t known is that Four Seasons owes other subsidiaries in the group £300 million charged at 15% which added £46.7 million to the total interest bill in 2014. There are also unexplained administration charges of £41 and £45 million in 2013 and 2014 respectively which amount to about £2000 per bed in the latter year and a one off special administrative charge of £99 million in 2014. We do not know the rationale for all of these charges but combined they make a cash generating business into one which made a loss of more than £170 million in 2014.
The overall rate of interest on external and internal debt is almost exactly 12%: in effect, LaingBuisson’s recommended 12% in the fair price has become the required 12% in the Four Season’s financing structure. Profit can appear only after the external and internal debt holders have cleared a 12% return on more than £800 million of debt. It is little wonder that Four Seasons is in crisis and it’s clear that the sole driver of this crisis isn’t Government underpayment.
The financialised chains are reformatting residential care because they account for most of the rebuilding, while many of the homes operated by mom and pops will be retired in the next decade or so. The mom and pops typically operate older, converted houses while the chains rebuild in a standard format with 60-70 beds as two storey, en-suite blockhouse hotels for older people.
An unintended consequence of the chain business model is a future in which care homes are increasingly alike. By default, society must then accommodate its older people in large, full service hotels of single rooms with en-suite, in a setting which is more institutional than domestic. We urgently need public debate about whether it is socially desirable to standardise care in this format and how much of this accommodation we can afford, given a rapidly ageing population and diminishing social care budgets.
We argue that the state needs to take the lead in the social mobilisation of low cost finance so that it is not only the large chains which are able to build new residential care homes. The state can finance building care homes at closer to 5% return which would allow us to provide welfare with 5%. If we drop the 12% requirement and substitute 8% and 5% returns in the Laing Buisson model, then the 2015 fair price for a bed for a week drops by £57 and £99 pounds respectively and the saving could be used to increase staff wages and/or reduce the price paid by local authorities.
Most importantly the state should sponsor social innovation in what is built. Social innovation in housing with care is about whether, how (and at what cost) it is possible to break with the dominance of the care home model of institutionalised group living which few of us find attractive in prospect. There are several different models of more domestic provision which have been tried in countries including the Netherlands and the US, as well as in the UK, in smaller scale buildings often with multi skilled staff.
About the author: Joe Earle, Research Fellow, Queen Mary and Westfield, London.