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Care homes: is COVID-19 masking their financial health?

Daniel Smith Daniel Smith

Government support measures may be putting balance sheets for care homes in the black, but is this masking ongoing challenges for the industry? Daniel Smith and James Hichens look at the state of the sector.

Before the onset of COVID-19, the elderly care homes sector was already in poor health, following years of cuts to council budgets, the increasing needs of older people - often with multiple care needs - and constant cost pressures; predominantly staffing and increases to the national minimum wage.

The Association of Directors of Adult Social Services’ (ADASS) autumn 2020 survey reported that a quarter of directors were concerned about the financial sustainability of most of their residential and nursing providers following the outbreak.

In addition, 17% were concerned about the financial sustainability of most of their homecare and community care providers. Before the onset of coronavirus, this figure was 3%.

During 2020, the government provided two tranches of extra funding to local authorities totalling £3.2 billion to support them in meeting pressures across the range of public services. It also allocated local authorities a total of £1.1 billion of ring-fenced funding via the adult social care Infection Control Fund.

Local authorities have taken three broad approaches to distributing the £3.2 billion they have been allocated:

1 Unconditional payments

Increased fee rates, NHS-funded nursing care uplifts, one-off or regular payments, commitments to cover excess costs and paying providers on an agreed level of usage

2 COVID-19 resilience payment

In return for a service or to be clawed-back at a later date. For example, payments in advance, block contracts and emergency funding

3 Non-financial benefits

The use of council staff and the provision of PPE.

The Infection Control Fund

The Infection Control Fund was initially £600 million (£1,000 per registered bed), but due to its deemed success, it has been extended until March 2021 with an additional £546 million of funding.

The funding is to support reducing the rate of transmission within and between care settings, in particular by helping to reduce the need for staff movement between sites by covering additional staffing costs and accommodation or transport costs.

There was some initial confusion, as it was specifically not to be used for the purchase of PPE. In addition, the second £546 million tranche has revised conditions from the original allocation.

This has resulted in the potential for it to be unintentionally used for the wrong reason and there's a risk it could be reclaimed by local authorities.

Other financial support has come in the form of block booking of beds by some Local Authorities often at attractive weekly tariffs.

How have care homes performed in 2020?

Occupancy declined by 8.5% in Q2 and Q3 of 2020

Office of National Statistics (ONS) data suggests mortality rates for those over the age of 80 were up to 20% in March 2020 and higher still for those with multiple health conditions. Meanwhile, pressures on the NHS to discharge vulnerable and elderly people also posed an additional challenge for care homes.

In Q2 and Q3 occupancy levels were down by 8.5%. While operators reported a normalisation of mortality rates in Q4, the further spike in COVID-19 cases in the first two months of 2021 will have decreased market occupancy further.

Of the few placements that have occurred, we've noted that a growing proportion of these have been on a respite or temporary basis rather than a permanent placement.

Fees increased by 6% in 2019/20 but cost pressures remained

Despite a 6% increase in average fees in 2019/2020, when adjusted for inflation, fees have only increased by 8% since 2008.

Fees in the South of England continue to be higher than in the North, reflecting the respective costs of living. However, the increase in the national minimum wage in April 2020 will, as a proportion of income, have had a greater adverse impact on northern-based operators.

Staff cost to income ratio increased from 58% in 2019, to over 61% by Q2 of 2020

Staff costs remain the largest overhead for care homes and the one that is the most challenging to control.

The lack of nurses and the difficulty in minimising the use of expensive agency staff continued to impact operators. The £1.1 billion Infection Control Fund has and will continue to help, but many operators have needed to remunerate and support existing staff through the coronavirus situation, while also recruiting new and additional staff.

The current impact of Brexit on the recruitment and retention of staff is exacerbating the challenges that most operators are experiencing around controlling staffing costs.

Other costs, insurance in particular, have markedly increased as insurance underwriters brace themselves for a run of coronavirus-related compensation claims. Anecdotally, we've seen insurance costs rising from around £10,000 per care home to over £30,000 coupled with a restriction in the level of cover provided.

Knight Frank reported that, in 2019, operators spent an average of £160 per bed, per annum on PPE. This compared with £260 during the second quarter of 2020 alone.

While care home residents and key workers have been the first in line for vaccination, an increased use of PPE is likely to continue throughout 2021 and beyond. This will represent a significant extra cost to operators.

Profitability appears to have been maintained, supported by the range of financial support

Care home profitability has been on a downward trajectory for the last decade. Coronavirus hasn't only worsened the position of those operators who were already struggling to balance the books, but introduced extra challenges to those who thought they had a healthy operating model.

The various support packages have provided a much-needed buffer, although it isn't clear whether or not the fee increases and various incentives are adequate to cover these in full. In addition, the costs and extent to which these are temporary or permanent means further budgetary pressure on an already parlous sector.

What does this mean for care homes in 2021?

A number of care homes have reported short-term profits in the Q2-Q4 2020, which far exceed their long-term sustainable income. This is because various support packages are masking their true underlying performance and viability. The question is how will they fare when the support ends, but the additional costs remain?

For now, care home finances may appear healthy, but the coronavirus situation will have likely weakened those already struggling. Never before has the gap been bigger and the hiatus and blurring of care home finances represents a real challenge for operators and their funders when trying to interpret their MI and accounts.

The high number of coronavirus-related deaths in care homes has consistently been reported by the media. But this may be unfair as elderly and vulnerable people have been pushed from hospitals into care homes and there was a lack of guidance from the government as to the risks and necessary precautions to prevent the spread of the disease.

A troubled future for care homes

This may have permanently damaged the reputation of the sector and any bounce-back from a change in the general public’s perceptions will take time.

Traditionally, homes that have a higher proportion of private - rather than local authority - funded residents are more profitable, due to the high fees that private patients pay. However, occupancy levels have dropped across the board and there is evidence to suggest the families of private residents have chosen to keep their loved ones in their own homes.

This presents a potential upside for domiciliary care providers, but not for the traditional care home operators.

The finances of local authorities have been adversely impacted too. It's widely reported that the lost tax and other income, and the extra costs and cash flow pressures arising from the response to coronavirus, have only enhanced this financial pressure.

If local authorities are facing pressures themselves, then it's unlikely they'll be able provide an increased level of support to care home operators. And the problems that existed in an already fragile care sector before COVID-19 haven't gone away.

For support in the care homes sector, get in touch with Daniel Smith.

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