“Too big to fail”? Care home closures and the price of market failure

By the Centre for Health and the Public Interest, 15th July 2013

The real human costs of market failure and care home closure for the residents and their families

As the Competition Commission points out in the guidance which it is uses when conducting a market investigation, truly effective markets are characterised by ‘uncertainty, turbulence and change’.

And nowhere has market turbulence been more keenly felt than in the care home sector for older people, which has been subject to the vicissitudes of the market for the past 20 years.  Most recently, the care home chain Southern Cross went into administration as a result of an unsustainable debt financing model.  As the care homes owned by Southern Cross were looking after 31, 000 people, the government was faced with the prospect that nearly 9% of all the available care beds in England would disappear in one fell swoop.

This phenomenon of a care home operator being “too big to fail” is relatively new in social care markets. Throughout the 1990s and 2000s the majority of care home companies were smaller operators, but as the sector consolidated – partly as a result of cheaper credit in the mid 2000s –20 companies came to have about 30% of the market, with 10% of all care beds being owned by just 2 companies (Laing & Buisson, Care of Elderly People UK Market Survey 2011/12).  Many of the 20 are backed by private equity firms and are “highly leveraged”, with complex capital structures.

The experience of care home closure is not, however, a recent phenomenon.  Between 1996 and 2003 around 74,000 care home places were “lost”, and between 2000 and 2003  around 800 care homes closed every year (Laing and Buisson ‘Care of Elderly people market survey 2003’ London 2003).  In one year alone, from 2000 to 2001,  1,113 or 5% of all care homes closed in England.  This troubling rate of closure slowed down following the introduction of national minimum standards and statutory national registration of care homes in 2004 but even so between 2004 and 2010 1,391 care homes closed, with 123 care homes closing between 2009 and 2010 .

Despite this obvious level of “turbulence” no systematic study of the impact of care home closures on care home residents has been commissioned by either this government or the last, despite the potential impact on a large number of the nearly half a million older people and physically disabled people who currently live in these homes.  What is known is that when care homes close down they do so very rapidly – often within 4 weeks of the decision to close.  And, as could be imagined, two studies show that this rapid closure has a significantly negative impact on care home residents – many of those who are transferred to new care homes die, whilst others suffer from increased “restlessness”.

And when private care homes are fending off financial collapse the quality of the care that they provide to residents diminishes – the facilities deteriorate, staffing levels are reduced and additional ‘services’ for residents such as outings or entertainment are cut back. In the case of Southern Cross, the Commission for Social Care Inspection found that there was a pattern of compliance with minimum standards at the point of inspection, which was not sustained, followed ‘by a rapid cycle of safeguarding concerns, [i.e. concerns about the safety of residents] and complaints’ after the inspections were over.

Moreover, when private care homes close down local authorities have to bear the cost and step in to ensure that temporary care is provided to meet the residents’ urgent care and support needs including somewhere to live.  So as happens in any private market which provides essential services to the public private sector, failure is met with state intervention, with local authorities bearing the costs as the providers of last resort.

Nonetheless, the potential for another “Southern Cross” to occur has prompted the government to act.  The highly indebted nature of many of the larger care providers is starting to worry the government, particularly as the debts held by some of these companies will need to be refinanced in the next few years – which the government acknowledges will be challenging.  Clauses  47-54 of the current Care Bill 2013 before Parliament therefore proposes a new regulatory “oversight” regime to deal with the possibility of large scale provider failure.  The Bill has 3 central components:

–          It will require a small number of large care providers to provide financial data to  the Care Quality Commission (Clause 52) ;

–          Where threats to the financial viability of the care provider are spotted, the regulator will be required to ensure that the provider has a plan  in place to mitigate such threats (Clause 52);

–           A formal duty will be placed on local authorities to meet the care and support needs  of residents of a care home company which has failed, irrespective of whether these are funded by the state or are private paying resident (Clause 47).

However, none of this addresses the two clear structural flaws in the market, which overshadow everything else. One is the increased squeeze on the profitability of care homes that is occurring as a result of cuts to social care, which was already a crucial factor in the collapse of Southern Cross. The other is the highly leveraged nature of the 20 or so providers which are delivering almost 30% of all home care. It will, in effect, continue to allow major providers to fail, while merely ensuring that the state and local authorities are forewarned about likely collapses, and that local authorities are there to pick up the pieces.

Moreover, the Department of Health’s impact assessment prepared for the Care Bill assumes that the CQC or Monitor will be able to do the job of fending off another large-scale provider collapse – and possibly several – with just 15 additional staff.  Leaving aside the ineffectiveness of the CQC in addressing the failures at Mid-Staffs and Morecambe Bay Hospital Maternity Unit, this means that they will be expected to regulate a highly complex market worth £12.4 billion with additional resources of just £1 million.

This indicates that the government believes that the possibility or even likelihood of market failure on this scale is a necessary price to be paid for competition in care services, and therefore should be allowed  – even though there is ample evidence that competition in the care home market has driven the quality of care down to the bare minimum.  Yet what is truly shocking about this strategy is that it doesn’t acknowledge the real human costs of market failure and care home closure for the residents and their families.  Instead, the government’s  impact assessment puts a (notional) price tag on the benefit to each resident of enduring an “orderly” rather than a “disorderly” closure of – precisely – £6,510 per person ( Department of Health Impact assessment para 104).
http://chpi.org.uk/too-big-to-fail-care-home-closures-and-the-price-of-market-failure/