Restructuring and care homes

Out-Law Analysis | 15 Mar 2018 | 4:00 pm | 11 min. read

ANALYSIS: The UK's largest care home operator Four Seasons is in talks with creditors to stave off the largest care home collapse since Southern Cross. Other care home operators will face insolvency in 2018, so restructuring professionals need to understand the issues affecting the sector.

The Care Quality Commission (CQC) has warned that “adult social care is approaching tipping point”, and the adult social care sector is under severe pressure owing to an increasing aging UK population. The number of elderly people with high care needs in the UK is expected to rise significantly over the next two decades and there will be a growing demand for fit-for-purpose care homes.

Age UK says there are 11 million people over the age of 65 living in the UK. Of these, some 773,502 are estimated to be suffering from dementia and will eventually need secure, reliable care. Whether this care will be provided by local authorities or private care homes is the subject of intense political debate.

Move towards privately owned care homes

Local authorities across the UK have closed many care homes in the past decade, arguing that it is much cheaper to pay a private care home than to provide that care themselves. But the long term viability of a private care home is not guaranteed, as the failure of Southern Cross and European Care has shown.

Demand for privately owned care homes will grow as councils close more of their own homes. Whilst pure private pay elderly care has held up well, it is highly dependent on geography and asset quality, whilst low local authority fees have resulted in some particularly challenging trading conditions for the private care home sector.

Care home residents are increasingly seeking a higher quality care home. This has led to older stock falling in value as care home operators seek to acquire new-build stock. This is part of a general trend towards larger care homes being owned by corporate entities rather than by individuals or families. Care homes are getting larger as private operators seek to get more beds into their homes. The larger the home, the more the operator benefits from economies of scale.

Local authority funding

The Care Act 2014 is the most significant piece of healthcare legislation since the establishment of the welfare state. It defines the primary responsibility of local authorities in the promotion of individual wellbeing.

The Act establishes a national minimum threshold at which people will be eligible for support. Once an assessment has been made, there is a duty on local authorities to produce care and support plans. The Act sets the levels of capital that a person can have whilst qualifying for financial support from their local authority. For the financial year 2017/18 the upper capital limit is £23,250 and the lower capital limit is £14,250.

A person with assets above the upper capital limit is responsible for the full cost of their care in a care home. A person with assets between the capital limits will pay what they can afford from their income, plus a means-tested contribution from their assets, calculated as £1 per week for every £250 of capital between the capital limits. A person with assets below the lower capital limit will only pay what they can afford from their income. From April 2020 the upper limit will raise to £118,000 and the lower limit will rise to £17,000.

It is also proposed that a total contribution cap of £72,000 will be introduced. This would mean that no one will have to pay any more for their eligible care needs once they have spent £72,000, although this does not include someone’s 'hotel costs', meaning bed and board, if they are living in a care home. These 'hotel costs' will still be charged but will be capped at £12,000 per year. The cap was due to come into effect from April 2016, but the government has delayed implementation pending a consultation on social care funding. As it currently stands 44% of care home residents are fully self-funded and the outcome of the consultation is going to have a material impact on care home providers.

The north-south divide

Care home costs vary widely in the UK depending on where the care home resident lives. Unsurprisingly, the highest local authority fee rates are in the south east of England and the lowest in the north of England and in Northern Ireland.

Research by Knight Frank for the 2015-16 financial year indicated that the average weekly fee for a private nursing home in the south east was £897, whereas in the north east the average fee was £566. That is a difference of £331 per week between the north and south. Across the whole of the UK, the average weekly care home fee is approximately £726, yet on average local authorities will only pay care homes £486 per week per resident in 2016-17. Although the government has recently given councils the freedom to raise additional funds for social care by increasing council tax, there is still a very significant gap between the fees they would charge private paying residents and the fees they are paid by local authorities. Owing to continued government cuts it is unlikely that this financial pressure will ease in the short or medium term.

CQC’s increased powers

Ever since the CQC’s “A New Start” consultation undertaken by Sir Robert Francis QC in the wake of the failings at the Mid Staffordshire NHS Foundation Trust in 2013, care homes have had to deal with a tougher regulatory regime.

The Francis report set out a number of recommendations and, as a result, the CQC introduced a new framework which contained a more robust approach to registration, the introduction of chief inspectors, expert inspection teams, and new quality ratings. To enforce this approach, new regulations were introduced in the form of the Health and Social Care Act 2008 (Regulated Activities) Regulations 2014, which came into force on 1 April 2015 and introduced new fundamental standards of care.

Fit and proper person test

All providers of services registered with the CQC must ensure that all directors, including interims and non-executive directors, meet the definitions of 'fit and proper person' and 'good character'.

The fit and proper person test is one of the key tests under the Regulations: directors must be fit and proper to assume responsibility for the overall quality and safety of care delivered and must not present an unacceptable risk to the organisation or the person receiving the service. A director will deemed to be unfit on mandatory grounds if, for example, he is bankrupt, disqualified as a director or has been responsible for or contributed to serious misconduct or mismanagement in the course of carrying out a regulated activity.

CQC guidance defines serious misconduct and mismanagement as “behaviour that would constitute a breach of any legislation or enactment which [the CQC] deems relevant to meeting these regulations”. The Regulations do not set out how far back in time providers need to go to determine these issues, but CQC guidance says that there is no time limit for considering “serious misconduct” or “responsibility for failure in a previous role”.

Notably, the Regulations do not apply to individuals and partnerships, who will continue to be reviewed under the previous 2010 regulations.

CQC enforcement powers

Following the introduction of the Regulations and the Health and Social Care (Safety and Quality) Act 2015, the number of prosecutions against care home providers has risen sharply. Since 1 April 2015, the CQC has largely taken over prosecuting health and safety breaches by care home providers from the Health & Safety Executive.

The CQC has a wide range of enforcement options, including both civil and criminal sanctions. Whilst the exercise of civil powers may impact upon a provider’s registration, of more concern is the CQC’s enforcement powers which can lead to criminal sanctions, including severe financial penalties.

The Regulations introduced a higher maximum penalty on conviction. Under the previous 2010 regulations, the maximum fine which could be imposed was £50,000. The fine is now unlimited. The sentencing guidelines for the courts to follow to determine the size of the fine are based on:

•           the level of culpability of the provider;

•           the seriousness and likelihood of the harm risked; and

•           the offender’s turnover.

The potential level of fines can be substantial and already some very large fines have been imposed: reportedly Embrace Care Group was fined £1.5m after a resident with dementia fell to his death and Maria Mallaband was fined £1.6m for letting a woman freeze to death.

Historically, the low level of fines in regulatory prosecutions meant that reputational damage was of greater impact to providers; however, while still a major concern, the new sentencing regime means that financial penalties will have real punitive effect on providers and in some cases could even force them into insolvency. It is not possible to insure against a criminal fine, though insurance can be taken out to cover the costs incurred in defending any prosecution.

Care providers, and lenders to them, will more than ever need to be extra vigilant to matters of safety within care home settings and if enforcement action is taken, providers may need to consider whether an early guilty plea could help mitigate the level of any fine.

New assessment framework

The CQC implemented a new assessment framework for adult social care services in November 2017 which affects how the CQC inspects a care home service. The CQC say they have attempted to simplify the system by reducing the number of assessment frameworks across health and social care and by closely aligning them wherever possible with a view to enabling providers to understand more easily what is expected of them.

The new framework continues to be based around the following five key lines of enquiry (KLOEs):

•           is the practice safe?

•           is the practice effective?

•           is the practice responsive to people’s needs?

•           is the practice caring?

•           is the practice well-led?

Providers will need to ensure that their own quality assurance systems reflect the new assessment framework and that they continue to be mindful of the detailed guidance available on the assessment of those KLOEs and priorities.

Increase in national living wage

60% of care homes providers’ costs are staff wages. As the provision of adult social care is highly regulated, it is difficult for care home providers to reduce staffing levels.

Consequently one of the main causes of financial distress in the care home sector has been the increase in the national living wage. In April 2017, the national living wage increased to £7.50 an hour and is set to increase further to £9 an hour by 2020.

Sleep-ins

Historically residential care workers were typically paid a fixed fee, which usually worked out as below the national minimum wage, for “sleep‑in” night shifts where they routinely “slept-in” as part of on-call shifts. A HMRC tribunal ruled that residential care workers who routinely “sleep-in” as part of on-call shifts should be paid the national minimum wage for the hours they are on site. Whilst some providers responded to this change, many did not. HMRC began investigating certain care home providers and assessing the tax and NI contributions that those providers had not paid by not adhering to the national minimum wage in respect of “sleep-ins”. HMRC’s initial stance was that back payments of up to 6 years would be payable as well as penalties.

As a result of lobbying by organisations such as Mencap, HMRC initially suspended enforcement action but that stay has now been lifted and since 1 November 2017 HMRC has written to many care home providers inviting them to participate in the Social Care Compliance Scheme. Such letters have generally given providers one month to decide whether to opt-in or opt-out of the scheme. If providers opt-in then they will have a period of 12 months to identify and repay any wage arrears to workers with support from HMRC. The deadline for paying any such arrears is 31 March 2019. Those who do not opt-in run the risk of not only being investigated and forced to re-pay the same amounts but also being named and shamed by HMRC.

Brexit

Brexit is likely to have a significant impact on the care home sector as many care homes rely heavily on EU migrant labour. It is estimated that around 15% of the social care workforce are non-UK nationals and many providers have much higher proportions. Care homes and home-care agencies could be short of up to 70,000 staff by 2025/26 if migration of unskilled workers from the EU is halted.

It has been argued that either substantial migration of care home staff from the EU will need to continue after Brexit, or wages in UK care homes and homecare agencies will need to rise to attract more home-grown staff. Other suggested incentives to overcome Brexit are sector specific schemes for foreign nationals with job offers in the care sector or a sector wide initiative to ‘professionalise’ care work to encourage the workforce into a career in care.

Recruitment and staffing issues

On any one day, there are 90,000 social care job vacancies in England, according to Skills for Care. A 2016 report by Skills for Care on the state of the adult social care sector and workforce in England estimated that just under 340,000 social care employees leave their jobs each year. On average, in care homes there are about 2,800 unfilled manager jobs at any one time. Despite concerted recruitment drives, vacancy rates for social workers in the statutory sector have jumped from 7.3% in 2012 to 11% in 2016, and turnover rates continue to climb. Providers increasingly have to fill the gap with expensive agency staff which again drives up costs and erodes profits. An ageing workforce is also thought to exacerbate shortfalls. People under the age of 25 make up less than 10% of the adult social care workforce, according to Skills for Care, while more than one-third are over 50. Combining Brexit on top of immense difficulties already in recruitment and staffing means that the problems of recruitment into the sector need to be resolved urgently.

There are a number of significant issues affecting the care home sector which will make 2018 yet another challenging year for many providers. A combination of increased regulation, together with rising staff costs, continued staff shortages resulting in greater reliance on costly agency staff, coupled with local authorities’ rates falling significantly behind the cost of providing care, means that many operators are no longer able to operate profitably. Brexit has also added to an already depressing picture and some private equity funds are currently looking to acquire bank debt at a significant discount as without significant restructuring many care home operators will find it hard to avoid insolvency.

In February 2017, the government proposed measures to address the funding shortfall in social care in England, including extra funding, some of which is based on a social care precept to allow local authorities to raise council tax bills by an additional 3% per year to spend on social care. However, these may not be taken up everywhere and will only favour wealthier boroughs whose residents can afford to pay more.

The north-south divide faced by many care home operators looks set to increase further. As it stands it appears unlikely that the funding gap is going to be significantly narrowed in the short to medium term which means that many more care home providers are likely to fall into insolvency over the next 12 months.

It is estimated that over 421 care homes have collapsed since 2010; this is the only sector which has seen rising insolvencies over the last seven years. Unfortunately a perfect storm of pressures coming together at the same time means this picture is unlikely to change during 2018.

Steven Cottee is a restructuring expert and Joanne Ellis is a healthcare expert at Pinsent Masons, the law firm behind Out-Law.com