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The impact of private investment on care homes

Within the UK care home sector, we hear a great deal about the need for more government funding. Surprisingly we do not hear a great deal about the impact of private investors. Given the level of investment by private companies and corporations on the sector it is difficult to see how care homes could survive without this level of investment. But is there sufficient regulation to ensure that the focus is on quality of care as well as profit.

Privatisation in Europe

Privatisation opened up a huge market for private corporations and investors across Europe. Most of the revenue from care homes comes from the fees, which are largely paid by the state. According to the OECD, state funds transfer around €218bn to care home operators each year, with a further €65bn paid by the residents or their relatives.

Research from commercial data provider Pflegemarkt.com and Investigate Europe (IE) has found that the private sector now leads the way in Spain, where 81% of care homes are privatised, followed by 76% in the UK (down from the 2019 figure of 84%), 49% in Austria, 43% in Germany, 29% in Portugal, 23% in Sweden and France, and 21% in Belgium.

What is the attraction to the private sector

The attraction to the private sector is clear. Christine Corlet Walker, doctoral researcher at the Centre for the Understanding of Sustainable Prosperity, told Investigate Europe that care homes “have a stable cash flow, because we know that, over the long-term, the population is ageing, and those people are going to need social care.”

And in the early days, this indeed was an attractive market. Folkman says that “this was a sector that was poorly run” and as the state increasingly out-sourced things that had previously been managed in-house, such as catering and cleaning, the private sector could develop more efficient models. This meant it could, he explains, “build new care homes that are to scale; where they can put in decent management: 60 rooms rather than 20 rooms, and put in proper controls”.

But once the efficiencies have been made, it’s a difficult sector to make big profits from. As Vivek Kotecha, author of ‘Plugging the Leaks’, says: “It’s a stable kind of investment, which is low risk, relatively low return.”

So when headline-grabbing dividends of £48.5m over two years are paid out by UK care home-provider HC-One, many would question where this money is coming from and if greater public funding would actually lead to better care or just bigger dividends.

“There’s a lot of public funding going in, but it’s not being spent well. And it’s being used to support rates of return that seem outsized, given the risk that’s involved in the service, and seem to generate really high-profit levels, given what it should be for a labour-intensive industry,” says Kotecha.

High returns for pension funds

What has happened, and is particularly marked in the UK, but can also be seen in other European countries, is known as financial engineering. This is an investment by private equity – often pension funds – that has the sole aim of maximising profits. This can be achieved by putting “in a lot of debt… If you’re going to be paid a pension, your pension fund needs to make a return,” explains Folkman.

Unlike the private investment seen by larger chains such as ORPEA, Korian and their ilk, which dominate in many parts of Europe, these private equity funds aren’t in it for the long-term. And while these private companies have a strong profit motive and adopt many of the same methods (offshore companies, driving down costs) to achieve this, they are nevertheless still in the business of providing care services and have shareholders invested in doing so – albeit for their return on investment.

UK leads the way in private equity investments

High levels of debt to maximise profit bring with them high levels of risk, and it doesn’t take much – an increase in the minimum wage, or a cut in government spending, as happened in the UK with austerity measures after the financial crash, for example – for the business to fail.

Both Southern Cross and Four Seasons were private equity-funded UK care home providers that collapsed in recent years. “The underlying problem is that private equity finance is debt-loaded… this is not unique to this sector, but, of course, obviously, the human impact is greater in this sector,” said John Spellar Labour MP, who has long warned about private equity’s involvement in care.

The UK probably leads the way in private equity investments – nearly one-fifth of the social care sector is taken up by the big five providers, three of which are private equity-funded – but it is not unique in turning to this method of funding. According to IE research, 30 private equity companies own 2,834 care homes throughout Europe with nearly 200,000 places.

Summary

We are living in a pipe dream world if we think government funding alone will solve the problems of social care. Private equity investments play a big part in funding social care with one fifth of the social care sector taken by the five big providers.

Private equity firms are in the business of making money and vulnerable to changes in the marketplace and government strategy. Their performance should be subject to stricter regulation.

When the focus is solely on the profit, it’s easy for these companies to lose sight of providing care that goes beyond the basics of keeping people comfortable.

Albert Cook BA, MA & Fellow Charted Quality Institute Managing Director Bettal Quality Consultancy

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