Social Care – a huge challenge for local authority procurement

I wrote this before this week's shocking Panorama programme on UK TV featuring abuse of patients in a private hospital / care home; obviously another issue that makes this such a difficult and sensitive area.

I bought shares in Southern Cross plc, the UK’s largest provider of care homes, around 5 years ago – it seemed to me it was a market that could only expand.  Southern Cross is now teetering on the edge of bankruptcy, and I’ve lost 98% of my money.  Why?

The particular Southern Cross reasons illustrate why this market is arguably dysfunctional and is building up to be such a problem for the UK State, procurement people and of course all of us who may need the services of care homes, for ourselves or our families. Southern Cross problems arose to a large extent through their strategy of selling off the freehold of their properties and leasing them back.  Perhaps they weren’t canny enough in those negotiations, but they seem to be stuck in upwards only lease deals, which they now can’t afford, because their revenues are not increasing to keep pace.

That’s because local authorities represent such a large part of the market, and their financial issues mean that they haven’t been prepared to pay increasing rates.  You can charge individual residents a bit more – but it’s not an inelastic market, and as individuals’ money runs out, their fees fall back onto the State. Certainly in some parts of the country, the local authority is virtually a monopoly buyer.

Meanwhile, let’s think about the cost structure for a care home.  Excluding the property itself, the number one cost is labour.  That’s going to rise with earnings, which in the medium term usually exceeds retail inflation (and the minimum wage has gone up faster than inflation).  Number 2 cost – probably food? We know what is happening to food inflation.  Number 3 – utilities.  As above – and that isn’t going to change with climate levies and so on.

And legislation, although well-intentioned and designed to protect residents, has brought more cost pressures on homes. So costs are going to continue to rise faster than general inflation I would suggest, while local authority budgets get tighter and tighter. And don’t forget, we will soon move into a generation where fewer pensioners have healthy final salary pensions, which might have helped cover nursing home fees.

What else makes this a difficult market? Well, it is very slow moving in terms of competitive pressure. It is difficult to move residents from one home to another. If Southern Cross does go under, it will be a nightmare for councils. So good – or bad – performance is not rewarded quickly in the way that happens in more dynamic markets, where a firm with a cost or quality disadvantage would lose market share as consumers switch to competitors.  Here, the more likely outcome for a supplier is the slow lingering decline. It’s also a market where it is hard to see how providers can drive efficiency aggressively – providing fewer staff has obvious implications for care, and turning down the heating or reducing food quality are not attractive options.

This is already one of the public sector’s biggest spend categories. And it has grown by almost 50% in real terms in the last ten years as more people live longer, and (I suspect) fewer families are prepared to look after their ageing relatives themselves.

Local Authorities have reported an increase in Adult Social Service Gross Current Expenditure from £16.1 billion in 2008-09 to £16.8 billion in 2009-10, this is approximately 5 per cent in cash terms and 3 per cent real terms.

That is not all residential care of course, but spend is only likely to grow, and become more and more of a problem, unless something radical is done.  What might that be? Innovative ways of helping people stay in their own homes for longer? Paying families to look after Grandma?  “Adopt a pensioner” schemes?  Bigger, more ‘automated’ homes to drive economies of scale? Moving residents to countries with lower land and labour costs? Back to the days of relying on charity and the Parish poorhouse (perhaps re-branded as a Big Society initiative?)

Back to procurement; that £16 billion is almost half as much again as the in-scope spend for the Whitehall ‘centralised procurement’ initiative. Think how much press coverage that has had, the seniority of the people in charge of that programme, and how much attention it has at Ministerial level.  Yet here’s a single ‘category’ that is half as big again and is facing a certain crisis – have we seen any big procurement initiatives here?  Do local authorities have a clear market and supplier strategy in place? How are their risk management approaches looking given the Southern Cross situation....

Or does it just fall into the ‘too difficult’ bucket?

But one small consolation to finish with; if you’re a capable category manager in this field, you’re unlikely to be short of work for the rest of your career.

Voices (3)

  1. Christine Morton:

    It’s a complex market indeed.

    We have in London areas where in the same care home there is competition for beds from a local NHS trust and a local authority. It doesn’t make sense for different parts of the public sector to compete against each other, does it?

    There is pressure also for people to be declared sicker to qualify for free NHS care. The criteria are laid down statutorily, but it can be a fine line between who gets free care and who doesn’t.

    Lastly, on the most current project I’ve been working on, one of the biggest concerns is supporting care homes so that they do not fail. I don’t mean financially as that is a given – we don’t expect social care companies to work for free – but reputationally. Care homes cannot be built in a day, and the current situation with Southern Cross has been spiralling as local authorities pull back from new placements (understandably, as they don’t want to have care clients in homes at risk) and that does not help the funding models. The lack of capacity is a serious issue and it remains to be seen how the Southern Cross situation plays out. Are they “too big to fail”? Will there be a bailout of sorts? Will they leave it to market economics, which might mean a sudden and immediate closing of business?

    And where does that leave the clients, arguably the most vulnerable in this situation?

  2. Rob:

    There is a layer in between Dom Care and Care Homes called Extra Care Housing (or ‘Sheltered Housing’ to many) but the effort required to implement and maintain this layer is often substantial….

  3. Rob:

    Once people are in a care home Peter, it’s all a bit too late.

    The strategy being adopted by many leading councils (beyond the distribution of ‘Personal Budgets’ in line with the personalisation agenda) relates to ‘inverting the triangle of delivery’. Essentially, too much money is spent upon care homes and nursing homes because folk are sent there to meet out-dated targets. And it’s easier because it’s a mature market.

    The new model (picture an inverted triangle) has distinct layers:
    top layer: universal service market (people with their own money, or money from an insurance policy, or from a personal budget, purchase what they need from the open market)
    second layer: reablement (people are ‘reabled’ to continue leading a normal life in the own homes. Example, little old lady goes into an acute for a basic op. Stats tells us that many come out of hospital feeling disoriented and end up first in a nursing home, then in a care home. Reablement helps them to function, with confidence, again)
    next layer: domiciliary care (range of interventions of care in the home, paid for by the range of options above – no need to sell the house, nor feel vulnerable etc)
    next layer: care home (amber zone only)
    final and smallest layer: nursing home (red zone only)

    Got to many countries but especially Italy or India (or simply talk to folk from there…) and a care home is the last place they would put any member of their family.

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