The Future of the Business of Care(In the wake of the Care Act 2014)

Topics covered: Ridouts professional advice

The focus of Government attention in the care sector has been the persistent demand that hard working citizens should look forward to state funded care in the evening of their lives without recourse to their savings, leaving those savings for enjoyment by their successors.

Of course such an aspiration is wholly unaffordable, particularly if it includes the promise that such care should include accommodation, subsistence, care services and holiday/leisure activities at the highest level.

No one has ever suggested that such a menu should be delivered.  At the most the proposition remains as it has always been that there should be limited means tested underwriting the cost of personal care (nursing care is already provided by a fixed grant of between £105- £110 per week- hardly generous) and this only to arise after individuals have exceeded a cap on spending which is likely to exceed by four (in personal care costs terms) the likely projected care home stay or care at home expected duration (CAP 1).

These provisions are not yet detailed and will be introduced in the second wave of Care Act implementation during 2016.

The complexity and uncertainty of these prospective provisions, the failure to include the whole package of accommodation and care costs, the likelihood that various elements of provision will in effect be cost capped reducing the ability for external contributions, and, the certainty that care fees for those in the system will be capped (CAP 2) so that payments in excess of CAP 2 will not count towards CAP1 present a most unattractive prospect to a potential investor.

Both in prospective legal terms and in commercial realities the fudge of using the relatively wealthy to subsidise the poor is not a realistic basis for a care sector business going forward.

So why are many people seeing this as a major opportunity for a rejuvenated and prosperous care sector. The following factors need to be considered.

  • There are now a very significant number of people whose accumulated assets (income and capital) are sufficient to meet reasonably anticipatable care fees (at home or in a home).
  • Duration of care need is paradoxically likely to be shorter than hitherto.  This makes it very likely that investment in care will diminish but not extinguish resources for other needs (pre and post inheritance).
  • It follows that selection of care service is for very many people a very real choice and a very real opportunity.
  • The austerity squeeze by NHS and local authorities on care fees is having the unexpected consequence that there are real signs in shrinkage in supply so that realpolitik of commercial care fee negotiations is changing significantly.  Public bodies will have to meet demands (the Care Act will ensure that) and, unless they negotiate guaranteed “take or pay” block contracts will be at the risk of market under supply.
  • It is inconceivable that public bodies or governments will even consider a building program to recreate public provision which in any event, is always more expensive than external outsourced services.
  • There are clear indications that care investment values are on the rise again.  A significant body of institutional investors (many based outside the UK (in the US and elsewhere)) are displaying a real appetite to invest on a basis of valuation of long term rental returns rather than on Enterprise Value based upon a multiplier of core earnings (EBITDA).  It is not unrealistic to contemplate values rising by 40% to 60% in the short term but only for businesses with sustainable growth based on market condition and not artificially depressed by Governmental quasi regulatory interference.

So, there is a real opportunity with clear options for care businesses or those who consider investing in care business.

  1. Clearly there will be at least 2 models of business.

First, those based on the Crown covenant based public finances revenue stream, with limited credit risk but almost no ability to sustain change through revenue management.

Second those aiming to attract and delight the independently funded purchaser from a generation used to choosing and spending according to taste.

We do not believe that there is a realistically sensible business prospect for a mixed care business.  That is to return to the inevitability of the unfairness of cross subsidisation.

  1. There will inevitably be different standards/tiers of care services.  Safety net care on the one hand and, on the other side, customised services built and priced to customer choice.

The prudent investor will make a considered decision as to which is the business in which they wish to place resources.

  1. Investors, managers and executives need to remember that the business of care is a business and not a public service.  Business plans (to inform both choice of model and viability) must address the market and the sustainability of quality services at prices which can achieve surplus for investment and the reward for investment with appropriate controls of identified risks.

The increasing number of customers able to maintain payments for chosen tailored services offers an opportunity not available to prior cohorts of operators.

Very careful attention must be given to the preparation of care and accommodation contracts with sufficient flexibility to manage commercial risk and customer expectation.

Even more important is detailed concentration on contract management- an issue often ignored in the past.Probably care businesses need to appoint dedicated contract managers rather than relying on overloading individual service managers.

Accountants must be used, not just to prepare historic accounts, months after period end, but proactively to project manage providing executives with real and valuable information to inform decision making.

  1. Investors should not automatically reject the public funded options and may have a selection of units in different models.   However we do feel real differences are so significant that the two different business models will need completely different styles of management.

Increasingly the public sector customers will be fewer in number and may even really amount to a single customer.Such a dominant customer needs to be managed tightly to avoid risk of disaster.A single customer can dominate and bully its suppliers (already seen in the care sector and in some retail business).To avoid these risks providers will have to negotiate flexibility in service and price and very careful termination provisions to avoid exposure to that disaster.

There is and will be no obligation to take publicly supported clients into a care service, but, if that service does admit such clients it will be expected to meet the full expectation of a Service Specification irrespective of actual viability.Hence that Specification is the most important feature of the contract.

Variation and review must be carefully drafted so as to ensure a contractual methodology to achieve sustained business success.

This must include the ability to change price if there are significant changes in service expectations or costs.

If the business does not accept public funding it will not have the risks of the complexities we have described.  As with all other businesses, customers will be told- “If you cannot meet our terms, you must seek a solution elsewhere.  If you can meet these terms you are very welcome but this service does not participate in the public option.”

This will need to be made clear at the outset.  If the models are not mixed that position will be obvious.

The next 18 months are crucial.  There is a real opportunity for care businesses to make and take strategic decisions to sustain the future and secure appropriate investment to deliver a business plan.

This opportunity will not recur.  The Care Act can give the sector this opportunity to reform and move forward- perhaps with better understanding of the basic fundamental key business performance indicators rather than relying on a wing and a prayer.

The opportunity will not recur soon and no sensible provider or investor will fail to grasp this.

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