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May 8th, 2019

Corporate care home collapse and ‘light touch’ regulation: a repeating cycle of failure

6 comments | 11 shares

Estimated reading time: 5 minutes

LSE BPP

May 8th, 2019

Corporate care home collapse and ‘light touch’ regulation: a repeating cycle of failure

6 comments | 11 shares

Estimated reading time: 5 minutes

In light of the care home chain Four Seasons going into administration David Rowland looks at the failure of the regime designed to prevent such situations, as well as the cause of the collapse. He concludes that the rights of hedge funds and private equity investors to extract profit from the care home sector are given priority than the rights of older people to a secure home at the end of their lives.

In 2011 Southern Cross, the care home chain which housed and looked after 31,000 residents went bust. A combination of the financial crash and high rental payments to its landlords meant that it was unable to repay the debts that it had accrued in order to expand the company. The impact of this on thousands of older people and their families was significant. Although only 3 homes eventually closed, the corporate collapse led to significant anxiety for the care home residents who were worried that they might be evicted at very short notice, as is common when care homes close.

When Southern Cross collapsed many of its care homes owned were sold to another larger provider, Four Seasons Healthcare. In late April 2019, Four Seasons Healthcare – which currently owns 220 care homes housing 14,000 older people – also became bankrupt, again causing distress and anxiety to thousands of older people. It too was a highly leveraged company which collapsed due to income from local authorities being insufficient to meet the costs of servicing its high levels of debt, as well as providing care.

The future ownership of Four Season’s care homes is currently unclear and no decision has yet been taken on how many will stay open. But given that some of its care homes have already been closed in order to meet debt repayments the anxiety of residents is justified.

In the 8 years between the collapses of these two major care companies the government introduced new regulations covering the private care home sector. Yet, despite this new regulatory framework the collapse of Four Seasons was entirely predictable. In fact it could be argued that the new regulatory framework made it more likely that the company would collapse.

The Care Act 2014 contained two provisions to address the issues behind the Southern Cross fiasco. The first was a requirement that any large care home provider should be subject to an “oversight regime” by the Care Quality Commission.  Certain care home providers had to provide regular financial information to the Commission so that it could monitor their financial viability.

Whilst 70% of the care homes in England are small, mainly family-run businesses, around 30% are owned by overseas investors many of whom view them as assets for extracting large sums in the form of interest payments, rent and profit. The larger care home providers which were required to submit data to the Commission under the 2014 Act are owned mainly by investors and owners registered outside the UK, some of which are private equity funds, real estate investment trusts or US hedge funds.

That the task of overseeing this highly complex financial market was given to a regulator with a remit to enforce care quality standards across the NHS and social care, and not to a financial regulator, demonstrates just how ‘light touch’ the new regulation was designed to be. In addition, whilst the Care Quality Commission is asked to spot the warning signs which may augur a provider collapse, it can do nothing to prevent it. In fact, although the financial woes of Four Seasons caused care quality standards in its homes to decline – as also happened before Southern Cross collapsed – the Commission could not require the company or its owners to take action to stabilise or improve the company’s financial position.

Thus, whilst the Commission has regulatory levers – although even these are very weak – to address the causes of poor care in some areas, such as low staffing levels or poor clinical governance, it has no powers to address one of the commonest cause of poor quality, namely the financial difficulties of the care home owner. As a result, the Commission has had to sit idly by over the past two to three years whilst the collapse of Four Seasons has happened in slow motion and the care provided to its residents has got worse.

The second aspect of the new regulatory framework contained within the Care Act was a requirement imposed on local authorities to ensure the continuity of care for the residents of any care home which had closed due to financial reasons. Whilst local authorities fund much of the care provided in private care homes, there is still a substantial proportion which is funded by private individuals.

The Care Act requires that in the event of a large provider collapse local authorities must also take on the financial responsibility for these privately funded residents on a temporary basis. In doing so, providers were relieved of the financial burden of making provisions to maintain continuity of care for their residents in the event that their company collapsed. This change in the law introduced a moral hazard into the system: once large care providers knew that the costs of going bust would be picked up by the state there was even less incentive for them to avoid risky behaviour.

The debt burden which eventually sank Four Seasons – estimated to be around £500 million and costing the company an unsustainable £50million a year to service – was loaded onto the company when it was purchased by the private equity firm Terra Firma. It has since been refinanced several times and the company which now owns the debt and took control of the destiny of the care homes last year is H2 Capital, a US Hedge fund.

It could be argued that neither of these two investors has the current wellbeing of the care home residents affected by their financial transactions as their primary concern. Certainly Blackstone, the private equity firm which owned Southern Cross, and Terra Firma, the private equity firm which owned Four Seasons, have not suffered unduly from the collapse of these companies. In January 2019, the Evening Standard reported that the staff of Terra Firma saw the wage of their employees increase from an average of £134K a year to £322k, whilst Blackstone made a reported £1.1 billion from selling Southern Cross.

If the government’s policy intention had truly been to stabilise the care home market through regulation, the Care Quality Commission could have been specifically authorised to withdraw the licence to operate of any company that was so highly leveraged that it was liable to fail. Alternatively, major care home providers could have been required to pay into a fund which the state could draw upon in the event that one of them went bust. Or they could have been required – as a condition of their licence – to hold certain cash reserves so that the long-term viability of the company was given priority over short-term shareholder returns.

But the intention of the 2014 policy wasn’t to prevent provider failure. It was to allow it to happen in a way which would cause minimum disruption to the functioning of the market. Thus, as also happened when Southern Cross collapsed, the opportunity is now there for a new operator – again funded by high-interest loans – to step in and pick off any valuable assets from the Four Seasons estate, knowing that the UK state will act as a guarantor if it too goes under. And so the cycle of highly leveraged international investors entering the English care home market for short term gain can start all over again.

There is currently little research on the impact of care home closures on older people. What is known is that it causes significant distress and can often lead to premature death. In 2013, the Department of Health quantified the benefits of an orderly care home closure compared to a disorderly closure. It estimated that if a care home closed down in an orderly fashion, as opposed to a disorderly one, the “greater peace of mind” this would give residents would be worth £6,510 to each of them. It was on the basis of this economic rationale that the light touch regulatory framework contained within the Care Act 2014 was justified.

Tellingly, no assessment was made of the benefits to care home residents of their home being completely protected from closure. To have intervened to eradicate market failure and provider collapse from the care home sector would have meant prioritising the care and wellbeing of older people over and above the interests of international financiers.

As things stand, the rights of hedge funds and private equity investors to extract rent and profit from the care home sector are given greater priority than the rights of older people to a secure home at the end of their lives.

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About the Author

David Rowland is the Director of the Centre for Health and the Public Interest. Prior to this he worked within healthcare professional regulation in the UK as the Head of Policy at three national regulators and has developed significant expertise in social care policy, NHS workforce issues, regulation, safeguarding, whistleblowing and patient safety.

 

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured image credit: Pixabay/Public Domain.

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