Some interesting analysis on the residential care home market has been carried out by FRP Advisory.
Running against a general cross-industry trend of declining corporate insolvencies, the care home sector has been going through a very rough patch with insolvencies up 23% year on year. We are looking at a staggering 24-fold rise since 2010.
More financial stress is expected throughout the rest of 2016 with residential care homes facing a combination of budgetary cuts to funding, together with rising costs for regulation, staff pay and pensions.
The annual number of residential care activities businesses - chiefly care homes - becoming insolvent rose by 23% in the 12 months to the end of 2015 compared with the same period in 2014. A total of 72 residential care operation business became insolvent in 2015, the fifth consecutive year of increased corporate insolvencies in the care home sector, and marking a 24 fold rise in insolvencies in the five year period since 2010, according to FRP Advisory analysis of official data.
The FRP Advisory analysis of government data reveals that out of all the industry sectors recorded at Companies House, only the residential care services sector has seen a significant and consistent year-on-year rise in corporate insolvencies over the past five years to the end of December 2015, with FRP advisory anticipating the trend to continue into this year and next of increasing numbers of care home businesses facing financial stress resulting often in insolvency.
While volumes of corporate insolvencies in England & Wales rose 2.5% from 19,796 in 2010 to 20,285 in 2011, the annual total has fallen consistently every year since, reflecting the move for the wider economy out of the last double dip recession into prolonged economic growth. By 2012 annual corporate insolvencies had fallen sharply 4.6% to 19,349 - back lower than 2010 - and have continued to fall sharply ever since, year-on-year down another 8.6% to 17,682 in 2013, down 7.7% to 16,317 in 2014 and down 10.2% to 14,647 in 2015 marking a total decline of 27.8% from 2011 to 2015.
Most parts of the private sector economy had to readjust sharply during the 2008/9 financial crisis and ensuing slow growth economy that continued until 2012/13 but more public funding reliant industries such as the care home sector only began to feel more severe and sustained pressure on their business models when the era of austerity for the public sector began to filter down properly to the local authority level from 2012/13 onwards.
FRP Advisory expects harsher economic pressure on the residential care sector in 2016-17 through a combination of: more severe local authority budgetary cuts due to take effect this financial year and next; the financial toll on operations from a greater regulatory compliance burden which is also more stringently applied in the interests of residents; higher staff pay and pensions costs due to statutory changes.
Chris Stevens, partner at FRP Advisory, the business advisory firm, said: “The care home sector may comprise fewer businesses relative to, for example, retail or construction but its impact on community care provisions is significant given the number of families and services involved with each resident. Last year saw a rise of nearly a quarter in residential care activity businesses chiefly care homes becoming insolvent, with the 74 corporate insolvencies in 2015 representing a 24 fold rise in numbers since 2010, the sharpest rise in any industrial sector over that period as the effects of local authority budgetary cuts finally take their toll.
The exponential rise in insolvencies in the care home sector which numbered just three only five years ago, contrasts to the overall downward trend in the number of corporate insolvencies since 2010 which have declined 35% since the end of 2010 and by 11.4% in for the twelve months to 2015.
There may still be worse still to come for the beleaguered care home sector due to all local authorities facing overall double digit budget cuts for the current financial year underway and beyond, comprising often cuts of over 20% to their social care provisions meaning operators have limited abilities to increase their fees which currently for many are running below the true cost to the businesses of delivering appropriate care, all placing rising financial pressure on care sector operators.
At the greatest risk are care home operators catering for purely local authority funded residents where financial stress is most acute. On top of local authority funding squeeze comes the ever weightier burden with increased regulation, often resulting in homes having to fund for both capital expenditure and higher overhead spend to ensure they continue to be compliant with regulators, just as the added pressure takes its toll from the rise in the national minimum wage from April this year rising further by 2020 to £9 an hour and the prospect of additional auto enrolment costs.
The combination of limited funding, extra costs for staff, pensions and increased regulatory compliance may put unsustainable pressure on care home operator margins if levels of patient care and service are to be maintained in accordance with regulatory requirements.
Public sector dependent industries lagged the private sector in feeling the effects of the debt-crisis triggered recession of 2008/9, but sectors such as education and library services first began to struggle in 2011-12 as local authorities tried to conserve money for front line services. Faced with another round of local authority budget cuts and none of the ring-fencing preserved at a national level for some NHS services, local authority-funded services such as residential care homes are in for a further squeeze as shown by the huge rise in corporate insolvencies for residential care activities last year.
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