Caring for profit

Issue section: 
Issue: 
(358)

The economist Joseph Schumpeter had a fine phrase to describe market competition - it's all about "creative destruction". Market enthusiasts love the creative bit. They tend to keep quiet about the destructive side. And this is especially so if the destruction potentially involves the biggest care home provider for the elderly in Britain.

If you have not heard of it then take note - it's called Southern Cross. It runs 600 care homes under its own brand and operates a further 70 as Ashbourne Senior Living and 47 as Active Care Partnerships. Together they have 38,000 beds and 40,000 staff.

The problem is simple. Southern Cross could go under at any moment. The financial specialists at KPMG accountants are desperately trying to find ways to restructure the company to avoid a disaster but it is an open question as to whether they can succeed. Shares which a couple of years ago were worth £6 now struggle at around 10 pence as Southern Cross tries to pay its bills.

Not surprisingly there is an air of suppressed panic in the care home sector. Some local authorities have prepared contingency plans but no one wants to rock the boat by shouting too loudly. After all, adding to the distress of nearly 40,000 old people, some of them with dementia, others bedridden, is not nice. Nor is it good politics when the government is pretending that private solutions are the way forward.

But if Southern Cross goes under, all hell will break loose and, yes, old people could be on the street. The reason is that in 2007 the House of Lords ruled that those in private care homes did not have the same rights under the Human Rights Act as elderly people in local authority homes. And who won this judgement? Yes, you have guessed it - Southern Cross.

Private care homes are about profit and they are big business. In the case of Southern Cross its homes generate an income of nearly £1 billion a year. Alongside it there are other providers like Four Seasons which employs 21,000 in over 400 care homes, Barchester with 200 care homes and 10,000 beds, and so on.

The director of one private equity group recently boasted that "we are on the lookout for opportunities, particularly where we can charge a premium for specialist services in areas such as learning difficulties, dementia, brain injuries and Huntington's disease". Charging a premium is part of the secret of their success. In business if you can make a profit the money pours in. But it is also their weakness - if you can't make a profit the money pours out again.

As many as 80 percent of beds in private care homes are taken up by old people who come via local authorities and the NHS. This has given the care home business a guaranteed source of income and enabled the big care home chains to develop.

Southern Cross grew rapidly in the last decade by speculative takeovers and new builds. It assumed that local authorities would always have the money to pay home care fees. But now they do not, and Southern Cross's revenues are not as strong as its bosses hoped.

Worse, the company also practised a little bit of financial engineering. It sold off many of its homes for a quick profit and now rents them back. The Qatar Investment Agency even bought some of them. But rents are not falling and so there is a double squeeze. Southern Cross's situation is far from unique in the care home world but it is the most precarious.

Critics of the government's plans for outsourcing care and health to the private sector usually raise quality issues. Southern Cross has had its fair share with its homes coming under the scrutiny of the usually benign Care Commission as well as being raised in parliament.

But the question here is about the underlying financial viability of private care providers.

Care homes come and go and are subject to rapid takeovers. The businesspeople who run them take huge salaries while many staff are paid at the lowest levels that the bosses can get away with. The trick is to build up the companies and then jump before they get into difficulties - which is fine so long as you are not an elderly patient, a worried relative or a low paid care worker. Then you find out what is really caring about the business of private care today.