Are we tackling the social care crisis the right way?

In the Budget, the chancellor announced a £2 billion rescue package for the social care sector, but the crisis needs a multi-level approach, writes EQ's Damien Lardoux

Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail   by Damien Lardoux, 27th March 2017

The adult social care crisis has been well-documented; residential care homes are closing on a weekly basis, NHS bed-blocking has reached record levels with thousands left in hospital (some for up to six months) due to a lack of alternatives, and local authorities are facing significant funding gaps.

Whilst we’re all living longer than ever, it doesn’t mean we’re healthier. The NHS is already at breaking point as it picks up the pieces, bed-blocking alone is costing the service £820 million a year. And that’s before huge numbers of baby boomers, now in their 60s, start needing care in future.

Furthermore, the introduction of the National Living Wage last April, combined with the uncertainty around the Brexit negotiations and their impact on EU care workers, are putting even more pressure on an already broken sector.

Simplified story

It’s important to understand that residential adult care in the UK has been more or less completely outsourced to private providers. The largest providers tell a simplified story about a lack of money, but equally important is where the money goes.

The collapse of Southern Cross in 2011 and the recent difficulties faced by the UK’s biggest care home provider, Four Seasons Health Care, can mainly be explained by aggressive financial engineering.

Both companies, backed by private equity, grew too quickly, financing acquisitions using high levels of debt.

They also made mistakes by chiefly focusing on the less profitable state-funded market and using a high proportion of agency staff, which led to a deterioration in care quality, as flagged by the Care Quality Commission.

Local authorities are taking steps by increasing social care funding with an additional council tax charge of 2 per cent.

According to business purchase consultant Christie & Co, the weighted average increase in fees paid by local authorities to care providers in 2016/17 was 4.5 per cent in comparison to an average 1.8 per cent per annum over the last three years.

This is welcome and should help to compensate for the increase in staff costs following the introduction of the living wage.

Unfortunately, this has been at the expense of other local services such as libraries and waste management. It’s time the government introduced long overdue reforms of the social care system, and multiple approaches are required.

Radical options needed

To start with, private equity investors need to reduce their extensive use of leverage within the sector. Increasing costs are already putting enough pressure on care home operators.

An increase in borrowing costs would only add to this. Furthermore, when this happens the quality of care tends to diminish, putting more care homes at risk of forced closures.

Secondly, the delayed lifetime cap on care costs and changes to the means test risk putting even more pressure on already financially stressed local authorities.

The sharp increase in property values over the last 20 years means that a number of elderly people have significant amounts of money saved in their property, which could help to finance their own need for social care.

The forthcoming green paper must consider radical options, such as a stamp duty break when older people downsize to free up money for care, or even tax-free pension withdrawals to cover care bills, although the implications need careful consideration.

Philip Hammond ruled out using a death tax to fund long-term care, which should be welcomed.

Finally, we should promote alternative options such as home-share arrangements with younger generations, adapting accommodation and sheltered housing. Local authorities could also sell vacant land at a discount for the building of care homes or retirement villages.

With the progress made by technology, there are probably also other roads to explore to enable elderly people to stay as long as possible in their home whilst still being monitored by nurses and carers remotely.

I think that the key question that we need to ask ourselves is whether the younger generation should be the main funding source for future demand in social care, or whether the private pay market becomes the primary road for most elderly people?

We need to start addressing the social crisis now, before it’s too late for all of us.

Damien Lardoux
Portfolio Manager

» If you have any questions about the above, please do not hesitate to contact us.

This article appeared in Money Observer on 15 March 2017. 

 

 

About the author: Damien Lardoux

Damien has an MSc in Management from Reims Management School and an MSc in Wealth and Asset Management from ESCP-EAP Paris Business School. He is also a CFA charter holder, being a regular member of the CFA Institute and CFA UK society.

Before joining EQ Investors, Damien worked for Bank of America Merrill Lynch being responsible for asset allocation, security selection and portfolio construction. Damien now acts as the portfolio manager for the EQ Investors Balanced, Positive Impact and Multi Index portfolios. He also co-chairs our Fund Selection Committee.

Damien is a devoted sportsman, playing judo and squash on a regular basis. He also enjoys hiking, to very far places such as the Himalayas and Kilimanjaro.

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