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2016 Conference Presentation

Funding/purchasingResidential Care United Kingdom

5 September 2016

Where does the money go? Financialised chains and the crisis in residential care

Anne Killett , University of East Anglia, United Kingdom
Sukhdev Johal, Queen Mary University of London, United Kingdom


This presentation will discuss the public interest implications of the practices of the financialised chains, and the dominant narrative they have developed about a crisis in residential care. In a public interest report we have argued that this narrative oversimplifies the story: the issue is not simply how much money goes into adult care but where the money goes.

In autumn 2015 the large chain care home providers claimed that residential care in the UK was in crisis. The argument was that 60% of care provision is publically funded, and that local authorities were not paying an adequate price for this. They argued that this would lead to the closure of care homes with devastating consequences for people in care homes and for the local authorities responsible for their welfare. This would also have serious implications for hospitals which would rapidly become full of people needing care home provision. However, this is a very partial account of the more complex reasons for the financial difficulty that several chains are experiencing.

We used ‘follow the money’ research, beginning with an analysis of the history and current business models in the care home sector’s large chains. Three of the five largest chains are owned by private equity. In this model financialised providers buy care businesses with small amounts of their own equity and larger amounts of fixed interest debt serviced by the operating business; this levers returns on equity when profits are made but makes but the business more fragile if cash flow falters. This debt based financial engineering approach is also associated with complex group structures that game limited liability so as to avoid tax and allow extraction through internal loans at high rates of interest or sale of asssets. While this approach is acceptable in high risk, high return, activities such as commodities and tech company start-ups, it is not appropriate to an activity such as adult social care which is low risk and should be low return. The financial pressure on operations compromises care quality and through the business model reduces the variety in types and design of provision.

We illustrate all these points by analysing in detail the case of Four Seasons which is the largest chain operator of care homes. We also examine the ‘fair price of care’ model which the trade has used to justify higher prices; and show how it has an 11-12% return on capital embedded in it which, if achieved, would offer care home chains, a risk free return on purchase. Of course, margins have been squeezed by austerity but we argue that the big chain operators should not to be bailed out by the taxpayer for the losses that are the consequences of their own actions. Instead, the state should take the lead in mobilising low-cost finance so that smaller providers (profit and not for profit) can operate new residential care homes and public policy should more generally promote social innovation in the forms of long term care.


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