The Living Wage: Care Home sector

“For many operators already struggling with the burden of declining occupancy, increased regulation and flat fees, this is a catastrophic blow. The UK Homecare Association’s open letter to George Osborne didn’t mince its words when it spoke of an unviable sector"

David Jones, Partner in the Healthcare and Life Sciences industry team

The care home industry is anticipated to be significantly impacted by the new Living Wage legislation and in particular, those care home and homecare operators with local authority funded residents.

With staff costs on average representing c.60% of the cost base for a care home and most care workers qualifying for the Living Wage, the new legislation will materially increase the cost base for operators. As the sector is regulated with clear guidelines on minimum levels of service provision, providers have limited flexibility to reduce staffing costs. To mitigate this increased cost of care provision, operators will therefore have to look to charge higher fee rates to residents. However we expect the success of such strategy to vary by type of care home operators. Care homes focusing on private pay residents should find it easier to introduce higher fee rates, however, this could possibly force some residents away from private care toward local authority In contrast we believe care home operators with local authority residents could face stiff resistance towards fee uplifts from local authorities which are already under significant financial pressures.

Government funding for elderly care homes has been cut by c. 20% between 2010 and 2014 (source: Age UK) and local authorities have been reducing rather than increasing the fees paid for elderly care provision. Indeed Laing & Buisson estimate that a third of local authorities did not introduce a fee uplift last year. As a result the new Living Wage legislation will further destabilise an already financially challenged segment of the care home sector.

With approximately 60% of care home residents funded by local authorities (source: Laing & Buisson), a large number of operators will now face an uncertain and challenging trading environment going forward in which certain homes become financially unviable and the sector sees a higher level of home closures. As a result, both large and small operators will need to revisit their overall business strategies to adapt to this new landscape.

While the provision of elderly care is a key pillar of local authority services to the UK population, there is currently no visibility on if and when the Government will adequately address this additional funding need of local authorities in the next Government spending review. The UKHCA believes an extra £750m may need to be put into the system next year to cope with the Living Wage demands.

In summary, until the Government and local authorities clarify their capability and willingness to address the costs of delivering such elderly care provision, we expect the Living Wage legislation to create an even more challenging trading environment for many local authority focused care home operators.

“George Osborne’s living wage could be the death of social care"
The Guardian 14 July 2015

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