Focus: Care homes lose battle to survive in funding crisis

FOR THE past 13 years, Kathleen McGaughey, a social worker, and her sister Frieda, a nurse, have owned and run a 16-bed residential care home in Bolton called Balgowney.

After years of struggling to make ends meet, they have decided to call it a day. Their local authority no longer has the funds to place elderly people in their care, they say. Unable to pay the upkeep or the mortgage, the sisters are selling, forcing residents to find alternative accommodation. For two ladies in their nineties, residents since the home opened, the upheaval is immense.

Balgowney is by no means the exception. Hundreds of homes, most of them small, privately owned businesses, are being forced to close this year, in what Paul Saper, of the healthcare consultants Laing & Buisson, describes as the annus horribilis of the care homes sector.

In theory, care homes should be a growth, even boom, industry. Britain's ageing population should be creating growing demand for residential care.

But for those unable to provide for themselves, the story is a very different one. Local authorities are cutting back at a time when costs are rising steeply because of a combination of the minimum wage, the working time directive and a national shortage of trained nurses. Figures from the Independent Healthcare Association reveal that the sector employs 550,000 staff to care for its 500,000 residents.

The consensus is that at least 40 per cent of Britain's 20,000 nursing and residential homes will face serious difficulties over the next 12 months, threatening thousands of jobs and putting billions of pounds of banking loans at risk.

Only substantial homes with minimal borrowings will survive, Mr Saper predicts. The average home size is small and the majority are mortgaged. GR Patrick, an insurance broker which insures 5,000 homes, estimates six or seven are lapsing on insurance every month.

Barry Hartley, chairman of the National Care Homes Association, says that in one West Yorkshire authority three homes have closed in the past month and three more are at the point of going under.

Another indication of the state of the industry is the rapidly diminishing listed sector. Two years ago there were 16 quoted companies. Now there are four with the take-over of Westminster Healthcare likely by the end of the month.

"The City got the wrong idea about what the care home sector was about," says Mr Saper. "They over-glamourised it. They didn't appreciate that once a home is full, there's no growth from it. Now that margins are being so heavily squeezed on all sides, they're making less and less profit."

The only people profiting from the sector seem to be estate agents. GVA Grimley's Andrew Rodger says: "As a firm Grimley have probably got 50 or 60 closed or dying nursing homes on their books. For every one I sell, two new ones come on."

With the vast majority of operators owning mortgaged businesses - around 80 per cent - industry experts agree that a significant proportion of the near-pounds 5bn of loans from clearing banks is at risk.

The crisis, which has begun to bite hard in the past few months, is the result of a combination of factors hitting owners' margins simultaneously.

"The outlook has deteriorated in recent months for a number of reasons," says the economist Richard Holberton, of the Royal Bank of Scotland, one of the leading lenders in the sector. "There's uncertainty about the overall volume of local authority budgets and how those funds are managed and allocated. On top of that the costs and regulation environment has become more difficult, particularly with regard to wage costs."

An analysis of social services spending on the sector by Laing & Buisson reveals a decrease for this year in real terms. Although the local-government finance settlement for 1999/2000 represents a 5.8 per cent increase on the previous year, the pounds 350m Special Transitional Grant - most of which went to the care home sector - was discontinued. The increase in local authority allocation therefore falls below the rate of inflation at just 1.2 per cent.

Then there are the additional costs faced by homes from 1 April as a result of the introduction of the minimum wage and the working time directive. The national shortage of nurses and the recent NHS pay award has further compounded the problem by forcing homes to pay more competitive rates for trained staff. Experts estimate wage costs have risen 8 per cent and agency costs are up 6 per cent.

Experts also lay the blame on the way local authorities are managing the situation. Seventy per cent of residents in the sector are referred - and paid for - by local authority social services departments.

Tony Shepherd, a Royal College of Nursing spokesman and chair of the Independent Sector Nurse Managers Forum, says that as the pot of money shrinks, authorities favour cheaper homes rather than quality of care when choosing where to allocate residents. It is often the newer, higher- quality homes which are in most danger of defaulting on recent loans - older ones are more likely to have paid off the bulk of the money they owe.

"Local authorities have to get as many placements as possible with insufficient money," he says. "If care is going to be determined by people undercutting each other, we're going to be in an appalling situation."

One specialist care home owner who claims an international reputation for quality of care looking after moderate to severe Alzheimer's sufferers, says that even he may have to sell. "I've been unable to break even for the last five months because the local authority, which is responsible for 90 per cent of our patients, won't send them here, saying we're too expensive," he says.

"Instead they're sending them to homes with no experience of looking after Alzheimer's, and everybody knows what happens to a person in that situation.

"I have a loan of pounds 1.2m from a bank which is now pressuring me. If my place goes bust, the Halifax will move in and I'll get nothing. I've got 70 people working for me and 70 people in the home. This is a picture which could be repeated a thousand times across the country."