The £5bn care home crisis that is seeing record numbers of providers close their doors

Hundreds of providers are deep in debt and struggling to maintain services, posing a threat to Britain's most vulnerable residents

It's a grim tale of boom and bust that has left care providers, who shelter Britain's most vulnerable residents, in crisis. As record numbers of privately owned care homes close their doors, thousands of people face increasing bills and the threat of forced relocation. Hundreds of care-home providers are on the financial brink as they struggle to service a £5bn debt mountain built up during the "boom" economy of pre-2008 and maintain services while local authorities, a key source of income for the sector, slash referrals and target publicly funded homes for closure.

The number of private providers declaring insolvency rose by 12 per cent last year with 67 companies going out of business. The annual rate of failures has more than doubled in the last five years from 28 in 2008, meaning nearly 250 operators – many of them running chains of several homes – have disappeared.

Andy Burnham, the shadow Health Secretary, called the closures a "crisis" and warned they were part of a wider collapse in social care driven by spending cuts imposed of on local authorities. One authoritative study has found that up to £2bn has already been cut from adult social services.

Councils across the country, from Northern Ireland, where more than half of state-owned residential homes are under threat of closure, to Derby, where up to 20 care homes are due to close, are also reviewing spending on private care, adding to pressure on companies struggling to balance budgets while maintaining standards. Local authorities, including Leeds, Leicester, Southend and Coventry, have all earmarked some or all of their care homes for closure.

Caroline Abrahams, director of external affairs at Age UK, said the result was chronic underfunding and trauma for residents, many of them dementia sufferers, facing the prospect of having to move home.

She said: "These figures reflect that the care system is underfunded and in crisis. When an older person goes into a care home they want to view that as somewhere there'll be left in peace to live their life and not having worry and anxiety that they could have to move. A sizeable proportion of people in care homes do have dementia and they need continuity not unsettling change."

Wilkins Kennedy, an accountancy firm, said its finding that 67 operators went out of business during 2012 concealed a large number among Britain's 10,000 care-providing organisations that were also facing chronic financial difficulties.

A Department of Health consultation on regulation and what protection to offer in the event of care providers failing closed last month. Ministers have yet to reveal its results.

Health minister Norman Lamb said last night that plans for a financial "early warning system" to ensure a continuation of care will be announced shortly.

Stephen Grant, who led the Wilkins Kennedy research, said: "As well as those care-home businesses that have already gone into administration, there are a large number of care homes that risk breaking banking covenants." Many providers are caught in a perfect storm of diminishing income while struggling with fixed costs and the debts left behind from fast expansion during the economic boom. He said: "Care homes have been really hurt by local authority cutbacks. Local authority referrals are a major revenue stream for a sector that is weighed down by very high fixed costs.

"Many care homes used the boom years to borrow heavily to fund growth. While the boom is over and occupancy levels are down in some homes, the debts remain."

The sector remains traumatised by the abrupt collapse in 2011 of Southern Cross, Britain's biggest care-home operator, which affected more than 30,000 elderly and vulnerable people.

But it has been followed by a steady stream of closures of small operators across the country – such Camelot, which ran four care homes near Cheltenham, and Cornward, whose single home near Lincoln shut last year with 50 job losses – amounting to a steady diminution of existing homes.

The trauma caused to residents and owners was underlined last month when an inquest heard how husband and wife Jaswant Singh Beeharry and Isabel Ibanez-Mahiques committed suicide in a burning car the day before they had been due to tell staff that their Lincolnshire care home was to shut.

A coroner heard that the couple had complained of financial difficulties due to lower occupancy rates and referrals from local authorities before driving to an isolated sugar beet field and dousing their BMW in petrol. They were found holding hands. Solving the inevitably rocketing costs of social care for elderly and disabled people is an issue that is expected to dog governments for decades to come.

Some 10 million people in the UK are now over 65-years old and their number is expected to have nearly doubled – to around 19 million – by 2050. One of the reasons local authority budget cuts have hit care homes so badly is that their costs remain fixed at a very high rate.

With carers' wages to pay, food to provide and mounting energy bills, there are few areas where budgets can be reduced without creating a dramatic decline in the quality of help provided.

The Government last week appeared to acknowledge the difficulties when, in a move revealed by The Independent, it said it would in effect remove the ring-fencing from the NHS budget so that more than £1bn could be put towards to the spiralling cost of social care.

But Mr Burnham said: "There is a crisis in our care homes which is a symptom of what we are witnessing in a broader context – the collapse of social care in this country.

"Council-care budgets are being decimated and we cannot go on operating a minimum-wage, malnourished system which will never be able to care for our own parents or future generations. What gives in this system is the quality of the service.

"We are disinvesting from the crucial part of our of health service. It has a huge human cost. For every statistic about a home closure there is a human cost of awful anguish and upheaval."

Campaigners argue that an increasing reliance by local authorities the private sector is potentially risky because of the high level of debt across the industry.

A joint investigation by The Independent and Corporate Watch last year revealed that Britain's biggest private-care homeowners had combined debts of nearly £5bn.

But the Government insisted that safeguards were in place to ensure that no-one could be left without care.

Mr Lamb, who is the care and support minister, said: "These figures [for insolvencies] need to be put in context – there are over 10,000 organisations providing residential care in England alone, and as with any market in tough economic times, the size and strength of companies will change over time."

'This won't work out well for mum': eviction a daughter's view

Gill Ferguson is in no doubt about the potential effect on her 91-year-old mother Joyce should her Derbyshire care home close: "I think I will be booking a funeral."

Up to 20 care homes have been earmarked for closure in Derbyshire, to be replaced by four "super" complexes of 1,600 self-contained flats with full-time on-site carers.

Mrs Ferguson, 66, said the fact each resident would have their own front door would be unsuitable for dementia sufferers. "She is prone to falls; she has dementia so she cannot remember when to eat or drink or go to the bathroom. Some days she doesn't know who I am. This model of care simply wouldn't work for her and many others."