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Care homes: why investment firms can be bad owners

Old woman looking out of care home window
The view from above. Nick Karvounis/Unsplash

The ailing social care system in England is due to be reformed as part of plans being announced in the Queen’s Speech in May. The most prominent issue is long-term funding, with the UK prime minister, Boris Johnson, recently talking up the need for a “ten-year plan” to fix the sector.

But while reform is good news, the question of how to fund the sector is not the only one that needs to be asked. There are fundamental questions about who is providing (and profiting from) social care, and how this affects quality and economic stability in the sector.

The care market

Like many European countries, UK adult social care is a quasi market. It is provided by a mix of private, voluntary and public players. Private companies and financial investment groups got involved after the marketised structure emerged in the 1990s.

In 2019, private players provided 84% of care home beds. Local authorities and the National Health Service cover the cost of about half of these services, on a means-tested basis, while the clients and their families pay the rest (see graphic below – click to make it bigger).

Graphic explaining social care spending in UK
Careless Finance

The sector has many small providers. Barely one-third of beds are in the hands of the top 25 companies, and the top five control about 11% of the market. Nonetheless, the five leading operators – HC-One, Four Seasons, Care UK, Barchester and Bupa – still provide some 50,000 beds between them.

Of the five, HC-One and Care UK are currently owned by private equity firms. Four Seasons also had a private equity owner (Terra Firma) until it went into administration in 2019, and was acquired by US-based hedge fund H/2 Capital. Barchester is majority-owned by three Irish billionaires, Dermot Desmond, John Magnier and JP McManus as part of a group of 50 investors. Bupa is a not-for-profit private company, meaning it reinvests all profits back into the business.

Top five care companies

UK top five care companies

There have been many concerns about financial investment outfits being involved in care provision, and whether this has negatively affected economic stability and the quality of care. As well as the Four Seasons failure, private equity was at the centre of the collapse of then leading UK provider Southern Cross in 2011.

Investment firms have become notorious in many sectors for taking over underperforming companies and loading them with debt, before using short-term strategies to maximise their profits for a quick return. With private equity, there is the additional issue that they are not listed on the stock market and therefore less regulated than listed investors in relation to financial disclosure requirements.

But what does the data say about how these financial entities affect the care sector? Our new Careless Finance report at international research network the Centre for the Understanding of Sustainable Prosperity aimed to find out.

What we know

The evidence that for-profit care homes deliver worse-quality care than voluntary and public sector operators is compelling. From Taiwan and Australia to the UK and the US, many studies have found that for-profit operators have on average fewer staff hours per resident and worse indicators for quality of service.

When it comes to the specific impact of investment companies, the results are more mixed. The evidence tends to focus on private equity ownership, is highly US-centric, and looks primarily at nursing homes as opposed to residential care. Many studies do indicate that private equity can reduce certain measures of quality of care, but others find no impact at all.

Old woman in care home eating a yoghurt
The research evidence has its limitations. Olga Bogdanova/Unsplash, CC BY-SA

How can this difference in findings be explained? Nursing home quality and governance experts Aline Bos and Charlene Harrington hit the nail on the head when they point out that private equity ownership per se is not the problem. Rather, it is the particular management strategies – such as reducing the number of registered nurses or time spent with clients – that can negatively affect quality. Some studies might therefore be looking at the wrong link in the chain.

Several management strategies and financial practices associated with investment companies can affect quality of care and undermine care companies’ long-term financial stability. For example, recent US research indicates that leveraged buyouts – where an investment firm buys a company using a large proportion of debt – “increase the probability of bankruptcy for the target firm by approximately 18%”.

For companies that provide foundational welfare services to some of the most vulnerable in society, this is a worrying prospect.

All five of the UK’s largest care home chains exhibit signs of financial engineering. Three have seen leveraged buyouts, while four have complex group structures, including related companies in tax havens, intra-group loans and sale and leaseback arrangements (where a care home property is sold off and rented back to the social care company).

Top five operators and financial arrangements

Table showing which top five operators have been subject to financial engineering
One star: The data in this table comes from the 2018/19 accounts for each company. Two stars: The company structure of Care UK has changed since these accounts were published. According to a spokesperson, the assets of Silver Sea Holdings (a company registered offshore) have been transferred to a UK-based legal entity, owned by Care UK Property Holdings Limited. We are therefore now unclear about the current use of these structures by the company. Three stars: Four Seasons Health Care went into administration in 2019, so the data may not reflect its current financial structure. Careless Finance

Three out of five of these operators have more care homes than average in either the “requires improvement” or “inadequate” quality ratings categories, as shown below (though one of them, Bupa, also has a disproportionate number of “outstanding” homes) . This is based on the most recent inspections by the Care Quality Commission regulator, which were conducted in the past year for all homes in the bottom two categories.

The below-average performances by some of these operators could be for many reasons. The companies might be buying lower-quality care homes to begin with because they see a greater opportunity for value growth. Equally, the average number of beds in these chains could well be higher – something known to be associated with lower-quality care.

Care homes in each quality category, by operator

Graphs showing percentages of care homes in each of the Care Quality Commission's different ratings categories
Data from April 1 2021. Care Quality Commission

Because of the complexity of the factors that determine quality outcomes, careful research is required to identify the role of each management strategy and financial practice. But given the relationships identified in the US, this certainly calls for a closer look in the UK.

The large proportion of public funding going to these companies makes this a clear issue of public accountability. With social-care reform apparently imminent, the government should surely get a better handle on the scope and depth of these challenges. Proposals to limit potentially damaging aspects of financialisation could then be brought forward, such as enhanced financial transparency, restrictions on companies that use tax havens, and limiting high-risk financing techniques.

To make proposals focused solely on long-term funding – as vital as that may be – would be a missed opportunity. It would risk leaving social care on a path of continued economic instability and crisis.

We invited the top five operators to respond to the findings in this article. A spokesperson for Barchester said:

Barchester is not loaded with debt, as is clear from our annual reports filed at Companies House. Also, there is no short-term strategy to maximise profits for a quick return because Barchester has been under the same ownership for over 18 years. Although certain care home groups have had well-documented financial issues, this is simply not the case with Barchester.

Barchester does not operate with “fewer staff hours per resident, poor working conditions and worse quality indicators” and is not at risk of bankruptcy. We reinvest more than half our operating profits in upgrading facilities and this contributes significantly to the wellbeing of staff and residents alike. We are also proud to say we are an above national minimum wage and national living wage employer, unlike most other large providers.

On long-term financial viability, Barchester’s profits before tax have grown significantly over the last five years. Barchester’s regulatory approval has also improved significantly, from 69% of services rated “good” or “outstanding” in 2015 to 88.3% today.

Over the last five years, Barchester has paid £28 million in corporation tax. With the exception of two care homes in Jersey, all Barchester care homes contribute to profits in the UK and pay corporation tax on that basis.

Barchester has invested some £127 million in capital expenditure over the last five years. Its capital expenditure has increased, year-on-year, to the extent that such annual investment has more than doubled over this period of time.

By almost all metrics, Barchester has outperformed other care home providers, both in the private sector and not for profit establishments. This is notwithstanding the impact of the COVID-19 pandemic.

Barchester has also been awarded Best Company accreditation in each of the last two years (being the only one of the large healthcare providers to have received such accreditation), in recognition of the regard that staff have for the business as an employer. Furthermore, Barchester has in each of the last two years won the ROSPA Award for Health and Safety (again, the only healthcare provider, public or private, to have done so).

A spokesperson for Care UK said:

You mention that many investment firms take a short-term approach to their acquisitions. This has not been our experience. We have been partnered with Bridgepoint for over ten years now, and it is their commitment and long-term vision which has enabled us to bring a significant amount of much needed investment to the sector. Since 2014 we have invested more than £200 million in opening 49 new homes, creating much needed capacity, and this is above and beyond the circa £18 million a year we invest on upgrades to our existing care homes.

We have no inadequate homes and operate more outstanding-rated homes than any other provider. It is also worth noting that we have a much higher proportion of nursing homes in our portfolio than many other providers, and on these more challenging services, we are 5.9% ahead of sector averages on good and outstanding homes.

Nothing in our quality ratings, colleague engagement scores or customer satisfaction ratings would support any allegations of poor working conditions or quality indicators.

A spokesperson for Bupa said:

Bupa is a large, international healthcare organisation. For context, our UK aged care business represents 3% of Bupa’s global business in terms of revenue. We are not backed by private equity. We do not have shareholders and all our profits are invested back into healthcare. It is therefore misleading to draw comparisons between our structure and that of other UK-based care home operators.

The remaining top-five operators declined to comment in time for publication.

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