The plight of Southern Cross, the private care-home provider, has highlighted the challenge we face in caring for our ageing population. Emily Hohler reports.
Why the sudden crisis?
Reports of the precarious finances of Southern Cross, Britain’s largest care home provider, have drawn attention to the economic threat posed by our ageing population. The issue has also thrown a spotlight on the potential conflict between the private-sector profit motive and society’s duty to protect its most vulnerable members. Over the past two decades, the state has increasingly becoming a purchaser rather than a provider of care, 70% of which is now private. Yet according to a survey in the FT, one in seven privately run care homes is rated ‘adequate’ or ‘poor’ compared to one in 11 among smaller not-for-profit homes. Yet the government is proposing to widen the purchaser/provider split within the NHS. No wonder policymakers are nervous.
How fast is our population ageing?
In 2009, 1.4 million people were over 85. By 2035 there will be 3.5 million. One in five of us alive today is likely to see our 100th birthday. This may sound like good news, but it gives cause for concern. Many of us may live longer, but in an increasingly frail state. Age UK estimates that there are already 800,000 older people in England who have care-related needs, but receive no formal help.
What is the current situation for those who require care?
It is complex and very unfair. Local authorities are responsible for a large proportion of the funding of social care, which is means- and needs-tested in ways that vary widely, depending on one’s postcode. With the squeeze in state spending, care services are increasingly being rationed. In 2005, half of all councils offered support to people with ‘moderate’ needs; only 18% do now. Anyone with more than £23,250 in assets has to pay their own care bills, which results in around 20,000 people a year having to sell their houses to pay for the fees charged by care homes. The system is widely perceived to punish those who have been prudent and worked hard to provide for themselves.
How much does care cost?
According to the charity Elderly Accommodation Counsel, average care-home fees have risen 22% over the past five years to £26,200 per year. This is still much cheaper than the cost of looking after people in hospitals (entirely state-funded at a cost of around £400 a day), which makes early intervention, whether in the home or in a care home, cost-effective. Yet changing demographics and rising care costs will still leave an anticipated funding gap in long-term care funding of £6bn per year by 2026.
Who will pay to close this gap?
The money has to come either from individuals with assets or from the state via taxpayers. In opposition, the Tories lambasted the Labour government’s proposal of a 10% ‘death tax’ on estates to fund care, effectively shelving the policy. Now the health secretary, Andrew Lansley, has to come up with his own solution. In the next few weeks a commission headed by the economist Andrew Dilnot will make recommendations on a national model to pay for care. He is expected to suggest a scheme under which individuals would have to cover their own care bills up to a maximum of £50,000.
How will people find the money?
Since three in four people may never need long-term care, it ought to be possible for the majority to share the cost of insurance to fund the claims of the minority – as most of us do already as householders and motorists. Insurers could develop products designed to cover bills up to the £50,000 cut-off point, beyond which the state would step in. Earlier attempts at a similar form of insurance flopped due to lack of demand, but if you look at the broader problem of saving for our retirement, this isn’t so surprising. The government tried using carrots – in the form of tax-relief – for pensions, but with limited success. Most people just don’t want to bother thinking about the future. If individuals are to fund their own care, the government may have to use a stick. Whether that means compulsory insurance or not, we must all address the question of how we pay for old age.
The debacle at Southern Cross
At the heart of the firm’s problems was a business model known as ‘sale and leaseback’. This involved selling off properties, in part to fund expansion, and renting them back again at rates that rose by a minimum of 2.5% a year, no matter what. With an ageing population, rising property prices and an ever-increasing stream of local authority money, care homes looked like a sure-fire investment. In 2004 Blackstone, the US private equity group, bought Southern Cross, financed its expansion and, two years later, took the company public. By 2007 it had sold its stake, netting an estimated profit of £1bn.
But a sale and leaseback strategy didn’t allow for the downturn. When the credit crunch hit, occupancy rates were already falling owing to doubts about the quality of care. The recession and cuts in public spending made matters worse. Unable to sustain the 90% occupancy rates that kept Southern Cross profitable, the company has told landlords that it will only pay 70% of its rent while it seeks a financial backer. Failure to reach a deal would be bad news for 31,000 residents in around 750 homes and could destroy the public’s trust in private care homes.