Investing in undervalued care sector is complex and challenging, warns Advinia’s chairman
Over the past decade, investors and private equity firms have piled into private health and social care, sensing the potential for high returns.
However, as the sector is beset with financial stress brought on by the global financial crisis following the pandemic, a range of healthcare providers, including HC-One, the UK’s largest, have started to downsize and offload assets.
City A.M. sits down with Sanjeev Kanoria, the founder and chairman of Advinia Health Care, founded in 1999 and these days one of the biggest private care providers in the UK, running 37 care homes and 3,300 beds across England and Scotland, specialising in dementia and Alzheimer’s care.
Some healthcare providers are offloading assets. Are low fees from local authorities the main reason behind this? Are you planning to do the same?
It’s unsurprising to see HC One offload assets. Fees remain low compared to the cost of care and mandatory annual capital expenditure, which local authorities and the government forget need to be met in order to deliver good quality care in a safe environment.
Some local authorities are paying less than £100 per day for residents which is not sufficient to cover staff, food and accommodation costs. To put this in perspective, the typical total cost of care for people living with dementia is £100,000 annually, and this can rise to £500,000. Staff costs alone range from £15 to £30 per hour, inclusive of benefits.
While budgets for the NHS continue to rise, it is going the other way for the care sector.
The inequity in the relationship between the funding of health and care is one of the biggest reasons we had such a high death rate in care homes during Covid
In other parts of Europe, like Germany and Austria, the government pays nearly 2.5x as much. Funding does matter. There were significantly fewer deaths amongst over 75s in both Austria and Germany, vs the UK.
But ot answer your questions, no we are not planning on offloading any assets. Increasing demand for care amongst a growing older population and consistent government fees, which we hope will increase, means we are optimistic about the future and are in fact looking to expand. The care sector needs good operators more than ever.
In addition to fees and a lack of funding, ivestors often cite challenging rules and regulations as another major obstacle to enter the sector, or to maintain a successful business in care, do you agree?
Yes absolutely. Most recently we have seen the [regulator’s] CQC Market Oversight guidance come into play, which is another reason large operators may want to offload a significant number of homes.
Market Oversight was set up in the wake of the Southern Cross collapse to ensure the regulator can assist local authorities in providing continuity of care if services had a high chance of failing and had no solutions to resolve financial problems. However, new draconian guidance released by MO means the system set up to prevent crises in the sector now has the potential to cause them.
So what does that mean in practice?
As of last month, stakeholders, including banks and local authorities, will be immediately notified if a care home group, over 1600 beds, has a ‘likely’ probability to fail. Whilst this may seem straightforward, there is no clear objective criteria or transparent industry benchmarks for what ‘likely’ means or a thorough process to challenge misinterpreted information.
The guidelines released say that MO would require only a 25 per cent probability of ‘likely’ business failure for all stakeholders to be notified. That means probability of actual business failure would be around 1 per cent. CQC MO can take this call without any objective evidence or proper scrutiny by an independent body and would have no accountability for their actions.
If stakeholders are notified then this minimal probability of failure would become 100 per cent, banks will call on their loans, local authorities will stop placement and suppliers will stop supplying essential food and medical supplies.
A notification, based on a very low probability of business failure, will create panic and a vicious cycle of events resulting in unnecessary suffering to thousands of vulnerable older people.
So what do you suggest?
Clear processes, scrutiny and independent review needs to be implemented before such notifications are issued and the provider given full opportunity to rectify any area of concern in a reasonable period of time as determined by an independent body.
Do you expect more large care home groups to be doing the same in the near future?
Between the low fees and the new guidance, large care groups are stuck between a rock and a hard place and many of them have already put in place strategies to offload their local authority funded homes.
These closures will result in disruption and stress for thousands of elderly residents and hardworking staff across the country, and put massive strain on the NHS. When older people end up in hospital beds, not only are they at significantly increased risk of infection but it also costs around £4,000 per week, four times what it would cost in a care home.
Do you foresee a number of operators to go bankrupt in the next few years, or closures that could mirror The Four Seasons and Southern Cross sagas?
Because of falling fees from councils, plunging occupancy rates and increased costs due to the pandemic and Brexit, the sustainability of many services is coming under significant pressure.
More than a third of care providers in the UK are at risk of going out of business in the next few years.
The sector also received little comfort from the recent budget, where once again the difficult challenge of social care was pushed further down the road. Last year, around 1.5m people over 80 had unmet needs for care, and this number has probably significantly increased since the pandemic. If care homes are forced to close and residents are left with nowhere to go, things are going to get worse and we can’t afford to let that happen.
The NHS will become the surrogate provider of older care which will result in massive pressure and costs. A sensible government would see that a significant boost to funding the care sector makes business and common sense in the long-term. And, any budgetary increase for social care would be more than offset by the reduced costs incurred in healthcare.
It is also worth noting that in the service sector, serious diseconomies of scale happen when a group becomes too big, and it is very difficult to manage sizes larger than 12,000 beds due to this effect.
What does this mean for the sector as an investment proposition?
The coronavirus has caused widespread disruption, but it hasn’t diminished appetite within this sector. Care home investment demonstrates strong fundamentals, including government-backed funding, their status as ‘real assets’ and the fact that a growing older population and a shortfall in care and hospital beds will only increase the demand.
The current fragmented market does present significant opportunities for consolidation and growth
It is important, however, to have an optimal capital structure where investors get a decent return but there is enough free cash to provide a good service and continue to make annual spend on maintaining and improving the properties.
Infrastructure pension funds and insurance funds are increasingly entering the market. They understand that care homes present a long-term, low/medium-risk investment with good returns. The sector, whilst it has had its struggles, has proven to be particularly resilient during the pandemic compared to other service sectors such as hospitality.
To get back to the issues you raised earlier, what does this mean for the future of the sector in the face of an aging population? Is there enough government support?
The care system that entered the pandemic was underfunded, understaffed, undervalued and in need of urgent reform and over the past year things have only become worse with spiralling costs for PPE and critical care, and revised guidance from CQC Market Oversight which has significant potential for creating panic and perpetuating business failure.
In the decade of austerity that followed the financial crisis, health care budgets have been ring-fenced and improved every year, whilst funding for the care sector fell by 35 per cent in spite of the rapidly increasing number of vulnerable older people in the UK.
The budget was a missed chance to tackle the short- and long-term funding crisis in adult social care
We must use the crisis of the past year to build a system that is fit for purpose, where care homes are funded to the extent that they can take pressure off hospitals and operate at a level that that people feel comfortable making the difficult decision to put their loved ones into care.
Finally, let’s quickly zoom in on your company. You started in 1999 and it is now a chain of 37 care homes with about 3,300 beds, which specialises in catering to patients that need dementia care and chronic care. A 2018 acquisition of 22 care homes from international healthcare group Bupa put your company among the top 10 private care providers in the UK, with its value growing to about £250m. Where do you go from here?
We are well placed to continue growing over the next few years. We are also making sure that innovative technology that benefits our residents and takes pressure off the NHS and government is central to our growth. We have adopted medical appointment technology, and also recently, in association with Softbank Robotics and leading universities, trialled AI software in culturally competent robots in our homes to great success.
Anything else you would like to share with our readers?
Yes, longer term funding for social care alongside greater cooperation between hospitals, care workers and local governments needs to be central to the new government’s ambitions to strengthen our national infrastructure and build back better.
There is no perfect answer to the current crisis in care. Any viable plan will involve uncomfortable trade-offs and higher spending in the short term. A fully nationalised service is impractical in terms of logistics, commissioning and operation and would likely cost the taxpayer around £14bn every year. It would also result in people receiving different levels of care, and result in the state paying for what many people are currently doing privately.
Perhaps the pension-style system proposed by Damian Green MP for the CPS is the most viable and sustainable long-term, with the state providing a basic level of support with individual contributions on top, similar to both the state pension and the successful system in Germany.