News that Guy Hands’ Terra Firma private equity group has bought Four Seasons Healthcare is seen as a vote of confidence in the care home sector after what has been a challenging and turbulent period. However in order for the investment to be a success and return a profit it will need to overcome a series of challenging economic, regulatory and political obstacles. If the reforms work and stabilise the quality and sustainability of the sector, then Mr Hands may indeed be on firm ground. However, that is a big ‘if’.
Public sector cuts
Perceived wisdom in the care home market for many years has been that the demographic changes relating to a growing older population have made care home investment a one-way ticket to financial success. Indeed the number of elderly or physically disabled people living in care homes in the UK rose by 6,500 last year to 421,000 in total. However whilst numbers may be rising, margins are being squeezed. Research by BUPA revealed that in 2010/11 the baseline care home fee rates paid by councils rose by just 0.7%, compared with estimated care home cost increases of 2.1%. The report predicted that this gap would widen in the future and represent a real terms reduction of 3.9% over the two years 2010/11 and 2011/12.
Delivering on his number one priority of ensuring that “Four Seasons delivers consistent high-quality care and peace of mind for residents, service users and their families” against such belt-tightening will pose huge business challenges for Mr Hands and his team.
The changing customer
Against this backdrop and perhaps more positively the care home customer continues to shift towards the private market rather than state funded payors. Indeed recent research by Laing and Buisson has indicated that if the number of residents who pay ‘top up’ fees is taken into account, 55% of residents now pay something towards their care costs. There is clearly a market for something like Four Seasons.
With the Government still planning on rolling out personal care budgets to all publically funded social care users by April 2013, the individual care home customer or their carer is set to play a more significant role in determining who delivers their care. Large providers will need to adapt their model to reflect this. However as with local authorities, consumers are themselves faced with budget pressures and constraints, so the option of using private cash to subsidise low local authority rates may prove elusive.
How Four Seasons, the largest independent provider of care in the UK, will market itself to customers will be fascinating. The perception of large, faceless, monolithic care home providers has taken a significant blow following the difficulties of Southern Cross and there is arguably a greater desire for more personalised and tailored forms of care. Using its size as an asset rather than a hindrance will be high on the new investor’s list of issues to get right.
One of the surprises about the Terra Firma investment is its timing. Following the collapse of Southern Cross and a critical report into current oversight of providers in the care home sector by the National Audit Office, the Government last year published a discussion paper on possible proposals to oversee the care market in the future. Whilst at pains to stress that the document is not Government policy, Oversight of the social care market sets out some potentially significant and costly regulatory requirements for providers including requiring companies to post capital upfront as a condition of their license, and giving councils and regulators the power to step in and manage homes if closure looms.
In addition it is highly likely that Four Seasons will need to be regulated by Monitor as part of its planned new licensing regime. Four Seasons provides NHS funded services including acute and longer term treatment in the areas of mental health and addictions, brain injury rehabilitation, neurodisability and learning disabilities through the Huntercombe Group. Whilst Monitor is continuing to consult on how its new license will work and the requirements it will place on providers, its proposals could place additional burdens and restrictions on the activities of the Group at the worst time for an investor – just as it enters the market.
Critics fear that some of the proposed measures would not create a more stable market but would instead divert investment away from delivering high quality care and support for users and place providers under increased financial strain, thereby having the exact opposite effect intended. Working with the Department of Health, Monitor and in conjunction with other providers to ensure that any new regulation is proportional and targeted should be an investor policy priority.
Integrating Southern Cross
Following the collapse of Southern Cross, Four Seasons saw an opportunity and stepped in to take over the management of 138 Southern Cross homes giving it a strong market position. However, getting these homes up to standard and re-engaging with commissioners will be a challenge – Southern Cross occupancy rates before its collapse had fallen sharply in a year from 92% to 85%.
Integrating these homes into the Four Seasons group quickly and ensuring that essential care standards are met and systems are aligned will need careful management and planning, as will management of any potential staff redundancies and layoffs. The GMB Union has been a vocal opponent of Four Season’s role in the care home market and its purchase of Southern Cross homes and the company will need to tread carefully as it integrates the two operations for fear of sparking any further hostilities.
The direction of travel
At a national level the direction of travel under successive administrations has been to move care closer to the user and deliver more personalised care at home. The current Government has accelerated this through the launch of a re-ablement fund to help people recover quickly after hospitalisation, the amount of which will rise to £300 million per annum in 2012/13 and the launch of the 3millionlives programme to deliver telehealth and telecare to people with long term conditions by 2017. Perhaps exemplifying this shift is the Adult Social Care Outcomes Framework indicator relating to the rate of permanent admissions to residential and social care – a measure firmly designed to keep people in their own home. This is significant as the Framework will be the mechanism used to assess progress in improving outcomes in social care, and so delivering on it will receive high levels of political and commissioner attention.
For Four Seasons, the challenge will be how it positions its homes and offer to commissioners and customers both to deliver its traditional residential and nursing care services and take advantage of new investment opportunities in re-ablement and intermediate care, where new growth opportunities could reside.
Mr Hands has certainly invested in a substantial business. Four Seasons has 445 care homes with 22,364 beds, and 61 specialist care centres with 1,601 beds. However against a tough economic backdrop, Government spending cuts, increased regulatory hurdles, the need to integrate another significant business and given the direction of policy travel he certainly has his hands full in the coming months. His success or failure will be an important signal as to whether efforts to create a sustainable high quality care sector are working.