The health and social care sector is currently facing its most significant challenge since the Southern Cross care-homes collapse in 2011. A financial crisis is on the horizon, resulting from the unwelcome trifecta of rising staff costs, significant funding cuts and a steadily increasing regulatory burden.

In the five years since the Southern Cross collapse the sector has remained fragile, with insolvencies increasing by 722% from just 9 in 2011 to 74 in 2015. This trend shows no signs of slowing and today’s market conditions make it impossible to rule out the failure of another big provider or perhaps more worryingly, widespread distress across the industry.

The announcement of the sale of Bupa Home Healthcare to Celesio at the start of the year and concerns about the future of two of the UK’s largest providers, Four Seasons and Care UK have done little to restore confidence in the sector. In the last month Four Seasons announced an eye watering annual loss of £264 million for 2015 and Care UK saw its debt downgraded by ratings agency Moodys and with over 500 homes and 25,000 beds between them, any threat to them is a threat to the sector as a whole.

So where did it all go wrong? The care home industry is necessarily, and rightly, one of the most regulated industries given the vulnerable people it deals with and the myriad of health and safety issues arising from the day to day running of the business. But regulation, and ultimately compliance, come at a financial cost. Compliance monitoring, upgrading of facilities, dealing with inspections and payment of CQC fees all eat into profitability.

This coupled with significant staffing costs stemming from endemic use of agency staff in the absence of skilled workers means overheads are significant. But there may yet be worse to come as those providers who have thus far been able to attract permanent employees and avoid the high agency costs have had to contend with the cost of pension auto enrolment and, as of last month, the introduction of the National Living Wage.

The true impact of the National Living Wage remains to be seen but it is estimated that the increase to £7.20 per hour for adults over the age of 25 could cost the social care industry £1 billion by 2020 which does not even take into account projections that the National Living Wage itself will increase to £9.00 per hour in that period. It is likely that there will be an immediate, significant and adverse impact on the sector as existing staffing costs will rise sharply and businesses that are already strained may collapse under the additional financial burden further destabilising the sector. For a wider discussion on the impact of the National Living Wage please see our previous blog on the topic.

The issue of the rising cost of social care has been further compounded by the fact that the traditional funding model for care homes is heavily dependent on local authority funding with privately funded residents in the minority. In the same period that insolvencies in the health and social care sector rocketed, local authorities have faced government cuts amounting to a loss of over £4 billion in their funding which has left cash-strapped local councils unable, and some would argue unwilling, to plug the gap caused by escalating costs.

George Osbourne’s “Devolution Revolution” of local authority funding includes various measures such as 100% retention of business rates up to £26 billion and a 2% levy on council tax which are designed to address the impact of the local authority spending cuts on social care. Whilst this is a step in the right direction, in most areas, it will still fall well short of generating the estimated 5% increase in funding needed to cover the costs of rising social care and runs the risk of creating vast inequalities in funding across geographic areas as local authorities ability to capitalise on these new measures will vary dramatically from region to region. Any benefit in real terms from these measures is yet to be felt by the sector and it is clear to see that against a background of an ageing population, where rising demand will only stretch available funding further, Mr Osbourne’s measures simply don’t go far enough.

The current situation is clearly untenable and there is unavoidable pressure on all stakeholders across the financial and political landscape to take action to avoid the catastrophic projections of a funding shortfall of up to £6 billion by 2020 becoming a very unwelcome, and insurmountable, reality. The industry is beleaguered but not yet beaten however, without significant legislative intervention, it is difficult to see an end to the mounting crisis and we can expect to see a year on year increase in the number of care homes buckling under the financial strain with almost 20 care homes, including the Elder Homes Group, becoming casualties since the start of the year.