The UK Care Sector | Problem or Opportunity for Investors?

by McDermott Will & Emery

McDermott Will & Emery

In Depth

For investors considering the UK care sector, the Care Quality Commission (CQC) State of Care report released 10 October 2017 again raises alarm bells. Beds in nursing homes declined meaningfully, and funding pressures are causing a withdrawal of service providers from local authority contracts. 

On the other hand, an aging population, with the number of over-85-year-olds set to double in the next two decades, implies certain growth in this sector. Over-60-year-olds have seen their average wealth rise and are presumably able and prepared to pay for additional services at a time when there is greater acuity of need. Adult social care is a huge part of the economy, worth an estimated £42 billion.

So which is it, problem or opportunity? The message is notoriously mixed, with further variation depending on the region of the United Kingdom in question. While notable successes do take place and high-value acquisitions continue, significant numbers of smaller care home businesses are reported to be in distress. Many in the industry worry that a large operator may fail, and the recent announcement of a likely re-structuring by a major player will only fuel concerns. Another scenario like that involving Southern Cross would cause enormous disruption. In its care homes market study, the Competition & Markets Authority (CMA) acknowledges concerns about operators’ financial health. The CMA’s report focuses on the risk that margins are insufficient to incentivise the levels of investment necessary to meet future demand. The impact this trend might have on competition for services is an obvious problem.

Most observers would agree that the current position is unsustainable and change is necessary—and, indeed, the CMA recognises this. Such change could take a long time, however. In the current environment of uncertainty, potential investors should take seven key factors into account, especially when considering acquiring distressed operators.

1. Discussions with Local Authorities

The financial pressures faced by the care home sector are caused in part by the dominant buying power of local authorities that have forced prices down in real terms. Retaining a positive and open dialogue with local authorities and any Clinical Commissioning Group is crucial, because moving residents may cause even greater commercial and reputational damage to an already fragile business. The key underlying issue is that if the local authority rates do not cover the cost of care, and self funders are subsidising local authority prices, that must be an important part of any dialogue. But, in practice, it may be difficult to negotiate upward increases in local authority rates, especially if that pricing is part of a wider regional policy. Negotiations are also complicated by the fact that an operator will work with multiple separate authorities, meaning that any negotiations are time consuming and duplicative.  

2. CMA Recommendations

The CMA is due to report its findings and recommendations later in 2017. Care home operators will be keenly awaiting that outcome, not least because the CMA has already identified consumer protection issues with care home contracts and fees payable by self funders. As the CMA has already mentioned, it may recommend an independent body that would look at long-term planning and set reasonable fee rates.

3. National Living Wage and Auto Enrolment

The increase to the National Living Wage and the further scheduled rise by 2020 to £9 per hour are commonly cited as the most significant cost pressures on the sector. This pressure is compounded by auto-enrolment in the work place pension by 2018. Retaining skilled staff is also critical, however, both to maintain levels of care and to avoid agency costs. Any investor in an existing provider should consider the treatment of staff, especially in a distressed context where there may be an enhanced risk of losing skilled employees during the process. Investors also should be aware of Transfer of Undertakings (Protection of Employment) Regulations implications.

4. CQC Registration

Every care service provider must be registered with the CQC, and registration cannot be transferred between companies. If shares in a registered service provider are sold, there may still be new registration or notification requirements (e.g., for the Nominated Individual and any new CQC-registered manager). If the sale occurs in a distressed context, the regulation of the buyer will be an issue for any insolvency practitioner, and investors should consider strategies to mitigate this risk. Distressed investing can be done though debt instruments as well as through acquiring assets and shares, and both strategies have different regulatory implications.

5. Regulatory Burden

The care home sector is obviously highly regulated, and compliance is a major and necessary cost. This cost is exacerbated by a lack of cohesion. The CMA noted the difficulties service providers face because of differences in procurement policies among local authorities as well as duplication of regulatory regimes. Collaboration among services is also a key message in the CQC State of Care. Another factor that the CMA identified is the length of time and long-term investment necessary to build care homes in a regulatory environment where standards are increasingly demanding (e.g., need for en-suite bathrooms).

6. Reputational Concerns

Reputation will rightly be at the forefront of consideration for all stakeholders, lenders and investors. Failing care homes cause uncertainty and distress which need addressing, and the publicity must be carefully managed. No investor will wish to be associated with the risk to well being that can be linked to a care home closure. The CMA recommended that the monitoring of operators’ financial health be reviewed, particularly for significant operators. Any investor should be aware that increasing attention will be paid to this issue and that the financial well being of providers may need to become more transparent.

7. Brexit

The care sector generally relies heavily on staff recruitment from outside the United Kingdom. Significant numbers come from the European Union, and Brexit has heavily affected this situation. The CQC State of Care refers to a report that the number of nurses registering to work in the United Kingdom had dropped by 96 per cent in the period from July 2016 to April 2017. With ongoing uncertainty, there is real concern about the tightening of immigration controls that might result if the United Kingdom exits the European Union.


The CMA is due to deliver its final report by 1 December 2017, in the context of a highly uncertain political situation. Investors will be well advised to consider carefully this final report.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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