The challenges facing the care sector are not news to anyone. However, as we enter 2023, a sector which has historically operated on thin margins may be about to hit breaking point, with the number of insolvencies involving residential care businesses having increased by 59% in the last year alone.
Is it possible to identify the straw which broke the camel’s back? Or is it simply that these stressors have been creeping up on businesses, before finally hitting a point where they cannot be ignored?
What are the challenges?
Alongside an ageing population which will, ultimately, lead to an increased number of people in care, the sector is having to balance the more immediate challenge of staff shortages. This issue has been exacerbated in part by Brexit, in addition to the lack of government funding provided to the sector. The number of staff vacancies increased by 55,000 to 165,000 between 2021 and 2022 – the highest since records began. As well as this being an obvious issue for the quality of patient care, these shortages present a significant challenge for a functioning business. With fewer staff working at these care homes, many employees are having to work considerably more than their contracted hours, which ultimately leads to job dissatisfaction and high turnover.
An obvious current issue for any business in the UK is the unprecedented rise in energy costs. However, for care homes, this is a particularly aggravated issue as they serve to protect the health and wellbeing of the elderly, which entails providing a warm environment. In some cases, providing a sufficient standard of quality and care will also mean providing machine support to residents. Simply put, unlike the majority of the UK, turning off the heating is not an option. Even with the Government having recently announced new support for care homes, for many this will simply not be enough to make an impact.
A bleak post-Covid landscape has been a concern for many businesses, but for the care sector one of the more pressing issues has been the increase in insurance premiums. Unfortunately for the sector, the driving force behind this is almost entirely out of their control, with many insurers being reluctant to insure post-Covid. This has stemmed from the concern that there will be a surge of litigation claims due to the number of fatalities that occurred within care homes during the pandemic. This decrease in the number of insurance providers has meant that the remainder have been able to put up their prices, with some care homes now paying 300-400% more in insurance premiums. Without this insurance, care homes simply cannot operate.
In response, many prudent boards have had to resort to taking on levels of debt which are now reaching a point of being unsustainable: it is this that has driven the increasing number of insolvencies and business failures. But is this really the only option that care homes have?
A brighter future?
The restructuring plan could be a lifeline for beleaguered care-home businesses. Following its introduction in 2020 the restructuring plan has been gaining momentum and, as we examined in our previous blog post, could take off in 2023 as a way for businesses to restructure, whilst retaining control and being able to deal with any dissenting creditors.
A restructuring plan has the potential to allow a care home operator to re-base their rental obligations, allow an orderly closure of homes that are not viable and, potentially, re-size secured debt whilst retaining the same corporate structure. Being able to stay in control of the process and leave the corporate body intact is critical for care homes, as it allows them to retain their regulated status and licence and ensures the best possible continuity of service for residents.
We have already seen Lifeways Group choosing to proceed with a restructuring plan, and expect as restructuring plans gain even more traction in the mid-market, that they could become a lifeline for struggling care-home operators, allowing them to weather the storms they are currently facing.