Funding for social care - the care home crisis

Care home fees are rising faster than ever, and are now standing at an average of £33,000 a year nationally - 10% up on last year. Prices in London and the south-east average £40,000. The average pension is £14,522.

The rise is driven by many factors:

• more people are living for longer creating greater demand
• physically disabled people and people with learning disabilities - people in their 30s and 40s - are also taking up places, as councils find that cheaper than providing sheltered housing
• care home staff costs are going up 
• councils are cutting what they will pay, meaning private payers have to pay even more to subsidise the council-funded residents.

Despite this rise in demand and in fees, care homes are closing because they can't make money. 

How is this possible? Essentially it is the difference between fixed costs and marginal costs. A care home needs enough residents to cover the costs it will have even if no-one is resident (e.g. maintenance, heating, rates, basic staffing). Once you have enough residents to cover those costs then every extra resident is a bonus

Of course, each resident still does cost money - food, nursing care, laundry, and so on. So once your fixed costs are covered an extra resident doesn't mean an extra £40,000 in profit, it might only mean an extra £10,000.

This is the standard way to make these businesses work, and it is why losing only a few residents can quickly lead to serious problems.Why doesn't it work in care homes? The difficulty is that the councils pay fees below the cost of care, so the council-funded residents actually cost the care homes money. The difference comes from private payers - their fees subsidise the council-funded residents.

This seems odd, but it can make sense to take council-funded residents. If you want private payers then you need somewhere for potential customers to visit - no-one buys expensive care for their nearest and dearest 'off plan'. People want to see what the home is like, meet the staff and test the atmosphere. So when you set up a home you start with guaranteed council-funded residents, budgeting for a loss in the first few years and then slowly draw in the real money.

Previously this worked, as care homes could attract enough private payers to cross-subsidise the rest. But as prices rise and incomes stall, fewer and fewer people can afford to pay privately, so the number of private payers is reducing and the subsidy isn't there.

It  is no use taking in more council-funded residents - the fees don't cover the costs. You can go upmarket and focus entirely on private payers - or go under. So homes close and elderly people become 'bed-blockers' in their local hospital because there is nowhere else for them to go - and a hospital bed costs a lot more than a care home place.

The market failure here is in who pays the costs. A person in a hospital bed is paid for by the NHS - i.e. from national funds, the care home has to be paid for by the local council. Given how stretched they already are, it is no wonder that they don't want to take on the costs of care. In poor areas councils have even less money and a lot more pensioners who can't pay for their own care, so those councils can't even afford to pay.

One possibility is for the NHS to pay for the care home places - they already pick up the tab for any specialist care needed by residents. However, this would be resisted by local councils as it would mean their funding being cut even further.

The fact is that something does need to be done, and done soon. Mr Hunt, the health secretary, has managed to lever an extra £20 billion for the NHS this year from Mrs May, though she has not said where the money is coming from. His next target is social care, which needs at least another £10 billion this year - rising to £20 billion by 2030. Doing nothing is what Mrs May is best at, but this issue is at the heart of a fair and caring society. She does believe in that, this is her chance to show it.