SOME of the Big 26 care home providers make use of ‘complex company structures’ is the finding of a report from the Centre for Health and the Public Interest.
Its title is: ‘Plugging the leaks in the UK care home industry’. The report clearly insists from the start: ‘Without doubt the financial model underpinning the UK care home industry is unsustainable.
‘Despite the billions which go into the care home sector, care home workers are amongst the lowest paid workers in the country, with high turnover rates (39.5%).’
‘The complex nature of their corporate structures,’ it claims, ‘meant that “profits were hidden in the chain’s management fees, lease agreements, interest payments to owners, and purchases from related-party companies.”
‘The Big 26 providers identified that many of the large for-profit companies have adopted structures which avoid tax, limit their liabilities if they are sued, and increase the amount of hidden profit which goes to their owners, investors, and related companies.
‘The interest rates on these loans range between 7% and 16%, which is considerably higher than the cost of borrowing money from external investors or banks.
‘These debt arrangements may reasonably be seen as designed to generate extra hidden profit for the owners of the company – the debt repayments made to related companies leave these businesses before their pre-tax profit figure is calculated.’
It continues: ‘In addition, interest payments on loans are tax deductible and the related company paid is often offshore, so tax is saved at both ends – representing a double leakage for the taxpayer.
‘This may explain why the Big 26 providers with an offshore owner paid out £9.09 of every £100 of income on net interest payments out, compared to £2.86 for all other large providers.’
‘Overall,’ it therefore stresses: ‘These arrangements make it hard to understand how much profit some of these companies are generating from providing care home services.
‘Eighteen of the twenty-six largest providers had corporate structures where the operating company (which runs the care home) was split from the property company (which owns the home).
‘This leaves operating companies with few assets (since they no longer own care home buildings). These companies are responsible for providing safe care, and if they fail to do so they can be sued. But the only assets the company will have available to pay out any compensation are cash in the bank and any equipment it owns.
‘This means that the split can be seen as a way to protect valuable property assets from being at risk. Indeed, five out of the 18 companies with this split had negative assets (in 2017, or the latest available year) meaning that their liabilities (what they owed in total over time) were greater than the value of their assets.
‘This is a public interest issue, since those providing care need to be able to be held financially responsible for any harm they may do.’
Nearly all the care homes in the UK are now in private hands (‘94% of all beds’). ‘Whilst a substantial number of them,’ the report continues, ‘are owned by small businesses, a large number of them are owned by international private companies.
‘In total, this means that 2,316 care homes in the UK (30.8% of the total number of registered beds) are owned by the 26 largest companies, whose investors see them as a source of income and profit.
‘Each year, independent care homes for older people receive £15.2bn in income. £7.4bn (49%) of this comes from local authorities (LAs) and the NHS, whilst the majority, £7.7bn (51%), comes from individuals and their families, who are often forced to pay privately because of the tight restrictions governing access to state-funded care.
‘The provision of residential and nursing care for older people in the UK has never been entirely provided by the state, in contrast to health care which is now mainly delivered in NHS hospitals and other NHS facilities. Instead, under the welfare settlement of the 1940s, social care – the delivery of personal care such as bathing, dressing, and feeding people who are in need – was not covered by the NHS and has remained the responsibility of local authorities and private individuals.
‘With local authorities unable to provide these facilities themselves and with a growing population of older people, a new market opportunity was created for investors.
‘As a result, since the 1980s the provision of residential and nursing home care has changed dramatically. From 1980 to 2018 the number of publicly provided (local authority) residential care beds fell from 141,719 to 17,100, a fall of 88%.
‘Similarly for nursing care beds, independent providers have grown from providing 25,523 beds to 194,100 beds, an increase of over 660%.
‘The care home sector is potentially lucrative because of the income which comes from providing a care service with growing demand, due to an ageing population, and because of the stability afforded by the fact that the state provides a significant share of the revenue.
‘But it is also lucrative because of the value of the property – the homes themselves – which are central to the delivery of the service. From the perspective of investors, therefore, the care home industry both in the UK and in the US is seen as much as a property business as it is a care business.
‘The term “Private Equity” refers to a range of investments which are not traded on public stock markets, so individual retail investors cannot buy shares in them. In general Private Equity funds tend to buy large commercial companies using a combination of capital raised from private investors (rather than on the stock market) and borrowed from lenders.
‘In many cases a Private Equity fund will purchase a company using a loan which is secured against the assets of the company being acquired. This means that a proportion of the income which is generated by the company will need to go towards repaying the original loan used to buy the company.
‘The funds aim to invest in a company for up to 7 years and then sell it on for an increased price.
‘Local authority-funded social care in England is currently only available to people with assets (including housing wealth) and savings of less than £23,250. Even if individuals meet this “means test” – which is becoming harder to meet, due to the increasing market value of houses – they may fail to be eligible for state funding because free local authority care is increasingly only available also to those with what are called “substantial” care needs.
‘The demand for social care is expected to grow as the proportion of the UK’s population that is elderly rises along with life expectancy. It is estimated that 1.2 million people (in 2016) didn’t receive the help that they needed for essential daily tasks (“unmet needs”).
Ideally, most of the income received by a care home company would be spent directly on caring for residents, through expenditure on care staff, facilities, food, laundry, entertainment, and other services for residents. Any money which does not go to these areas is less clearly legitimate, meriting critical analysis, and should therefore be treated as potential “leakage”.
‘A detailed analysis of the Four Seasons care home chain found “cash extraction tied to opportunistic loading of subsidiaries with debt; and tax avoidance through complex multi-level corporate structures which undermine any kind of accountability for public funding”.
‘“Offshore ownership” – this allows tax to be avoided when money is paid to related companies that are based overseas. This is often achieved through repaying large loans which have been made to the care home business from a related offshore company. Expenditure on interest repayments is not usually subject to tax.
‘Splitting up the company – care home businesses are often split into multiple companies with some companies in the group providing care in the homes, while other companies in the group own the properties or provide supplies and management services.
‘The care home company is then charged rent or billed for supplies or management fees by the other companies. This reduces its pre-tax profit but not that of the overall business. The fees and prices charged can be at above-market rates, so that profits are moved out of the care home company, making it look less profitable than it actually is.
‘Sale and leaseback – many of the large companies sell their care home premises to a buyer and then agree to rent them back over a number of years. In some cases the care homes are sold to and then rented back from a related company. These rental agreements are often opaque so it is hard to determine whether the rent paid by the care home company is reasonable or not.
‘If the rent charges are set deliberately high then the profit of the care home company is reduced, although the profit of the overall business is not.
‘When rental payments (via sale and leaseback or otherwise) are paid between related companies it becomes hard to identify the true profitability of the underlying care home business and hence the true level of leakage, because rental charges may be levied by related companies at rates far higher than would be set by the market.
‘In addition, the offshore location of some of these related companies means that UK taxes can be avoided, which is another form of leakage from the system, although one that we have not been able to quantify.
‘The collapse of the care home provider Southern Cross was in part due to unaffordable rents on sale and leaseback care homes.
‘Ordinarily, a company will seek to borrow as cheaply as possible in order to keep the cost of debt repayments as low as possible, and to maximise their profit. Because most of the debt in the large for-profits is owed to related companies at rates which are higher than would be available from external lenders, these debt arrangements may reasonably be seen as designed to generate extra hidden profit for the owners of the company, a sum which leaves these businesses before their profit before tax figure is calculated.
‘Interest payments on loans are tax deductible and often the related company to which they are made is offshore, so tax is saved at both ends.
‘In addition, the larger for-profit care home companies are not interested in either purchasing or building smaller homes but instead prefer to build or invest in very large homes with 60-120 beds. These facilities – which have the potential to generate large amounts of income – are also increasingly being built to attract the growing private pay market rather than to meet the planned needs of specific communities.
‘Both the high levels of debt which are loaded onto these new facilities and the high cost lease arrangements which underpin them mean that this is an expensive way to finance new facilities for older people. The use of private finance to build public infrastructure such as schools and hospitals can lock taxpayers into repaying the high cost loans which have been used to finance them.
‘Local authorities and the NHS could build and own the new care home infrastructure. A decision could then be made about whether to operate these homes themselves or lease them out to other public, private, or not-for-profit providers.
‘This would limit the opportunities for the type of extraction and leakage that we have identified in the form of rental payments and debt repayments. State ownership of the care home infrastructure would also offer protection for residents against the risks associated with the financial collapse of a care home company.’