Former Finance Director, Bupa Care Services and Bupa UK
Keith is a qualified accountant with 15 years experience working at Bupa, one of the largest care home providers in the UK. He worked as General Manager and Finance Director for Bupa’s Healthcare Professional business before moving to Bupa’s care home unit as Development Manager where he led M&A and policy. Keith then moved to Finance Director of Bupa Care Services where he led a $1.2bn AUD acquisition and integration of Australian and New Zealand elderly care assets and was a strategic lead for over 300 care homes in the UK. Keith has vast experience engaging with the Government, Department of Health and various policymakers to discuss and implement regulatory frameworks for UK social care. Read moreView Profile Page
Keith, can you start by providing context to the evolution of the UK social care industry in the last decade?
I think it’s a great topic and I think the social care sector within the UK has changed enormously over the last 10 years. It’s seen a real sea change. Ten years ago, social care was by and large provided by the state via local authorities. But as a real focus on public spending started to happen, post the financial issues in the market in the late ’80s to early ’90s, it forced local authorities to start thinking hard about money.
They found that social care was something that was actually very expensive for them, not just providing care but providing support effectively for bricks and mortar because that was expensive, providing residential homes. What started as a trickle—inviting private sector partners to help them support—turned into a flood.
You end it with the position now, where just over 90% of social care in the UK is provided by the private sector and social care now includes residential care, care for people at home, adult care, and childcare. 90% is provided by the private sector, which is a fact that few people realize. That in itself has brought growing pains as we’ve seen the switch. Over those years, we’ve seen an increasing polarization between healthcare and social care. Healthcare is effectively defined as acute care that’s provided by the state through the NHS, and social care is ultimately provided by the state but through local authorities and then into the private sector, where 90% of it is provided. The differential is that healthcare is free at the point of requirement, so you go to the NHS and it’s free; you don’t have bills. However, social care has become means tested. It all boils back to how much money is ultimately in the pot for government-funded social care.
Increasingly, we see local authorities use models of means testing, and increasingly those criteria for people to qualify for state funding and social care have been increasingly difficult. We’ve seen a swing; we’ve seen polarization between health and social care. We’ve seen a swing in terms of the provision of social care to the private sector. What we’ve also seen on the supply front is that labor has become increasingly scarce, and that’s really due to poor staff planning at a government level. It’s been very poorly done over the last few years which has created a real shortage of qualified nurses, doctors, etc. This has driven payrates up for a period, but within the healthcare NHS sector, and it’s left social care lagging behind, fighting for scraps for labor. Labor has been difficult.
There have also been very public failures in social care. There has been an increase in regulation to meet those failures. You’ve got increasing regulation; you’ve got a scarce labor force; and you’ve got an increasing level of demand because you’ve got an aging population and therefore a lot of the social care projects—about 60 billion pounds of it, that’s the size of the market—relates to the care of the elderly people, whether residential or in their own homes. So, there’s been quite a sea change over the last few years with increasing support from the private sector.
Can you elaborate on the government budgeting process?
A budget year is a fiscal year in the public sector, so it’s effectively April to the end of March. Local authorities start the planning cycle during the summer, and they plan for what they think they’re going to need effectively to cover all areas of their responsibility, including social care. They will then submit a budget to government in the autumn and negotiate around that. The government will then turn around say, “We hear what you’re saying, but there’s a squeeze on, and therefore we’re only going to allow you x amount”. So, if the local authority asks for a billion pounds worth of support for an area, and the government turns around and says, “Sorry, you can only have £700m”. That’s what they have to play with. Then the local authority will go away, re-cut the budgets, and determine where the key priorities are. They will then look at innovative ways in terms of how to continue to provide a service.
As I’ve explained, social care has become more of a partnership with the private sector. The private sector has really started to build up a presence within social care. That’s how it works. Then local authorities themselves have the central budget from government but they also source money locally through council tax, and then more recently for social care, there has been a social care pre-set, which was introduced about three years ago, which helped them support specifically social care. In theory, this money that is raised locally is to only supplement the provision of social care governed within that particular local authority. Whether it actually finds its way to other budgets or not, no one really knows.
If you read the reporting from the largest private chains in the UK, their view is that the system is broken, and they pass the blame onto the government or local authorities who are not paying enough for the care provided. Do you buy into this narrative?
Yes, I do. As we know, 90% of social care is provided by the private sector, but there are also individuals who pay their own way, called “self-funded” people. These are people who prefer to pay to know that they are getting the service that they want, as opposed to the service that the local authority can only afford to give them. The increase in the number of people self-funding their way is now just over half of social care—if you imagine the market in total is around about 16 billion pounds—just over half of that now is related to people paying their own way. That has just become a bit of an issue.
One of the reasons for that is because of an increasing level of demand, as well as an increasingly tight criteria for funding for the public. This has meant that the actual provision of care has almost become secondary and it’s become quite minimalistic in some ways. Anybody that’s had an older relative, for example, that’s become increasingly infirm and wants to stay at home as long as possible—that is the preferred choice for most people—but they need help and support. Often, you can find that people are waiting two or three years on a waiting list before a local authority can afford to pay, assuming that an individual can’t afford to pay for it themselves. Hence, that’s why it drives people to pay for it themselves if they can. Otherwise, you have to wait two or three years if you can’t afford to get support yourself. In that context, I would say the system is broken.
Indeed, it’s worth also drawing on a report from the CMA. A couple of years ago, they did an investigation into the residential care sector. A key finding was that a provider of care, whether it be in the public sector or private sector, to someone that can only be funded by the government is almost impossible to provide a return and a level of care that is needed for the budget allocated to them. Typically, for residential care funded by the government, the fee £550-600 on average per week. But it typically costs £800 to provide the level of care for that individual for which the government is only wanting to fund £600-700. Therefore, there is a disconnect in the gap, which means, yes, the system is broken.
The other argument for that, though, is that the financialization of social care itself has put pressure on the system due to the fact that they’re run by private equity sponsors. If you think of the private equity play here, the cynical view is that they buy the freehold assets and the operating business, split them into a ‘Opco-Propco’ structure, then leverage the business, and extract cash from the business through outright or sale-and-leasebacks? What is your view on the sustainability of this model?
I believe it has a role to play. As I mentioned, just over half of the market is now funded by people paying their own way. You’ve got people making their own choices.
Are private payers subsidizing the public payers?
You can look it at that way. Some of the headlines would say, ‘why am I paying £1,000 a week for care when somebody next door is only paying £500? Therefore, I must be subsidizing’. As I mentioned, the reality is that typical cost of care might be £800 a week for a normal residential nursing care, and therefore at £1,000 a week, then all that is happening is a resident is simply paying for the care properly and allowing for a margin for the operator to be able to fund the business in the first place and meet financial obligations. Whereas if the cost of care is £800 and the local authority is only funding £500, then there is effectively a £300 loss. I would like to think that the basic state funding system is fundamentally broken, and indeed that’s what the CMA reported two years ago. There’s a big independent body of thought, and there are lots of other reports that would also support that.
So private equity sponsors have a target rate of return required for their limited partners. Do we get to the more political question of, should this industry really be targeting a higher return when it’s so crucial to welfare?
It goes back to what the future adult care model should look like and what all parties should play as part of that, in terms of a social responsibility. Clearly, any private investor that’s investing in any business does so for a reason: because they want to make a return from that. We all do—when we put money into a bank account, into our savings account- we want a return from that. Why would somebody not expect a return when they are risking a substantial amount of money in purchasing a business?
I think that there is a space within social care for investors, and in particular private equity, because it drives innovation. It does drive efficiency. I’ve seen examples where it has driven investment in technology that has supported the sector as a whole, and I don’t think that would’ve happened if the whole sector was funded by the public sector. An example at the minute would be the use of robotics in the dispensing of medicines. There are lots of examples around where businesses are just testing others ways of actually making the process of dispensing medicines more efficient and safer as well. I’m not sure that level of innovation would have come through in a completely shared? environment.