Government Needs Better Oversight To Tackle Market Failures In Children’s Residential Care

Residential care costs for looked-after children have almost doubled in five years, reaching £3.1 billion in 2023-24, driven by rising demand, limited placements – especially for children with complex needs – and a profit-driven market.

The NAO’s latest report, Managing children’s residential care, assesses DfE’s response to challenges faced by local authorities in placing looked-after children in residential care in England.

Although most children’s homes are rated good or outstanding¹ many children are not in a setting that meets their needs contributing to worse outcomes. In March 2024, 67% of children in children’s homes were placed outside their local authority, with 49% placed more than 20 miles from home. Children may also move frequently, be confined without consent² or placed in illegal, unregistered homes. In the longer term, care leavers face higher risks of being out of education or work.

A shortage of places within foster care and for looked-after children with more complex needs are among factors driving up costs and creating a dysfunctional market.⁴ DfE and councils do not know how decisions made in health and justice settings affect children with the most complex needs, which makes it harder to plan and respond to demand.

Councils are competing for spaces in a mostly private market (84%) with mismatched supply and demand across local areas. This can allow providers to decide which children to home based on how much support the child needs or the profit levels available. In 2022-23 and 2023-24, DfE assessed failure of the children’s home market as one of its most significant risks.

The Competition and Markets Authority (CMA) has estimated that from 2016 to 2020, the 15 largest private providers had average profit rates of 22.6% for children’s homes with prices increasing above inflation.

DfE does not have adequate data on providers’ and councils’ costs, which makes it hard to judge fair charges, or take effective action to tackle excessive profits. DfE plans to improve cost transparency and introduce oversight measures by 2028–29.

In response to the challenges, DfE has focused efforts on prevention, to avoid children needing to be looked after.⁵ It has also started to make changes to the residential care system, such as with the Children’s Wellbeing and Schools Bill, which include implementing recommendations from the CMA and MacAlister reviews (2022). However, changes are taking time to implement.

As the Children’s Wellbeing and Schools Bill passes through the House of Lords, the NAO report outlines what DfE must consider for measures impacting children’s residential care to be effective. DfE has started piloting regional commissioning, with some areas starting to work effectively together, but it has not yet committed to when regional commissioning will be rolled out more widely.

The NAO has several recommendations to support DfE to establish a productive and resilient residential care system.

These include:

• Provide clarity on its vision for the residential and foster care market, and define and develop its role overseeing the operation and resilience of private providers
• Give local authorities further guidance and support so they can more effectively maintain homes and reduce the need for expensive repairs or new buildings6
• Agree with the Department for Health and Social Care and the Ministry of Justice a cross-government approach to ensure looked-after children with the most complex needs are provided the most appropriate setting and care
• Bring together a package of interventions to support providers in having enough staff with the right skills

Gareth Davies, head of the NAO said:
“The residential care system for looked-after children is currently not delivering value for money, with many children placed in settings that don’t meet their needs. Local authorities are forced to compete for limited places in an under-supplied market, driving high costs. Our recommendations are designed to help DfE, and local authorities find better solutions for looked-after children whilst they tackle this market failure.”