LaingBuisson welcomes Wednesday’s budget announcement on the living wage. But as the Treasury is well aware, there will be knock on effects in some publicly funded, low pay sectors where government will have to take immediate action if service providers are not to be forced out of business.
The care sector is the largest of these, with councils and the NHS paying for about 250,000 residents of all ages in independently run care homes across the UK and a similar number of people receiving publicly funded home care from independent agencies.
In the case of care homes, using its widely used ‘fair price’ model, LaingBuisson calculates that the increase in the minimum wage from £6.70 per hour (which comes into force in October) to £7.20 per hour in April 2016 will require an increase of about 5% in council funding, if providers are to be compensated for the extra cost. At present levels of funding from central government, councils simply cannot afford it, and nor will they be able to afford to pay for further living wage increases up to the £9.00 per hour target in 2020.
But neither can care home providers afford to absorb the extra costs. Publicly available data from the three largest care home providers – Four Seasons Health Care, Bupa Care Homes and HC-One Ltd – make that very clear. In each case more than 70% of their residents are publicly paid, which makes them especially vulnerable:
- After 5 years of austerity and real terms council fee reductions, providers’ gross operating profits as a percentage of revenue have tumbled from 25% to an all-time low now of 15%, for Four Seasons, Bupa care homes and HC-One in aggregate.
- If councils do not raise their fees to take account of additional ‘living wage’ costs then gross operating profits would take another 5 percentage points drop to about 10%, other things being equal. At this margin, even care providers with prudent levels of gearing would start going to the wall.
- Providers are also faced with additional uncertainty from the Care Act, due to be implemented at the same time as the living wage in April 2016, which will put further pressure on their margins.
A similar narrative exists for homecare.
Commenting on the news, LaingBuisson CEO William Laing said: ‘It is clear from the foregoing that the government will have no choice but to review funding available for care in 2016/17 in the light of the living wage policy. Ministers should grasp the opportunity for a full scale review of the adequacy of funding under the current system of public support, and seek to place it on a firmer footing for the long term.’