Put together a rise in the privately-owned residential market in learning disabilities, an exodus of small-scale private providers and the rise of debt-laden mega-providers whose first loyalty is to their investors, and you have a problem. Ivan Farmer* explains a complex finance web, and the threat it poses to the independence of people with learning disabilities.

We talk a lot about taking an ‘asset-based’ approach to supporting people with disabilities – it is part of everyday language about using strength and potential across the social care system. However, there is another group which views people with learning disabilities as a different type of asset – a financial asset to be borrowed against in increasingly complex financial transactions, funded by private equity, investment banks and pension funds from across the globe.

Amongst all the headlines in the specialist and mainstream media about the financial crisis in care, one sector is largely keeping its head down – the privately owned residential care sector for people with learning disabilities. Some of the pressures that impact on the wider care market – such as the national minimum wage and the current policy mess that is sleep-in rates – are undoubtedly causing providers some operational and financial concerns. They also have problems recruiting that are similar to those in the older person sector. However, the narrative of a private provider sector in financial crisis is not borne out in learning disabilities.

Higher fee levels

One of the most obvious reasons for this is relatively simple – fee levels are significantly higher in learning disabilities residential care. Average fee levels are at least £500 per week more than in older persons care – and many more are considerably higher still – reflecting the complexity of need of people with learning disabilities as well as the need to offer more activities and skills acquisition than other sectors. Services have tended to be smaller, giving less opportunity for economies of scale for providers and a more person-centred, homely environment. However, these fee levels, as well as the significantly longer stays of people with learning disabilities in residential care, the fact that the care homes are a physical asset that can be borrowed against, and the entirely state-funded market, have created an environment that is attractive for investors.

In recent years there has been a huge rationalisation in the privately-owned learning disability residential market. The growth of the large national and regional private providers has been quite remarkable. The model is pretty consistent: look for external financing to fund acquisitions from the old ‘mom and pop’ providers looking to exit the market, and sometimes open some new homes yourself as well.

Funded on borrowing

All this is funded on borrowing so as a provider there is a dual focus. First, you must maintain their EBITDA (Earnings Before Interest Tax Depreciation and Amortisation), which is an important measure for your investors, particularly if there are plans to sell the business. Second, you must extract as much cash as possible from the fees to pay down some of the debt you used to acquire the business, and potentially pay yourselves some dividends or a ‘management fee’. Complex webs of company ownership structures are created, money moves around a myriad of related companies, becoming ever harder to track. Some of it goes offshore into further financial opaqueness, all designed to avoid paying corporation tax and to financially engineer a business that can generate EBITDA and cash but never make much of an actual profit.

Once the business is established, the next phase is to ‘flip’ the company. The private equity operator in particular does not think in 15 to 20 year cycles like the traditional care home operator. The objective is not to build up a nest egg to retire on once the mortgages have been paid off on the care home. They plan in three to five year cycles: borrow a load of money, buy a business, take as much cash as possible out while growing the business and then sell it to the next investor. And repeat. Some might ask, ‘so what’?

Some of the largest learning disability care home brand names are on their third or fourth owners in a relatively short space of time. They have grown to significant size through acquisition and are increasingly dominant – so dominant in fact that collectively they are responsible for many thousands of learning disability beds. So why should we care, they are doing OK aren’t they? The services are mostly satisfactory according to CQC?

Here are three reasons why we should care.

  1. The negative impact of all of this debt on care and support

As a provider’s debt burden increases, the amount of money available to spend on actual support decreases, particularly in these financially constrained times, when annual increases from councils have been hard to come by. It used to be a commonly held view that 70% of care home fees went on staff – some of the large private providers have pushed this narrative themselves – but their company accounts paint a different story. It is not unusual to see providers spending only 55% of their income on staffing (income, let us remember, that comes entirely from local government and the NHS). Private providers are much better than the state or the third sector at managing costs – so the growth pressure is often on financing their debts, debts that have arisen through business decisions their investors have made to extract maximum value in a short period of time. The upshot of this is that there is less money to employ staff, and those staff you do employ are paid low wages. This impacts on the quality of care provided.

  1. The perverse incentives that come from needing an asset to borrow against

Whether a provider does a sale and leaseback on their buildings or is simply owning its buildings and borrowing against them, having a physical asset helps the valuation of the business. Many providers have each bed valued on commercial terms and then use this to inform the valuations of their business. Additionally, some borrowing can be predicated on occupancy levels. All of this leads to a perverse incentive of investing in models of support that do not lead to more independent living, with the risks that resultant ‘voids’ will cause problems with their financial backers.

  1. Misleading claims of ‘specialism’

There are of course some truly specialist private providers who support complex people extremely well and are paid fee levels accordingly – as they should be. However, for an investor, being a specialist provider is attractive as there is a premium that can be charged on the fees. How many times have you looked up a residential home because it has ‘specialist’ in its Google search terms and then found it is specialist in everything going? This might look good to an investor but can you really be a specialist in every type of learning disability support within the same residential home – or even the same organisation – effectively?

What does the future look like?

Aside from the obvious risk of a Southern Cross scandal happening in the learning disability sector, what does the future look like? Should we just accept the status quo – ever larger providers borrowing more and more money, having more power in the market, the increasing commodification of people with learning disabilities? Or should we be agitating for more change. There continues to be huge pressure on the Assessment & Treatment (ATU) sector for change, as the recent excellent #7daysofaction campaign demonstrated. It argued that people with learning disabilities in ATUs were being treated as financial assets and the provider had no incentive to move people on.

There is a risk that we just move that problem down from ATUs to residential care and we will all be discussing this again in five years time. There is a large amount of development activity by some providers to create step-down provision from ATUs that has the appearance of supported living but is, in fact, residential care, with all the lack of security and opportunity that brings.

Current reality

We could argue that for many people with learning disabilities that is their current reality. They are a financial asset being traded by private capital across the globe, creating a sector with no incentive to change and do things differently. What interest do private equity, pension funds and investment banks have in people with learning disabilities? Their first and main responsibility is to secure a return on their investment and that surely creates a conflict with providing good quality care with a long-term view of personal development.

Why not be more radical? Let’s see:

  • councils borrowing money (money is very cheap for local government) and build community-based settings for people with learning disabilities to have a proper tenancy in;
  • commissioning of more supported living and proactive work with the many providers who want to work with us to provide more community-based support – to be clear, this can include private providers;
  • a decisive move away from people with learning disabilities being seen as an asset that can be traded every three to five years by faceless money people;
  • freeing up of money from debt repayment in the system to pay support workers a decent wage and attract more people to work in this fantastic sector.

Let’s finally put choice and control at the heart of learning disability care.

*Ivan Farmer is a pseudonym