Care homes struggle as pandemic prompts changes to business model

For Britain’s biggest care home operator, the pandemic that has claimed more than 2,000 of its frail and elderly residents is far from over.

Forty-three of HC-One’s 326 homes are in lock down and closed to new residents, occupancy rates remain at least 10 per cent below pre-pandemic levels, and there is a looming staff crisis.

“Covid is still very much with us,” said James Tugendhat, the chief executive of HC-One. “Right now we are managing, but it is very, very tough.”

Earlier this month HC-One was forced to pay a £10,000 golden hello for night nurses in Scotland, while the government’s demand that all employees are double jabbed by November 11 risks a further haemorrhage of staff this winter.

“We’ve had very, very few outbreaks in our resident community, but all it takes is two colleagues testing positive to be declared an outbreak and that means admissions and visits stop,” said Tugendhat, a former Bupa managing director, who took on the job in the middle of the crisis in September last year.

The combination of lower occupancy and increased staffing and Covid-related costs is changing the business model for a sector that already operates on low-margins. 

Social care is means tested in Britain and while most of the industry is shifting its focus to residents who pay their own, higher, fees, HC-One is targeting the elderly with financial resources low enough to be paid for by the state.

“We are the only major provider seeking to make local authority care the core of our operating model,” said Tugendhat.

The question is whether the focus on state funded residents will work at a time when the fees local authorities pay are considered inadequate to cover costs.

In April, HC-One was on the brink following a series of Covid-19 outbreaks at its homes that halved new admissions, lowered occupancy to 76 per cent, and dented confidence.

“It was Southern Cross all over again,” said one person close to the company, referring to the care home provider, then Britain’s largest, that collapsed in 2011. 

HC-One disputes the allegation, insisting that although it was under pressure it had sufficient cash and was never in danger of breaching loan terms. Although the company was formed out of the ashes of Southern Cross, Tugendhat argued that unlike the bankrupt care home group it now owns almost all of its properties.

In May, HC-One refinanced and secured £60m of investment from an existing shareholder, the US private equity firm Safanad, which gave it majority control. 

Court Cavendish, an investment vehicle belonging to Chai Patel, the former owner of the Priory, also increased its investment, while at the same time HC-One agreed a £540m interest only mortgage with Welltower, a New York listed property investor.

The deal cuts its debt by £66m to £540m but will also lead the business to shrink. It has already decided to close four homes and sell 52, exacerbating a pre-existing shortage of beds for the elderly needing care.

Who pays for the UK's elderly care

The fear is that more closures across the sector will follow. Government schemes such as infection control funds, tax breaks on national insurance, and furlough have supported the industry so far, but they will come to an end and occupancy remains low across the sector.

Although the industry welcomed the government’s planned £5.8bn social care package announced earlier this month, it remains unclear how much or how soon, the money will flow through to care homes.

Most operators subsidise local authority residents by charging fee paying residents up to 40 per cent more, even in the same home. But alongside the funding boost, the government is introducing rules to prevent this cross subsidisation. 

Tugendhat remains optimistic about the government’s plans. “The devil will be in the detail but it’s hard to believe we will see less money coming to social care,” he said. 

Nick Hood, an analyst at Opus Restructuring, which has advised several care home operators, said it is difficult to see how the business model could work given that it is focusing on loss making residents.

The hope for HC-One is that its investors have deep pockets. As part of its refinancing, HC-One has increased minimum pay for its 22,000 staff to £9 an hour and is investing £55m in refurbishments, so it can cater for more complex care including the 80 per cent of its residents, who have dementia. 

But it is not trying to compete with the more luxurious end of the market. “We are about kind care, not about a hotel experience,” Tugendhat said. “It’s homely versus hotel. There is room for differentiation.”

HC-One has attracted criticism in the past, from unions and anti privatisation groups, for its complex structure, which includes a parent company in the Cayman Islands. Its offshore ownership has left it open to accusations that taxpayer funding is being siphoned off to pay interest, dividends and management fees, instead of going to the elderly. 

Tugendhat said the company pays UK tax, but agreed that more transparency is needed. “What is important to us as a delivery agent of the state is to be seen as having a transparent structure.”

In line with that ambition, HC-One plans to reduce the number of companies it owns from 82 to 37 by the end of the year, and to have just 12 overseas entities, down from a peak of 28. Tugendhat hopes to go further, although he concedes that its foreign ownership means it will not be able to dismantle everything.

“We are proud to have the investors we have,” he said. “At the moment, there is no other source of capital and that’s one of the arguments that’s not always marshalled alongside the criticism. We live in a world of trade-offs.”

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