Sunday 5 June 2011

Important Lesson From the Southern Cross care home crisis

The current crisis at Southern Cross is a cause for great concern and has been the subject of much debate. It has come at a time when there is huge concern about the health and social care sector being opened up to more competition,concern about the quality of care in residential care and hospitals and concern about NHS Hospital Trusts in financial crisis.
Unfortunately (though predictably) much of the debate about these important issues involves simplistic arguments about the unsuitability of applying the 'profit motive' to social care. These arguments ignore the fact that the majority of people involved in private sector social care (including most of the managers) are employees and never see any profit. Like their public sector counterparts they are likely to be motivated by wanting to provide a good service to the people they care for. Certainly, they could forced to cut corners by owners to save money- but this is equally true of people working for cash strapped public services.
There ARE reasons to be concerned about the private sector involvement in social care. However, to examine them requires a much more nuanced approach than that on display in some parts of the media.
The current problems with Southern Cross would appear to derive from the business model which the company has been saddled with since 2007.
Southern Cross was purchased in 2004 for £162 million by an American private equity firm called Blackstone. It was floated in 2007 on the stockmarket with a valuation of £423 million. The business model was called sale and leaseback. The company would sell off its valuable property assets, (ie the buildings which housed the care homes) to property investors. These investors apparently include the Qatar Investment Authority and other wealthy landlords who were guaranteed steeply rising returns. The careccompany would then lease back the properties from their rich landlords with 30 year leases which required them to pay ever increasing amounts of money in rent each year. This arrangement assumed that the demand for residential care would increase year on year and that local authorities would be willing to continue to pay increasing amounts of money for residential care.
The money that the company made from the property sales was used as finance for the purchase of additional care homes which were then in turn sold and leased back. As long as property values kept rising and there was the ongoing income from new residents the flow of money continued.
Blackstone made a 300% return on investment from this deal.Four executives at Southern Cross sold their entire holding of the company in December 2007 when the share price was £5.50 per share netting them personally a combined £35 million. The share price plunged just 6 months later and stood at £0.063 per share on 3rd June 2011.
Now the company cannot afford to go on paying the steep rents and local authorities are facing the prospect of having to rehome large numbers of vulnerable older in the event of a collapse.
The Southern Cross collapse was a result of high risk business strategy which had reaped huge profits for a small number of people and a private equity firm. The model was vulnerable to economic and political changes. In any case it would have been cheaper to have funded expansion from loans than from sale and leaseback of peperty.
The long term fallout from this is going to place a great deal of anxiety for vulnerable older people and their relatives, local authorities, council tax payers and current investors.
This is likely to be especially felt in the north east where the care home chain has a strong presence. So far central Govt has shown very little leadership. Their localism agenda seeming to allow them to bail out of any responsibility for anything which they consider to be a 'local' issue. But Southern Cross is not a local issue. It is a regional and a national issue. It requires a national solution and new strategies in dealing with issues of private sector involvement in public sector provision.
I believe the lessons from Southern Cross are as follows:
1. Private sector involvement is not a panacea for the high costs of providing decent health and social care.Research by the Financial Times (4th June 2011 p2)suggests that PFI intiatives are imposing unstainably high costs on a number of hospital trusts accross the country. PFI was once thought to be an easy way iof raising money for capital projects but it is now being realised that PFI schemes have huge long term cost implications.
There is currently thought being given to new methods of funding of services such as social impact bonds. The advocates of these funding mechanisms suggest that they will offer reduced risk to the public sector and benefits for investors. However, all of these funding models seem to work on the assumption that it is possible to simultaneously save public money and generate good returns for investors. How these two objectives can co-exist has never been explained to my satisfaction and I challenge anyone to explain how this can happen.
2. Greater regulation and oversight is needed of private involvement in health and social care. This is needed not just in oversight of the quality of care but also in the business models used by providers. The Govt is rightly seeking to reduce some of the pre-qualification checks required of small and medium entrprises in bidding for public sector work. These checks on financial solvency etc. are often far too onerous for people bidding for small pieces of short term work. However, for the long term commitment required of companies who are going to care for vulnerable people, a higher degree of scrutiny is needed. Central Govt needs to act so that the interests of the city for short term profit do not overide the needs of vulnerable people for high quality and secure care. The Southern Cross business model should not have been allowed to operate.
3. A greater understanding of business models and finance is needed for all people involved in social care from social workers to senior managers. As long as local and central Govt are responsible for care of older people they will have to keep a careful watch on who is providing care and how it is being provided. It is not good enough just assume that existing regulatory mechanisms are sufficient.
4. Providing services to the public sector is a high risk endeavour. Many local authority staff are being encouraged to set up social entrprises and co-ops at a time when public sector bodies are cash strapped. These workers should be aware of the risks of being in busiess and the hazards which political and economic change hold for suppliers to the public sector. The Southern Cross business model was built on assumptions about the continued flow of new customers and year on year rises in charges. These have turned out to be ill-founded assumptions.
5. The old adage about not investing in anything you don't understand should apply here. I doubt that so many investors would have put money into the Southern Cross flotation of they understood the business model or just how risky it was. It is likely that the investors included pension funds. British institutional investors seem to be asleep at the wheel a lot. The fact that the executives sold their entire holdings shortly after the flotation should have raised some eyebrows.
6. A greater degree of financial literacy is needed amongst academics and social care managers. As this blog has hopefully illustrated the issues behind the Southern Cross debacle are complex. The need for debate is not served by reducing the issues to the level of public sector=good vs private sector=bad. Involvement of the private sector in health and social care is undoubtedly here to stay. Arguments about the viability of desireability of individual situations needs to be based on their own merits and not on prejudice towards the business sector. Neither are the needs of vulnerable people well served by the view that the private sector is always more efficient or better value for money than public sector provision. Whatever benefits have been achieved in the past by using Southern Cross as a provider are likely to be outweighed by the costs of a bail-out or a disasterous bankrupcy situation.

Southern Cross, the problems associated with PFI and the fragile state of many social care providers in the current austerity period suggest that private sector involvement in social care involves high levels of risk for both Government and investors alike. It is certainly not a panacea or easy solution for covering the rising costs of social care. Critically, it can involve high risks for the most vulnerable people in our society.

Factual information for this post was obtained from articles by Simon Mundy, Sarah O'Conner, Sally Gainsbury, Nicholas Timmins, Sarah Gordon, Jim Pickard and Elizabeth Rigby in the Financial Times on 1st and 4th June 2011. Opinions are my own and do not necessarilly reflect those of any body whom I have worked for or been associated with now or in the past.

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