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Healthcare has been top of the agenda globally over the last year. But as an industry sector it declined in 2020, as coronavirus took centre stage, pushing other health issues down the priority list. As the pandemic recedes, recovery is anticipated. But this may be trickier for some segments of the healthcare sector than others. Chris Newell, a managing director in our Restructuring & Insolvency team, looks at the care-home industry, as it seeks to reconcile the twin demands of care and cost, in what are its toughest circumstances to date.

Care-home costs and challenges

The care-home industry is currently facing several challenges, not least the issue of increasing costs. It employs some staff on the minimum wage − and as the living wage has increased over recent years, this has pushed up costs. It is also an employee-heavy industry, in that care homes need a considerable number of people to take care of their residents. So, the number of employees required and the cost of employing them is high.
It’s not just the cost of employees that is putting pressure on owners and operators in the sector. Incorporating personal protective equipment (PPE) for COVID-19 requirements has also driven costs upwards. The price of food has risen too, as has the price of other day-to-day necessities, such as medical supplies and cleaning products. This trend is likely to continue over the next few years, partly because of Brexit.

The impact of a drop in occupancy levels

Another challenge for care-home owners and operators is occupancy levels, which are falling. This is largely due to coronavirus as, sadly, many people have been passing away prematurely. It is also due to care-home owners taking the decision not to bring in any more residents, who might not have been tested or vaccinated, to protect their residents.
Specialist business property advisers Christie & Co’s Business Outlook report, published at the end of January, found that occupancy levels dropped to 80% during the first wave of the pandemic. This is worryingly low for care-home businesses, as some of the homes need to be operating at much higher levels than that, just to break even.
The outcome is that between rising costs and lower occupancy levels, a lot of care-home owners will be losing money at the moment. The Government has provided support, but it’s still a tough sector to be in.

The need for reinvestment

The care-home industry is a capital-intensive business. Care-home owners and operators recognise it is a high priority to keep the home well-maintained, to provide a comfortable and pleasant environment for its residents. But this comes at a high cost. For instance, the building takes a lot of upkeep, requiring maintenance of residents’ rooms, communal areas, kitchens, and gardens.
People looking to choose a care home for their loved ones may make a quick decision about a home based on looks alone – they don’t want to see that the grass hasn’t been cut or that paint is peeling off the walls. This will put them off. So, owners want to be able to keep reinvesting in the home to maintain the standards that residents and their families will be looking for.
But when homes are operating at only 80% and not breaking even, the owner may not have the necessary £10,000 or so of spare cash available to undertake the necessary maintenance work.

Pressures on staff – and owners

It goes without saying that the pandemic has created the biggest challenge for care homes in the last year – in several ways − not least the tragedy of resident deaths.
Dealing with the pandemic has put an enormous strain on the staff. Many have themselves fallen ill or have had to self-isolate because they’ve come into contact with people infected with coronavirus. While in normal times, a home might have 40-50 staff, staff numbers have been significantly affected by the pandemic, as there might be around 10% of its employees either self-isolating or off ill with COVID-19 at any one time. This means calling upon agency staff to step in to cover for them and, as agency staff are more expensive, this also has an impact on costs.
The mental health of the staff, operators and owners is also a very important factor for consideration. Running a care home is not like running many other businesses, where you can in most cases make decisions without involving emotion. In this sector, you’re dealing with people’s lives. And there is going to be an emotional toll on everyone working in care homes, from doing their job through the pandemic. They have been experiencing situations that are very difficult to process and deal with.

The future of the health-care sector

The Christie and Co report revealed that as many as 92% of care-home operators had been affected by the pandemic, with more than half (59.4%) estimating that it would take between one-three years to recover. In addition, the report found that more than a third (35%) plan to sell the business or some assets in 2021, highlighting how tough things are for the sector at the moment.
Despite its many challenges, though, the sector should recover during the year, especially against a backdrop of more testing and as the vaccine is rolled out. All care-home residents should have been vaccinated by now or are close to having their second dose of the vaccine soon.
Occupancy levels will also start to increase again, which will help financially, but the issue of rising costs will remain. The businesses that do well, will be those operators who have a sufficient cash surplus to get through the pandemic. Those who don’t have cash buffers and can’t reinvest, won’t be able to carry on. Care-home operators in a better position will be able to acquire those who are struggling, so it is likely there will be a high level of consolidation in the sector over the next few years.

How we can help

Our healthcare sector team understands this market inside out, enabling us to offer a comprehensive range of advisory services to clients from providers of primary and secondary care, private equity houses or pharmaceutical and equipment suppliers.

We’ve successfully completed a number of transactions across the healthcare services sector and have specific expertise in helping owners, operators and investors meet their long-term objectives.