Sector Foresight

Residential Elderly Care

Businesses that rely solely on demographic trends for future business success will not necessarily prosper. The UK population of people aged 85+ is forecast to more than double from 1.3 million in 2008 to 2.9 million by 2031 and as a consequence the demand for elderly care services is likely to increase from its current level of £13bn p.a. However, we explore below some of the challenges residential elderly care operators are having to contend with and some of the attributes that can help contribute to a successful future.

Market challenges

Alternative care models: Promoted by Government initiatives and including services such as domiciliary care, sheltered housing and assisted living, these alternatives to residential care are likely to reduce demand for lower acuity residential care

Star rating system: Introduced in 2007, this system is likely to be used by Local Authorities to determine their placing and fee rate policies, potentially significantly reducing admission levels in low–rated care homes

Rising staff and utility costs: Increased holiday costs as a consequence of the Working Time Directive, coupled with the rising cost of utilities, are likely to reduce margins

Asset quality: Older care homes that have had little investment and have a low proportion of ensuite single rooms will find it increasingly difficult to attract service users at favourable rates and achieve high occupancy rates

Characteristics that contribute to success

Size: Generally the most profitable care homes are 50-80 beds as this level allows operational leverage from a staffing perspective without being too institutional in character

New build: Newly built care homes can often be operated more effectively than converted homes and are normally compliant with National Minimum Standards

Service users: Private fee payers often pay higher weekly fees for the same services than Local Authority funded residents

Location: Homes located within a reasonable travelling distance of populated areas and supported by travel infrastructure often benefit from higher occupancy rates

Star/CSCI ratings: Local Authorities gravitate where possible to more highly rated homes in a locality

Staff: An established and stable workforce with low staff churn, especially at the home manager level, can reduce agency spend and provide an efficient operational performance

Synopsis

KPMG has extensive experience in advising shareholders, management and funders of elderly care businesses. In the current economic climate, there will be an ever increasing focus on conflicting objectives - financial KPIs, reputation with users and staff, quality of care and regulatory requirements. Successful operators will balance these objectives, but experience tells us that many of the under-capitalised operators will not have the flexibility to react to any downturn in occupancy levels or adverse CSCI ratings.

KPIs - industry averages

Average weekly fee (residential): £450-500 (note: varies considerably by geography)
Average weekly fee (nursing): £650-700 (note: varies considerably by geography)
Occupancy rates: c. 90%
Payroll costs as % of turnover: 50% - 55%
Non payroll costs as % of turnover: 20% - 25%