The UK’s social care sector has been firmly on the front line in facing the most severe challenges presented by the COVID-19 pandemic. This has left operators facing a slower recovery to pre-pandemic performance, as a continued blend of financial and operational headwinds look set to restrict the more pronounced bounce-back potential of the wider UK economy.

In recent months, the more virulent transmission rate of the Omicron variant has severely impacted care homes’ ability to find a sure footing after the initial waves of the virus, although restrictions are now lifting for public life. Rules for the social care sector still mandate the closure of individual homes for a minimum of 7 days, should there be two or more positive cases confirmed amongst staff or residents in any single facility. This continues to restrict the ability to accept and onboard new resident admissions, adversely impacting the chances of an accelerated financial recovery. The spike in cases also led to unprecedented numbers of staff isolating and therefore a rapid rise in nursing and general agency labour usage, an area that so many operators had worked so hard to address before the pandemic.

The Care Quality Commission’s (CQC) 2020/21 State of Health Care and Adult Social Care in England report recently stated that occupancy rates in care homes dropped by around 10% between January 2020 and March 2021, with other more recent industry sources pointing to a similar drop and continuing occupancy challenges, hitting bottom lines hard against a backdrop of increased operational costs associated with the additional health and safety provisions required to mitigate the spread of the virus. While the Government’s infection control funding has been provided to support these measures throughout the pandemic, this financial support is set to cease from Q2 2022, providing additional impetus to fill the occupancy voids created by the pandemic.

A people-focused business can’t prosper without people

Other sectors have now re-opened, largely free from all restrictions, allowing those businesses that survived the pandemic to set their sights firmly on restoring revenue and adapting their business models where necessary to respond to evolved customer behaviours and enhanced digital imperatives.

However, the social care sector still faces sizeable barriers in the way of resuming business as usual. For example, the regular staff testing and the continued recommendation for self-isolation in social care settings introduced to protect residents and staff do add additional strain to daily operations, with workforce absenteeism running at 5% as a result, on average, as of January 2022. This is increasing agency labour demands at a time of acute shortages of skilled workers for both care professionals and associated ‘hotel services’ roles, such as housekeepers and chefs. Agency labour premiums are increasing sharply as a result, further hitting the profitability and cashflow of many operators.

Should this particular rule around testing and isolation rescind later this year, considerable labour concerns will remain to be resolved to adequately serve social care operations that are overwhelmingly driven by the skill, dedication, and high-quality service of staff, rather than any transformative technological programmes or redesigned operating models available to other parts of the economy.

Irrespective of where one stands on the merits of the decision, the recent announcement from the UK Government that the requirement for care home staff to be fully vaccinated will be lifted from 15 March has the potential to help ease staffing pressures slightly. However, restriction of movement regulation remains in place currently, which prevents a percentage of critical part-time labour from working across multiple employer locations and across different social care providers and/or NHS locations (put in place to help prevent additional circulation of the virus). This further impacts operational efficiency and exacerbates the nursing staff shortages discussed above, with the consequential impact on profitability and cashflow.

The sector has a very loyal and dedicated workforce, with social care long being considered a vocation, as well as a career. However, as sectors such as hospitality, travel, leisure, and retail reopen – with many presenting more flexible working opportunities and significantly bolstered financial incentives to attract staff – the growing cost of living may cause the sector’s current workforce to reconsider their options, particularly those in hotel services roles. Data compiled by Skills for Care states that staff vacancy rates are rising steadily – from 6.0% in April 2021 to 9.5% in January 2022.

A dilemma in serving growing demand and maintaining margin

The current frustrations for social care operators culminate in the fact that they are unable to satisfy the levels of demand they see, which could support long-term recovery and catalyse strong growth in the sector. Inbound enquiries are high, the NHS is keen to reduce “bed-blocking” in its already over-stretched facilities, and the capacity exists to capitalise on this environment working collaboratively with local commissioners, in part shaped by the preceding two years. In addition, there is likely to be deferred demand from the private sector, where anecdotally it appears many families may have delayed placing family members into residential care during the lockdown periods.

At a practical operational level, serving this demand can only be accelerated so far – the onboarding of new admissions typically takes several hours for an average resident and requires experienced staff who know the home well.

In terms of wider staffing issues, although the previously mentioned staff shortages can in some cases be mitigated through increased dependency upon agency labour, this often carries a premium of more than 100% on associated labour costs. The upcoming 6.6% rise in the National Living Wage in April this year – together with wider wage inflation pressures to recognise the hot labour market, near full employment and cost of living challenges – all add further pressure to staffing costs, and ultimately the bottom line. All before other input costs such as surging energy prices and food and consumables inflation are factored in.

More positively, social care nursing is now high on the critical immigration list and government infection control funding has underpinned the P&Ls of the social care sector in 2020 and 2021. Local authorities are emerging from a long period of austerity and undertaking cost of care reviews to (hopefully) see average weekly fees better reflecting the costs incurred, leading to increased fees from public payors, together with a strong ongoing demand from the private payor market.

Positive signs are being seen by investors

As a result, the positive medium- to long-term outlook is reflected in continued private equity interest in the sector, robust M&A activity at an SME level and an increasing number of European operators investing in UK social care. For example, the French healthcare fund Perval Santè has acquired a group of Care UK investments from Legal and General, Confinimmo – one of the largest property funds in Belgium – has entered the UK market, while Korian – one of the largest European operator consolidators – acquired the Berkley Care Group platform last year.

The make-up of private ownership has shifted in recent times, following a general trend towards downsizing of larger operators and active portfolio optimisation efforts, as limited cost synergies make that particular operating model less desirable. An industry so reliant on people – and typically representing 60-70% of the cost base – restricts the economies of scale available, refocusing value creation opportunities on the quality of service delivered to drive reputation and brand in the sector and build even more demand for the highest-performing operators.

In the past, some operators have seen the catastrophic results of negligence in isolated situations that tarnish a brand irreparably. AlixPartners’ Changing Consumer Priorities research has also documented the emergence of the “anxious” consumer, with nearly one third (32%) of UK consumers asserting high concern about both health and finances driven by the impacts of COVID-19. Clearly, the need for robust care quality performance at every level in a private healthcare setting is more critical than ever, as is greater confidence amongst the UK population in sustained acceleration away from the worst of the pandemic.

For the operators that get it right, the opportunity is sizeable, with the potential to restore and sustain profitable occupancy from both local authority and private purses, while long-term demographic trends point to further growth potential – The Health Foundation reported at the end of 2021 that, in the next 25 years, the number of people older than 85 in the UK will double to 2.6 million.

A statistic of that kind perhaps reinforces the opportunities in the long-term outlook for UK social care. The sector provides a critical service, largely delivered from the private and voluntary sectors. The challenge for operators will be how to best navigate the remainder of 2022 in particular – with pandemic-related support falling off sharply soon, recovery in occupancy likely to be much slower to build and all within a high inflation and constrained labour environment.

The operators we are working with are facing squarely into this challenge and putting in place operational and capital strategies to build resilience through the months to come, to seek to enable them to come through with sufficient financial strength to capitalise on the strong demand for their critical services.