UK Care Home Companies in Critical Condition

The future of Southern Cross Healthcare and the 31,000 old people living in its care homes is causing anxiety across the UK establishment, from the Houses of Parliament to the City.

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On Tuesday, Prime Minister Prime Minister David Cameron had to guarantee that elderly people in Southern Cross homes will not be put out on the street if the business fails, raising speculation that the company could be taken over by the state. The opposition Labour Party called for a "Plan B" if the company fails.

The spectacular dip in the fortunes of Southern Cross has cast new light on the care homes industry.

As the population ages in the Western world, you might have thought that care homes would be a license to print money.

Yet the UK’s biggest care homes company, which looks after more than 30,000 old people, has been struggling with a business model brought in under the previous owner, private equity firm Blackstone.

It is also battling rising wage and energy bills, at the same time as a trend towards placing fewer old people in care.

It is often cheaper for local authorities in the UK to keep old people in their own homes, with regular visits from health and social care workers, than in a care home.

Other operators including Four Seasons have suffered from this, as the majority of care home residents are funded by local authorities rather than from their own pockets.

“It doesn’t seem to me that it’s the taxpayers’ job to fund the losses that have been suffered by the people who have invested in Southern Cross; that was their risk and it’s their loss,” said the chairman of Parliament’s cross-party Health Committee, Stephen Dorrell.

Care home companies are all chasing more lucrative private-pay residents.

Under Blackstone, Southern Cross

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[SCHE-LN  Loading...      ()] was broken into an operating company/property company model, with property investors buying bundles of freeholds for homes operated by Southern Cross, which committed to raising rents regularly.

It has now lowered the rent it pays by 30 percent, without formal agreement from its landlords, who are believed to have looked into the possibility of getting other care homes companies to run Southern Cross homes.

Some of these landlords are in the hands of state-backed bank Royal Bank of Scotland,

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[RBS-LN  Loading...      ()] which may not want the potential public relations disaster of allowing a care homes company to collapse.

Southern Cross embarked on an ambitious growth strategy, buying up care homes in the expectation that the freeholds could be sold on quickly.

The credit crisis and the resulting fall in property values and difficulty in borrowing put paid to that. Blackstone had already listed the company on the public markets by the time the flaws in its business model became evident.

It now has until the end of June to try to stay afloat. After announcing a pre-tax loss of 310.9 million pounds ($501.7) for the six months to March on Thursday, observers believe this is increasingly unlikely.

Average occupancy in its homes has fallen as it has lacked the resources to update and repair them. Only 86.9 percent of its beds were occupied at the end of March, compared with 90 percent in March 2010.

One potential light at the end of the tunnel for the business could be British government plans to merge medical care of the elderly with local authority provision.

The government is planning to reduce "bed blocking" by elderly patients who are no longer acutely sick, by moving them from hospitals into care homes.

This could be a lifeline for Southern Cross.