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LONDON, England / The Guardian / Healthcare / May 17, 2009
Debts that threaten the elderly and vulnerablePrivate care-home providers boomed while the property market rose. Now, mired in the slump, their debt-laden balance sheets are dragging some into financial crisis. Nick Mathiason reports By Nick Mathiason, The Observer
Resident A still cannot be identified, because his death was so contentious. What we know is that a man in his sixties was living at Newark Care Home in Port Glasgow, Renfrewshire. The modern 61-bed home is owned by Southern Cross, the biggest elderly care home provider in the UK.
A nurse, it is claimed, was responsible for administering to Resident A an anti-coagulant drug but allegedly failed to do so. The man's foot turned blue. Rushed to hospital too late, Resident A had his foot amputated and later died.
Two weeks ago, the Nursing and Midwifery Council sat to decide whether the nurse was incompetent and covered up her failure to give the injections. The nurse denies the charge. The tribunal adjudicating the case understands there may be suggestions that others shared responsibility. The case continues.
Unquestionably, caring for the elderly is far from easy. Yet the Resident A case is the latest in a long line of serious problems affecting Southern Cross. The quoted giant, with revenues totalling £889.4m, has been prosecuted five times in seven years after a series of deaths and safety failings.
Last January, eight pensioners died in an Oxfordshire home from chest-related infections over a two-week period after the central heating broke down for up to 10 days over Christmas. Southern Cross said they provided temporary heaters and that temperatures did not fall below the recommended level; investigators issued the home with a "requirement notice to improve" for not informing the authorities of the heating failure or the deaths of residents sooner, but did not hold it responsible as there was no evidence of a link between the heating breakdown and the deaths.
With 730 homes and 37,000 beds,
Southern Cross has a 10% share of what is a fragmented market. Offering a range of services, including nursing, residential and dementia care, the Darlington-based company employs 41,000 staff. Floated on the stock exchange by Blackstone, the US private equity giant, in 2006, it was valued at £425m; Blackstone quadrupled its original investment.
But Southern Cross, like many of its rivals, has since faced a series of serious challenges caused by the bursting of the leverage bubble that helped turn it into a plc. Since it floated three years ago, it has seen the back of two chief executives and three finance directors. Its business model was undermined by the property crash and shareholders have seen much of their investment wiped out.
Worryingly, its care is rated well below average by the UK's health watchdog, the
Care Quality Commission, with 29% of its homes deemed adequate or poor, the two lowest categories in the rating system. A series of deaths at homes it owns has now attracted the attention of MPs, who are demanding an independent inquiry into the company.
What is more, health-workers union Unison and campaigners for the elderly fear that many of the country's biggest care providers - not just Southern Cross - have capital structures that could affect the level of care they provide.
At the root of Southern Cross's financial problems is what it thought was a tried and tested financial-engineering technique. The company thrived thanks to the property boom: it expanded rapidly, borrowing hundreds of millions from banks to buy nursing homes, the idea being to sell them on to new landlords and then rent them back. Selling at a profit meant Southern Cross could fund the care side of the business.
Relying on ever rising real-estate values, it was an immensely profitable device; at least, it was until 3 March 2008. Then a stock market statement flagged up a seemingly innocuous announcement. As Bear Stearns was teetering on the brink in the US, and most businesses were shelving plans to expand, Southern Cross's former chief executive, Bill Colvin, sanctioned the £46m purchase of 422 new beds spread between eight homes. The deal was financed with a £106m agreed bank facility earmarked for expansion.
But the new landlords Colvin thought he had lined up to buy the nursing homes pulled out of the deal. Without the money from the freehold sales, Southern Cross breached its bank agreements. It has largely been in crisis ever since.
Chris Glasper, an analyst at Brewin Dolphin, says: "Southern Cross was a 100% leasehold model. It didn't own the [property] asset. It had bank facilities for capital purchases. And that's how it grew so rapidly. Its strategy factored in ad infinitum growth and as soon as [that] was scuppered it got in trouble."
It is too early to say whether the pace of expansion and the problems caused by the property downturn have directly affected the quality of care Southern Cross offers. But there is one worrying indicator: the Observer understands that Southern Cross has laid off hundreds of overseas care workers. Unison claims this is because it does not want to pay a new required rate of £7.02 per hour. The firm vehemently disputes this and states that changes in British visa law mean it has to find replacements from within the European Union and no longer go further afield.
The firm is now employing social and healthcare students from abroad who have come to the UK to gain qualifications. A college the Observer contacted confirmed it had recently supplied 40 students from overseas to work at Southern Cross homes. When asked if this would mean inexperienced staff looking after patients, the official stated students, mainly from Eastern Europe, could only gain access on his course if they could prove they were care workers in their homeland with relevant qualifications.
But Unison general secretary Dave Prentis says: "It's a disgrace that Southern Cross should be able to drop experienced workers and exploit students in this way. The quality of care is bound to suffer ... Southern Cross shouldn't be allowed to get away with it and we will be asking the Care Quality Commission to investigate."
Imelda Richardson, deputy director of operations at the Care Quality Commission, says: "We are very aware of the financial pressures of these organisations and we are keeping an extremely close eye on their quality of care as a result. Our assessments show that [Southern Cross] has room for improvement in terms of the number of homes rated adequate or poor. We have, however, seen some improvement and there are reasons to think that this improvement will continue."
Southern Cross's new chief executive, Jamie Buchan, is aware of the need to improve the quality of care and is seemingly taking steps in this area. He maintains the problem is caused by the firm over-expanding and being unable to improve new homes sufficiently quickly.
In a statement the company says: "Southern Cross is the largest care provider in the UK and has grown rapidly by acquisition over the last four years. Net debt is at a relative low and the company is generating sufficient cash flow to further reduce debt and invest to improve business performance. A detailed portfolio review was carried out this year to assess quality levels following a period of rapid, acquisition-led growth. The new management has declared publicly that current quality standards, in certain homes, although already improving, are unacceptable. To improve the quality of care a new quality inspection system and new training programmes have been implemented.
"Management has targeted achieving industry-leading quality standards within two years while at the same time continuing to reduce net debt. Southern Cross recognises that as the UK's leading provider of elderly care it has a responsibility to target the highest quality standards possible."
Southern Cross is by no means the only major elderly-care provider facing challenging financial conditions. The Four Seasons Health Care group has begun inviting takeover offers while it negotiates a debt-for-equity swap with its banks. Lenders, led by Royal Bank of Scotland, have been asked to write off around half of its £1.5bn debt in return for a stake in the provider, after it defaulted on its borrowing last September.
The 400-home business cares for 15,000 people. It was bought by the Qatari Investment Authority for £1.4bn in 2006 with a huge slug of debt. The issues at Four Seasons led to the Qataris parting company with one of their main UK investment advisers, Paul Taylor, who advised them on this deal and the attempted takeover of Sainsbury's. One insider believes the business is now worth half the original price. Private-equity firms and industry rivals are weighing up a cheap takeover.
Likewise, retirement home specialist McCarthy & Stone was bought by some of the UK's most colourful businessmen, including Express owner Richard Desmond, the Reuben brothers, property investor Nick Leslau and Scottish investor Sir Tom Hunter in 2006, backed by HBOS. The £1.1bn price included over £800m of debt that could not be serviced; the business is now owned by banks after a debt-for-equity swap saw the tycoons lose their stake.
Problems for indebted operators come amid suggestions that local authorities, the most important source of income for care home businesses, will soon have problems maintaining the level of payments as funding runs dry. This could see firms cutting staff and investment.
Age Concern and Help the Aged charity director Michelle Mitchell says: "The very high debt levels of some care home operators has been a significant worry for Age Concern and Help the Aged. If operators go broke, the protection available to care home residents is often very limited. Unplanned home closures could have a devastating impact on residents, with older people losing their homes, their friends and even facing the risk of premature death.
"There are many excellent care homes run by private sector operators but the pressures to drive down costs in the current climate are sometimes acute. If these pressure are not carefully managed they can lead to corners being cut, which could have a dangerous impact on the quality of care provided and the happiness, dignity, wellbeing and safety of vulnerable older people."
Companies like Southern Cross are now trying to improve their homes in the face of serious pressure. It is a life or death mission on every level.
Who pays the bills?An estimated 146,000 older and physically disabled care-home residents in the UK pay their fees privately, 35% of the 418,000 such people living in care homes or long-stay hospitals. Nearly all private payers live in private and voluntary care homes, where they account for 39% of the 376,000 residents.
The remaining residents of private and voluntary homes, plus the 42,000 residents in council-run homes and long-stay NHS hospitals, are nearly all paid for by the state - either by local councils (the majority) or by the NHS.
Local authorities determine how much they pay elderly care-home providers and their budgets are under constant pressure. Providers receive different rates according to the priority placed on elderly care by councils. The next government spending round in 2011 could see pressure to cut funds to operators further.
Laing & Buisson, a leading consultancy, projects that care-home demand will increase slowly from 418,000 places in 2008 to about 427,000 by 2013, before accelerating to 454,000 by 2018.
It believes the public sector supply will continue to decline. Care homes were closing at a rapid rate five years ago, but this is now slowing.
© Guardian News and Media Limited 2009
The transit agency said Monday it has posted signs pointing out the priority seats by the center doors of each rail car that are for senior citizens or people with disabilities.
