The near-collapse of major care home firm Southern Cross last week revealed the cancerous effect of the drive for profit on healthcare. Yuri Prasad takes a look at a sick business
More than 30,000 elderly and sick people could be left homeless after ruthless City speculators plunged Southern Cross, Britain’s largest care homes firm, into chaos.
Bosses have wrecked lives to make a quick buck.
But the rot doesn’t stop at Southern Cross. Britain’s second biggest care home firm, Four Seasons, also hovers on the brink of bankruptcy.
The meltdown of Britain’s care home empires is a story of greed that put profits before the needs of vulnerable people.
The government has claimed that its policies have nothing to do with the crisis. But Tory plans to privatise chunks of the NHS echo what happened to adult social care—and threaten to cause more chaos.
Ten years ago, banks and investment funds poured money into buying local authority care homes.
A rising property market, and the prospect of an ageing population that would need housing and basic medical care, drove the frenzy.
This privatisation gold rush ended with the private sector owning more than 70 percent of the market.
Then private equity firms moved in. They bought up firms, including Southern Cross, because they saw a chance to make money without spending any.
Private equity firm Blackstone bought Southern Cross for £162 million in 2004. Two years later, its value had more than doubled.
Blackstone used a “sale and leaseback” strategy. It created a separate company and spun off Southern Cross’ property assets into it.
Blackstone then set about fleecing Southern Cross by charging higher rents for the care homes.
It later sold the new property arm of the company for at least as much as it had paid for the whole business.
This plan was repeated in one care home firm after another as property speculators rushed to be part of the action.
With nursing home rents averaging almost £700 a week per resident, news of super-profits spread like wildfire.
“Even those involved in the deal could not believe the lives of mentally ill people were worth so much money,” noted the Financial Times last week.
One private equity speculator told the newspaper, “You wouldn’t believe the deals I was getting offered from property guys.
“Everybody was just desperate to get in.”
But then the bubble burst.
As the banking crisis erupted, the property market went into freefall.
Loans secured on care homes started to look shaky. Many owners had to get further into debt to stay in business.
Around the same time, local authorities started to change their policies. Old people who needed care were left living in their own homes for longer.
So, the number of spare places in cares homes rose, at the same time as new tenants tended to be older and sicker—and more expensive to care for.
Then the Tories slashed local authority spending on adult social care by around 10 percent.
During the boom years, care home owners nabbed profits with little thought of the future. Most reinvested only a fraction in better buildings, or new furnishings and facilities.
Southern Cross cut its capital expenditure from 8.3 percent of revenue in 2006 to just 3.7 percent in 2010.
The result was shabby homes reeking of decay that few people wanted to live in. Occupancy rates fell from 92 percent to 85 percent over the same period—and Southern Cross couldn’t afford to pay its rent.
The obsession with profit drove the private sector to axe jobs and slash pay.
A senior care worker in the private sector now earns an average 20 percent less than one in a local authority.
Staff turnover in private homes is more than double that of local authorities.
People who most need stability can never be sure who will be caring for them from one day to the next.
The government regulator, the Care Quality Commission, rates far more privately-run homes in England as “poor” than publicly-run ones.
One home was so bad that residents who became sick were taken to hospital covered in their own shit, having not been cleaned for days.
Blackstone’s billionaire bosses didn’t stop to ask questions about their care homes, at least not while the profits were flowing in.
But now, like the bankers who demanded bailouts after crashing the world economy, care home owners are demanding public money to stay afloat.
Then, having filled their boots, they will walk away.
The same cannot be said for the vulnerable people they were supposed to care for—or the low paid staff who tried to make homes out of the wretched hell holes they worked in.
Private equity firms buy companies as cheaply as they can.
They borrow heavily to finance the purchase—then use the company’s profits to pay off the loan over several years, while cutting “costs” ruthlessly.
Loans fund up to 90 percent of the cost of acquisition, while investment funds 10 percent. This reverses the usual financial structure of firms.
If a private equity firm targets a company worth £10 million, and thinks it can turn it into one worth £12 million, that’s a 20 percent return.
But if it can persuade banks to provide £9 million of the £10 million, the return becomes 200 percent.
If a buyout goes well, private equity bosses receive huge returns. Workers may keep their jobs.
But if the company goes bust, the private equity company sells off the assets to pay its debts—and workers are left with nothing.
Private equity is not just the “unacceptable” face of capitalism. It exposes the reality of the way capitalism works.
The Care Quality Commission was set up in 2009 to regulate the care homes “industry”.
But the commission is itself in crisis.
Its roughly 900 inspectors are supposed to keep tabs on over 400 NHS Trusts, 9,000 dentist surgeries, 8,000 doctors’ surgeries—and 18,000 care homes.
With a budget of just a third of its predecessor, the commission has cut its inspections by 70 percent.
The commission currently has 283 unfilled posts—including some 133 inspectors.
It has blamed a recruitment freeze imposed by the government last year.
The crisis shows that the Tories’ rhetoric of slashing “red tape” is really about cutting vital services.