Calculating a fair price for care

Research review by Alison Petch

Is what you charge for residents to stay in your care home reasonable given the service provided? Here, we examine how one toolkit helps owners determine a fair market price

THE RESEARCH

Title: Calculating a fair market price for care: a toolkit for residential and nursing homes

Author: William Laing

Affiliation: William Laing is chief executive of the independent company Laing and Buisson which provides data analysis and market intelligence on the health and community care sectors. The report is published by the Joseph Rowntree Foundation which has also provided a summary Findings under the title Calculating the cost of efficient care homes.

OBJECTIVES

Discussion of the appropriate level for care home fees can generate heated debate and conflicting perspectives from different stakeholders.

In 2002 the Joseph Rowntree Foundation sought to introduce an element of consistency by devising a formula for calculating a reasonable fee level for individuals resident in care homes for frail older people and people with dementia.

This was based on a specification of the reasonable operating costs of efficient care homes for these groups across England. The formula was revised in 2004 and has now been issued for a third time with benchmarks and data from Spring 2008. This seeks to provide a robust basis for the determination of “fair market fees”.

An alternative approach based on average costs was rejected on the grounds that it would include the costs of inefficient providers.

The underpinning data was collected from three main sources. Responses were received from 1,008 (of 10,100) care homes for frail older people to a survey seeking information on pay and employment conditions for home managers and hourly pay for domestic and catering staff.

Senior managers from the seven largest care home groups in England were interviewed and asked to provide a range of detailed cost information. Benchmark costs for individual elements were selected on the basis of the lowest modal cost figure (ignoring outliers).

Through this mechanism it was hoped that the composite fees would represent those for the most efficient corporate operators. Finally, a telephone survey of transfer agents in the care home sector sought information on the sale prices for care homes as a multiple of operating profits. This allowed a benchmark for the rate of return on capital to be set.

The report is accompanied by a toolkit spreadsheet which guides the user through populating the spreadsheet with tailored data, for example on local pay rates, to produce suggested fees specific to local areas.

FINDINGS

Care home costs are composed of four main elements: staffing repairs and maintenance other current costs and capital costs, the latter including investors’ and operators’ returns. Staffing costs usually amount to between 45% to 60% of care home fees.

On-costs in addition to hourly pay include holiday pay – an entitlement from April 2009 to a minimum of 28 days’ paid holiday (an on-cost of 12%) an employers’ National Insurance benchmark of 9% for nurses and 8% for care and domestic staff a sick pay on-cost of 2% and an allowance for employers’ pension contributions for management and administrative staff which gives an aggregate on-cost for these staff of 30%. No pension contribution is allowed for hourly paid staff.

Non-staffing current costs include utilities, food, registration fees, grounds maintenance and capital expenditure for maintenance. These vary little by region and based on benchmark data from major care home operators typically absorb 12%-15% of care home fees. In respect of capital costs, the study proposed an annual target return on capital of 12% for spot purchase, a reduction from the 16% of 2002 and 14% of 2004.

It is argued that the care home sector is increasingly seen as part of the mainstream commercial property market, with a reduction in the yield sought by investors. A further modification from the earlier toolkits is an increase in staff input to reflect the increased dependency of care home residents.

The study seeks to recognise both the quality of the physical fabric and the CSCI rating ascribed to the home. With the aim of avoiding physically sub-standard homes accruing large profits, it introduces what it terms a “capital cost adjustment factor”, the “floor” being 50% of the “ceiling” capital costs in a home fully compliant with physical standards. The practical implications of this calculation are a maximum weekly difference of £75 between floor and ceiling rates.

A physical environment grading tool drawing on existing tools would be developed and combined with the CSCI ratings as a quality trigger this would produce a range of fee levels. Care homes with a “good” or “excellent” rating which also meet the 2002 physical environment standards for new homes would receive the “ceiling” rate

Those rated “good” or “excellent” but not fully meeting the physical environment standards would receive the “ceiling” rate less the capital costs adjustment factor determined by the environment grading tool. Homes rated by CSCI as only “adequate” or “poor”, one in five in 2008, would be “orphaned” under the mechanism – paid a rate at the local authority’s discretion to encourage improvement or allowed to close.

ANALYSIS

As a result of the rationale outlined above, Laing derives the fair market fees shown in the table (below left).

These fee levels are in general higher than those currently being paid by local authorities in England. At the time of the original study in 2002, the care home market, it is suggested, was under considerable strain.

Local authorities were unwilling to pay fee levels sufficient to cover provider costs, leading to a decline in capacity and a reduction in choice for local-authority funded users as self-funders and those able to pay top-up fees dominated the market.

Post-2002 the situation improved, with local authorities responding to local market pressures with fee rises well above inflation.

More recently, however, post-2006, fee increases are again being held at below inflation levels. If this continues it is likely that providers will not be motivated to develop new care home capacity for frail older people and people with dementia dependent on state funding.

The report argues that an additional £540m would be required to meet the ambitions outlined in this report – a fully modernised care home sector funded across England at the ceiling rates.

There are of course more fundamental questions that lie beyond the details of these calculations. Is for example the care home sector the most appropriate for the support of those groups identified in this report?

Would frail older people and those with dementia, or at least a proportion of the group, fare better in alternative models of provision such as extracare housing or intensive domiciliary support?

And what would be the relative costs of such alternatives? The ongoing evaluation of the Extra Care Housing Initiative by the Personal Social Services Unit, for example, should contribute to such debate and enable an increasingly sophisticated discussion of the cost effectiveness of alternative models of provision and their role in the balance of care.

Whatever the emerging trends, however, care home provision is likely to remain a major force for the foreseeable future. The analysis offered by this toolkit and the ongoing monitoring which informs its revision provides a transparent basis for negotiation in this critical area.

PRACTICE IMPLICATIONS

Transparency: Use of the format detailed here allows at a glance transparency in terms of both the assumptions that are being adopted and in the spread of real costs that results. The template can be used to model the potential impact of variations such as increased staffing hours and thereby contribute to more informed debate.

Information sharing: The transparency identified above provides the opportunity to share with residents, potential residents, family members and other unpaid carers, the information on how the fees charged by care homes are structured and the explanation for variations across the sector.

Variability: Purchasers and providers should not be lulled into a false sense of security by toolkits of this type. They provide a useful resource but attention should be paid to the assumptions on which they have been developed and the impact of potential variations. For example, the hourly pay rates are based on those paid by the private sector. It is calculated that increasing the hourly rate by one pound would add an additional £32 per week to fair market fees.

Raising standards: The toolkit incorporates a mechanism designed to improve the quality of provision through market incentive. The impact of any implementation needs to be scrutinised to ensure this operates with the desired impact and that there are no unintended consequences.

Context setting: Any formulation of this type should be located within a wider discussion of the balance of provision across different options for support provision. Similar costs analyses should be contemplated for alternative provisions.

Click here for the electronic version of the toolkit

Alison Petch is director of Research in Practice for Adults