Can children’s homes cope with councils cutting fees?

Children’s homes are struggling to survive as councils squeeze their funding and occupancy rates fall. Molly Garboden reports on how they can fight back and become sustainable

Low occupancy, unpredictable demand and council cuts have combined to put children’s homes in a tough position over the past few years. A report in December from the government’s Commissioning Support Programme said children’s homes are financially the weakest of children’s services providers, falling below fostering and residential special schools.

“For a couple of years the unofficial word has been that children’s homes were having a hard time,” says Andrew Rome, author of the report The Commissioning E-book. “Referrals have been down, occupancy is low, people are saying we’re going to have to close homes. Most providers will run with a level of vacancies most of the time. It’s unusual to find homes that are 90% to 100% full all of the time.”

Rome felt it was time to support anecdotes with evidence. His report was published soon after the controversial demands by the London and East Midlands local authority consortia for providers to cut their fees by 2% from April 2010.

With these added pressures on the sector, Kevin Gallagher, chief executive of children’s home provider Bryn Melyn Group, says dialogue with local authorities is crucial for a sustainable business. “Any discussion about a positive solution to meet the financial pressure has to be understood by both sides,” he says. “If there was more dialogue, even with the 2% decrease in fees, maintaining a viable business would be achievable.”

Howard Milliman, director of commissioning and referrals at Advanced Childcare, another children’s homes provider, says this approach has worked well for his business.

“The most challenging part of dealing with local authorities is in the early stages,” he says, “when we’re establishing the balance that sits best with the needs of the young person and the local authority and what we can provide.”

Milliman strongly supports creating contracts with local authorities as a way to guarantee income. Advanced Childcare has fixed agreements with Birmingham, Manchester, Oldham and Wolverhampton, and has just finalised a tender with Blackpool.

“As a result of our contracts we have an occupancy rate of between 95% and 100%,” Milliman says. “Part of that is the need of the local authorities to get value for money, but we do have a very open referral process.”

Milliman emphasises that his company’s homes are never “dumped on” simply because a local authority has a child to place and an obligation to Advanced Childcare.

“If a young person has a need that means they wouldn’t fit into one of our homes, then we wouldn’t expect the authority to place them with us.”

Despite the stability such contracts can bring, there are potential downfalls to the system. Rome says small providers can suffer if too many councils operate this way.

“The larger providers are perceived as more able to engage in the tendering process because it can be quite arduous, requiring a lot of resourcing from the provider just to keep responding to the questions put to them,” he says. “So the small providers, I think rightly, are concerned that they’re not equipped for it.” The refusal of many local authorities to sign up to the national contract for residential care placements can also lead to a lack of consistency in tendering processes.

Limitation on choice

Another possible tension caused by contracting is a limitation on choice.

“In an ideal placement, the social worker would be able to look at all options,” says Rome. “If you go into a tendered contract, you may not get the same level of choice. There may be choices within that provider, but there might not be a choice with another organisation that could be better suited.”

Concerns about decisions based on business and financial considerations rather than what’s best for the child are not restricted to discussions of contracts. More children’s homes providers are owned partly or wholly by private equity firms, raising questions about commercial intentions.

“People are concerned about a natural tension between what could be seen as a very business- and finance-focused shareholder and a set of vulnerable, volatile young people,” says Rome. “How does an organisation work at the borderline between the pressure to make a financial return and the need to do everything you can to meet the needs of some very challenging young people? It can make the business itself relatively unpredictable and that can be difficult for anybody with a finance focus – it’s difficult to make forecasts.”

Rome says, however, that private equity’s presence in the sector is too recent an addition to gauge accurately and the benefits may yet show themselves.

Gallagher agrees: “Private equity has the advantage of bringing capital investment into the sector. That can be a good thing as long as providers know how to get the most out of it. You need to be specific in your use of the investment – otherwise best practice can be eroded.”

Fostering agencies face freeze

Like children’s home providers, independent fostering agencies (IFAs) expect placement fee freezes or reductions. With inflation at 2.9% this is a cut in real terms, writes Stephen Vaudrey.

At the same time, local authorities want to use only IFAs with “outstanding” or at least “good” Ofsted ratings, and some smaller agencies are already struggling financially and with standards. Market analyst Plimsoll UK says one in six may face difficulties this year.

There have been many recent acquisitions of agencies, often involving private equity. Already this year the sector has witnessed the sale, for a reported £150m, of Bolton-based Acorn Care & Education by Phoenix Equity Partners to Teachers Private Capital, the investment arm of the Ontario Teachers Pension Plan.

Deloitte Corporate Finance partner David Jones says: “We see strong interest from investors looking for good, responsibly run, social care companies. The independent sector can only expand and consolidate over the coming years, offering potentially good returns for investors as well as value and choice to commissioners.”

The big IFAs, those with 1,000 beds or more, could dominate the scene. Some mid-range agencies (say with 120 beds) will continue. Smaller agencies, unless offering something unique, may disappear.

The surviving IFAs will be bigger organisations that use their financial backing to fund the infrastructure needed to achieve high standards. The downside is that some choice and diversity will be lost.

As IFAs become more efficient, local authority schemes could become costlier through already agreed pay rises and a lack of economies of scale. Surprisingly then, cutting fees might bring speedier change and growth, as best value considerations dominate the agendas of hard-pressed councils.

Stephen Vaudrey is a journalist, and former social worker and owner of a fostering agency.

Finances of children’s services providers, 2006

● Children’s homes

Sample of five providers – Continuum, Northern Care, Bettercare Keys, Advanced Childcare, and Hillcrest – with total market share of 36%. Overall operating profit of £1.9m and pre-tax loss of £3.5m.

● Residential special schools

Sample of five providers with 32% market share. Operating profit of £18m, pre-tax profit not listed.

● Fostering

Sample of five providers with 54% market share. Operating profit of £13.7m and pre-tax profit of £2m.

Source: Commissioning Support Programme ebook, chapter 3. From www.commissioningsupport.org.uk