Care Home Trading Performance Review 2018: Staffing Costs & Profitability

Staffing costs

Staff costs in 2017/18 increased 4.7% to £23,575 per resident. This has reduced from a 7% increase witnessed in last year’s review, when care assistant pay rates were inflated to meet the NLW standards. The national average wage rate per hour for a care assistant stands at £8.00 which is 50 pence per hour higher than the NLW in 2017/18. The current rate is also above the 2018/19 NLW of £7.83 per hour.

However, the NLW is projected to rise to at least £9.00 per hour by 2020, therefore the rising staff costs per resident, since 2011/12, as illustrated in Figure 21, will continue this upwards trend.

Figure 21

Even though staff costs per resident increased materially, staff costs as a percentage of income only marginally increased by 0.1% to 57.6% due to:

• AWF inflation

• Increasing SF ratios

• An average 3.6% LA fee rate increase

However, when predominantly focusing on the LA pay market (90% of income and above) staff costs as a percentage of income stand at 69.9%, up from 65.5% in last year’s review which indicates that the LA fee rate increases are insufficient.

Recruiting and retaining good quality staff remains the biggest challenge for operators as agency costs increase from 7.4% to 8.2% when compared with last year’s analysis. The UK unemployment rate fell to 4% in the three months to June 2018, its lowest rate since 1975.

More choice and opportunities are available for staff, allowing them to switch jobs for preferential pay rates and to work in less challenging environments. This is quite evident in the South East region where staff agency costs are above national average, at 10%.

The shortfall of skilled nursing staff in the UK continues to hamper the sector and mount further pressure on existing staff.

This is affecting trading performance as agency costs in nursing homes reflect 9.3% (8.5% in 2016/17) when compared with 5.4% (4.1% in 2016/17) for personal care homes.

As per Knight Frank’s Healthcare Development Opportunities Review 2018, the sector witnessed 226 home closures in 2017/18 in the UK (6,740 beds), 90% of which were rated Inadequate or Requires Improvement by the Care Quality Commission before deregistration. A large proportion closed due to the impact of the NLW and challenges of recruiting nursing staff.

In light of the nursing staff crisis, a shift towards personal care home developments has continued as 54% of new openings in 2017/18 were for personal care homes only.

In regards to staff costs per resident, London takes top spot from the South East region as shown in Table 1 when compared with 2016/17, driven by the upwards pressure to recruit and retain staff within the M25. The lowest staff cost as a percentage of income was established in the South East at 52.9% driven by the higher fees, comfortably compensating for higher labour costs.

Staff costs as a percentage of income has reached 71% for Northern Ireland, driven by low fee rates paid by the Trusts and a low percentage of SF (7%) coupled with the challenges of recruiting staff from only six counties within the region and required nursing ratios.

Profitability

The industry standard definition of earnings before interest, tax, depreciation and amortisation, rent and management (EBITDARM) allows for consistent comparison across all care homes.

The 2017/18 financial year witnessed a fall in profitability from 29.0% in 2016/17 to 28.3%, measured as a percentage of income.

The trend line in Figure 25 shows a gradual downwards slope in EBITDARM as a percentage of income since dataset records began in 2006, and profit margins achieved before the recession in 2007/08 have not been regained.

Figure 25

One of the main reasons for this fall is contributed by the decline in profit margins for personal care homes from 29.9% to 28.5%. The year-on-year increase in staff costs per resident (7%) exceeded the increase in income per resident (5%).

Within our dataset, over 50% of the personal care home stock was built in the last century and circa 30% was built in the early 2000’s. This limits their ability to inflate fee rates to a sufficient level when compared with future-proof assets built over the last 10 years.

Interestingly, in the homes that are mainly LA funded (90% of income and above) profit margins stand at 15.9%, down from 20.7%.

There was only a marginal fall in profitability for nursing homes from 28.6% in 2016/17 to 28.2%, which is supported by the increase in occupancy in nursing homes, as discussed earlier in the report.

The South East remains in top position as the most profitable region. Its robust trading performance is driven by the affluence of the region.

The region’s AWF increased by 5% while staff cost per resident increased 4%. Staff costs as a percentage of income are also controlled well and the region presents the highest percentage of SF income.

Combining the regional picture with the care home type, the East Midlands have the most profitable personal care homes with a margin of 33.0%. Staff agency costs are at 3.0% which is well below national average. It also has the lowest staff costs as a percentage of income at 51.9%.

The most profitable nursing homes are in the South East region. It is also no surprise that Northern Ireland remains rock bottom, driven by its low AWF and high staff costs.

Whilst averages are an interesting and intuitive way to analyse markets, distributions give an added dimension of insight (Figure 28). Considering 10 percentage point brackets for EBITDARM as a percentage of income, the largest proportion of homes (28.9%) make a profit between 20% and 30%.

Figure 28

A quarter of homes make between 30% and 40% profit. Interestingly 12.4% of homes make a profit margin above 40% (increasing from 9.2%) which indicates demand for the premium end of the market driven by affluent locations, luxury products, good quality food and activities.

If you'd like to discuss any of the points raised in this article or to find out more contact: