Calculating the costs of efficient care homes

William Laing
17th Sep 2008

Updated study to calculate reasonable fees, based on the operating costs of efficient care homes for older people in England.

The demands resulting from an ageing population means that more care homes will be needed in the future. However, most public sector funding agencies do not currently offer fees that are sufficient to encourage care home operators to invest in new capacity for state-funded clients. Calculating a fair market price for care offers a transparent and evidence-based mechanism for working out what such fees should be, based on the costs borne by care homes in the financial year 2008/09.

Updates for the third edition include:

  • A new and simplified approach to working out ‘floor’ and ‘ceiling’ fair fees.
  • New staff input and other cost benchmarks derived from a survey of major corporate operators of care homes in 2008.
  • A downward revision in the target rate of return on capital from 13% to 12%.

In order to make use of this facility, the Word and Excel files should be saved in the same folder on a PC running a Windows operating system. All of the parameters set in the toolkit spreadsheet may be varied, if desired, to test the effect on calculated fee levels. Note that the hyperlinks will no longer work if either of the file names are changed.

Please note: Neither The Policy Press nor the Joseph Rowntree Foundation can deal with enquiries relating to the functionality of the spreadsheet. Please refer to the full report for details of how to use the spreadsheet.

Read the second edition of Calculating the costs of efficient care homes, published in 2004.

Summary

Summary

This study refines the formula published by the JRF in 2002 (revised 2004) for calculating reasonable fees, based on the operating costs of efficient care homes for older people in England. Using 2008 benchmarks, the study guides users through its associated spreadsheet and advises on modifications to reflect local market conditions

Key points

  • Four principal care home cost categories are: staffing; repairs and maintenance; other current costs; and capital costs (including investors’ and operators’ returns).
  • For the 2008/09 financial year, fair market fees for operating a modern, efficient care home outside London were £665 per week for nursing care (all categories of older people), £538 for the personal care of frail older people, and £566 for those with dementia. Costs were higher in more affluent parts of England and in London.
  • The study suggests:
    • Basing ‘spot’ purchase fees on a benchmark rate of 12 per cent yearly return on capital, reflecting investors’ perception of care homes as a moderately risky business activity.
    • A ‘good’ or ‘excellent’ rating for a home as a prerequisite for these ‘fair market fee’ levels.
    • Using a ‘capital cost adjustment factor’, proportional to the degree to which a home/room falls short of national minimum physical environment standards. This would lead to a maximum weekly difference of £74–£76 between ‘ceiling’ and ‘floor’ rates.
  • The author concludes that local authorities may have to find an additional £540 million annually to fund fair fees for a fully modernised care home sector to meet the latest physical environment standards. If ‘modernisation’ is extended to include a professionalised workforce, paid accordingly, the additional cost would be substantially greater.

Background

Despite upward realignment between 2002 and 2006, fees paid by most English councils still offer inadequate returns to care homes for older people. This has reduced choice for council-supported residents and led to a virtual cessation of development of new care home capacity catering primarily for them. However, such is the projected demographic pressure of demand that substantial expansion of capacity will be required. Independent sector providers will not develop such capacity unless fees offer a reasonable return.

Building on reports published in 2002 and 2004, this study refines and develops guidance to enable care commissioners to identify the reasonable costs that typical, efficient care home operators may incur, and the reasonable fees they may expect to receive. The study rejects an average cost approach, as this would include the costs of inefficient operators.

Establishing care home costs

The toolkit spreadsheet generates costs (fair market fees) as summarised in Table 1 (.xls file).

Staffing

Staffing costs typically absorb 45–60 per cent of care home fees, and include care, catering, cleaning, laundry, management, administration and reception staff. Costs for hourly paid staff can be calculated by multiplying the volume of resources required (using benchmark data on the number of staff hours per resident) by weighted average hourly pay rates (including unsocial hours enhancements), plus on-costs (see below). To determine local pay rates, care commissioners need to survey actual rates and enhancements paid. A cost allowance for (salaried) management, administration and reception staff is based on national norms for a home of approximately 50 beds.

On-costs include the following:

  • Holiday pay – from April 2009, staff will be entitled to a minimum of 28 days’ paid holiday, including bank holidays, equivalent to an on-cost of 12 per cent.
  • Employers’ National Insurance benchmarks of 9 per cent for nurses and 8 per cent for carers and catering, cleaning and domestic staff. This is lower than the standard 12.8 per cent because of high numbers of part-time care home staff.
  • An assumed sick pay on-cost of 2 per cent, based on private sector norms. Nearly all private sector care home operators pay no more than statutory sick pay to hourly paid nursing, care assistant and domestic staff.
  • Based on private sector practice, a zero employer’s pension contribution has been adopted as the benchmark for hourly paid care and domestic staff.
  • An allowance is, however, made for employers’ pension contributions for management and administrative staff, increasing their aggregate on-cost to 30 per cent in the toolkit spreadsheet.

Non-staffing current costs

These include utilities, food, registration fees, grounds maintenance, and maintenance capital expenditure (in place of depreciation). Typically, these costs absorb 12–15 per cent of care home fees. They can be calculated fairly readily on a ‘per resident’ basis, with relatively little regional variation. The study used benchmark data from major care home operators.

Capital Costs

Capital costs, including investors’ and operators’ returns, account for the balance of fees. The study proposed a target return on capital of 12 per cent annually for ‘spot’ purchase, which remains the dominant procurement mode of care home services among councils.

Summary of Costs

Table 2 (.xls file) summarises the estimated reasonable costs incurred by efficient care home providers.

Capital Cost adjustment factor

To avoid super-profits for physically sub-standard homes, the study proposes that councils should apply a capital cost adjustment factor, with the ‘floor’ being 50 per cent of the ‘ceiling’ capital costs of a home which fully complies with physical standards. This would be based on a transparent physical environment grading tool, which should be developed by stakeholders. Such tools are already used, for example within several councils in the north-east. CSCI ratings should also be used as an overall quality trigger for payment of fair market fees as calculated through the toolkit spreadsheet.

The proposed approach to setting 'ceiling' and 'floor' fair market fees is that:

  • Those care homes with a ‘good’ or ‘excellent’ star rating, which also meet the 2002 physical environment standards for new homes, should receive the ‘ceiling’ rate (see Table 1).
  • Those homes with a ‘good’ or ‘excellent’ rating, but which do not fully meet the physical environment standards, should receive the ‘ceiling’ rate, less the capital cost adjustment factor as determined by the physical environment grading tool.
  • The 20 per cent of homes (in 2008) with ‘poor’ or ‘adequate’ ratings will be ‘orphaned’ under this mechanism. They should be paid at the local authority’s discretion whatever amount best incentivises them to improve their rating or, if they cannot improve, to exit the sector.

Modifications to the toolkit spreadsheet

The principal modifications in the 2008 toolkit spreadsheet are:

  • The benchmark for return on capital has been reduced to 12 per cent, having been set at 16 per cent in 2002 and revised to 14 per cent in 2004. These downward revisions reflect the care home sector’s emergence as part of the mainstream commercial property market and the consequent reduction in yields sought by investors.
  • Start-up losses have been included as a capital cost for the first time.
  • Staff input benchmarks have been increased (compared with 2004) to reflect residents’ increased dependency. Non-qualified care staffing has risen from 19.5 to 20.5 hours per resident per week for nursing care, from 16 to 18.5 hours for personal care of frail older people, and from 20 to 22 hours for those with dementia.
  • Working Time Regulations are raising statutory minimum paid holiday entitlement to 28 days from April 2009. Thus, the holiday on-cost has increased from 8.3 per cent (2004) to 12.0 per cent (forthcoming statutory minimum).

On balance, the modifications have increased the calculated fair market price for care at a faster rate than general inflation.

Conclusions

The study concludes that most public sector commissioning bodies do not at present pay fees at levels which are adequate to support and sustain a care home sector that meets all of the most recent National Minimum Standards.

The potential additional cost to the public sector of an England-wide commitment to pay a fair market price for a fully modernised care home sector, in terms of physical environment, can be approximated by comparing the England ceiling rates (i.e. the fair market fees calculated for ‘new’ homes) with the average gross fees currently paid by English local authorities. The additional cost to the public sector is estimated at approximately £540 million per annum at 2008/09 prices and volumes of demand.

About the project

While the toolkit spreadsheet’s structure has remained virtually unchanged since the 2004 report, it has been repopulated with benchmarks and data collected in spring 2008 by Laing & Buisson from three sources:

  • a mailed survey of care homes requesting information on staff pay and employment terms and conditions;
  • interviews with senior managers of the seven largest care home providers in England, plus an extensive email questionnaire; and
  • a telephone survey of major business transfer agents in the care home sector.
Downloads

Downloads