Criminal Care? · 25 Jun 2019
Private profit from children’s services
Earlier this month we delivered a seminar about our programme to students on the Criminology Masters course at Oxford University. They, like many groups we present to, were surprised to learn that three quarters of children’s homes are owned by private companies and some of the questions probed our concerns around this. One of the students challenged us to explain why we were so concerned about private companies making a profit from providing a service which is clearly needed.
This question has been recently exercising a number of public and government bodies and I want to use this blog to pull together some of the points that have been raised.
There is a fundamental question about how we, as a society, feel about companies – some of which are large and based overseas – making profits from the care of the most vulnerable children in our society. This essentially moral question was raised by a number of stakeholders in the recent inquiry into the Funding of local authorities’ children’s services. The Association of Directors of Children’s Services was quoted in the inquiry report as questioning whether ‘the government and indeed wider society remains comfortable with the extraction of ever larger profit margins from the care of children and providers of vital care services being bought and sold on the open market’ (para. 105). It advocated for ‘a review of the ability of organisations and individuals to generate significant profits from the care of some of the most vulnerable children and young people in the country, particularly when set against a decade of year-on-year reductions for local authorities’ (para. 107).
One Director of Children’s Services described a ‘wild west’ market in residential care
The National Audit Office’s (NAO) Pressures on children’s social care (January 2019), which we discussed in a blog earlier this year, reported that the demand for residential care was growing but that costs were rising even more precipitously. The number of children placed into residential care increased by 9.2 per cent between 2013–14 and 2017–18; during the same period the cost of residential care went up by 22.5 per cent, from £1.02 billion to £1.25 billion in real terms (paras 1.24, 1.27 and 2.19). It is currently ‘unclear’ why these costs have been increasing (Funding of local authorities’ children’s services, Summary).
The Public Accounts Committee, in its March 2019 report Transforming children’s services, reported a lack of capacity in the residential care sector which was resulting in ‘bidding wars’ between local authorities for places. This competition was driving price increases which could have ‘extreme financial consequences in individual cases where there is an urgent need to find a placement for a child’. The report cited evidence from Oxfordshire County Council which spent £21,000 housing one child over Christmas 2018. Northumberland County Council reported to the Committee that the costs of placements beyond the county’s boundaries had increased by 116% over the past three years (para. 15).
One Director of Children’s Services we spoke to described a ‘wild west’ market in residential care. In such circumstances there is a reluctance to tackle private providers who can easily find business elsewhere. Concerns about making the sector unattractive to private providers were reflected in evidence given to the Housing, Communities and Local Government Committee’s inquiry into the funding of local authorities’ children’s services. In discussions about a potential non-profit making clause, which could prohibit or limit profits, the Children’s Commissioner for England, Anne Longfield, said it was ‘very enticing’ but ‘the main drawback with it is that we are where we are and we already have a shortage of places. We would fall over if we did not have the private sector within it’ (para. 108, Funding of local authorities’ children’s services).
The market is not working for children or for the public purse
In the Committee’s report Funding of local authorities’ children’s services (May 2019) the following key recommendations and conclusions were made in relation to residential care (Summary):
- The government should consider the barriers to creating more residential care placements to increase supply.
- There may also be a role for greater regulation of the children’s care market to ensure that costs do not rise disproportionally and that there is appropriate competition. The Competition and Markets Authority should investigate this market.
- A review of the commissioning and procurement system, which also assesses the merits of the various improvements, should be conducted by December 2019. The government and local authorities should introduce greater oversight of how different care placements affect outcomes for children and their value for money.
The Department for Education’s response to the issues appear to have been focused on putting the responsibility onto local authorities to collaborate in order to provide ‘cost-effective commissioning’ (para. 17, Transforming Children’s Services). The government seems unwilling to address the core problems of the absence of central oversight of the ‘market’ and the lack of transparency surrounding costs and profits.
As reported in our blog on the NAO’s findings and in our third briefing, Hearts and Heads, we are concerned about how the current market structure is affecting children and contributing towards criminalisation. Undoubtedly there is much more that many local authorities could be doing to fulfil their statutory duties on corporate parenting and fiscal control, however, it is up to the government to provide central oversight and control of a market that is not, at present, working for children or for the public purse.
I do not understand your comment about ‘self-styled, Chief Executive (Emeritus)’. The box for the comments does not ask for any affiliation or title.
My moving on is well known and public. The Emeritus title is accurate until end of August. After that time I shall be spending more time on policy and practice continuing the championing of the rights of children in care, and residential child care generally.
Irrespective of my recent work for ICHA I think the ICHA state of the market/sector is an annual significant insight that has to be noted in any discussion. It is a statistically significant piece of research and provides essential context.
You are aware of ICHA commitment to decriminalisation of looked after young people. ICHA has been working on a new specification and concordat for the support of young people and children’s placements to bring a child-centred ethical focus for all agencies.
What is the Howard League view of a new DfE definition of children’s home? Many settings included in the current definition do conform to the requirements under regulations and as such, cannot be children’s homes. Do you agree that the term ‘children’s home’ should be restricted by law to that of homes regulated and inspected by Ofsted, or CQC, ie those that conform to the standards expected of children’s homes?
What is the Howard league view of leaving care or semi-independent accommodation for all young people under the age of 18 being made subject to regulation and inspection?
Following this blog I think I should start by declaring my position in the field. I am the CEO of a Charity that runs a specialist residential children’s home offering intensive intervention to older teenage boys. Not quite in the standard children’s home field but our service is a registered children’s home (and has been for over 50 years).
I would like to make some general observations. Firstly, YOU REAP WHAT YOU SOW. By this I mean that some years ago children were turned into commodities. Our Intake Team stopped asking referrers questions like how tall is the young man because the referrer had never met the young man they wanted to place. The “market ” became a market and young people became units. This is an exaggeration – but the trend is in that direction. Well market forces means costs can be driven down when supply is greater than demand but also the reverse is true. I would not want to imply all private children’s homes are profiteering. I know many many services with the best of intentions and who go the extra mile often needed to support the young people they work with.
Secondly, I represent a Charity. The Third Sector historically had a significant influence in social care (it could be argued that the NSPCC ‘invented’ social work). Not all the third sector behaviour was laudable but the latest figures from OFSTED suggest less than 5% of children’s homes beds tonight are offered by charities. The important questions asked in the Howard League blog might be addressed by not-for-profit services.
Perhaps the wrong questions are being asked about how the sector finds itself in the situation it is in? A commissioning system cannot truly crate a mutually supportive partnership relationship. Perhaps the central question should be how can we create a process where stakeholders working together can produce services that meet the needs of this challenging and vulnerable sector of society.
For balance and the most accurate information available readers of the blog may also need to read the ICHA State of sector 2019 report.
This report shows we are at a delicate moment for children’s homes. There is still much to be done to assure the healthy sustainability of children’s homes’ provision in England. 59% of respondents are at best unsure about the market but this is more marked amongst the small providers where 68% are, at best, unsure.
The report shows that national and local government should be mindful of the consequences of seeking any reduction in spending on residential child care. We do not need to trigger a crisis that could come from unplanned reactive spreadsheet actions.
The sector is experiencing volatility of conditions and situations; uncertainty with potential to be destabilising; the sector requires stability.
Here is the representative factual data from the report
54% of respondents report increased income, 25% reporting decline
30% of small providers report increased turnover and income.
30% of small providers report profit increases.
(The sector is majority small providers with 1-2 homes or medium providers with a few more).
There has been an increase of 3% per year, consistent with RPI increases in the same period, and only marginally ahead of CPI.
EBITDA shows a mean of 4.78%. Small providers, on average, report profitability in a range 0.5 – 1.5% lower than the market as a whole.
The increase in profits is mostly due to increased occupancy. 65% of respondents agree that occupancy is the single most influential factor on their financial outcomes. Occupancy is 85-90%.
The key determinants of differential pricing are related to the individual child’s complexity of needs and the staffing and other resources needed to meet the needs.
All placements are costed according to individual need. The intensity of staffing and other resources needed to meet those needs, most strongly influences price levels.
About one third of providers report a deterioration of reserve levels. There are more providers reporting declining reserves than increasing reserves.
It is clear that decreasing the income of providers (by reducing occupancy or spending), at a time when there is a need to at least sustain it or increase it if the sector is to expand to meet demand, is identified as a strategy that will lead towards further stresses.
The few LAs that are opening homes are mostly replacing previous provision. The costs of LA homes are at least the same as independent sector and there is the same range of Ofsted inspection outcomes.
Additional homes are mainly coming from small providers. Smaller providers are less likely to be using external bank funding for investment, and more likely to need to rely on positive cash-flow from profitability of existing operations.
This report gives the figures to the contradiction in the current situation that has to be resolved;
• the situation of the providers is that growth of supply cannot occur without expansion of current profitability;
• the situation of the local authorities is the need to manage and/or reduce spending.
We need to establish: What needs are there? How many homes do we need? Of what type? Where should they be located? How shall we finance them?
After the needs analysis we need sharing of demand and forecast data and sharing risk and investment.
The report concludes demand forecasting of needs and numbers is seen as a positive way forwards for LAs and providers to work together.
Close partnerships, open communication, is seen as bringing the potential for a more effective economic outcome for all parties, as well as encouraging investment in the required additional capacity and innovation.
The question before us all: There is the need for strategic planning for the next 10 years. Who will do it?
Note: For a method of understanding the sector and the costing go to Rome and Stanley Residential child care: costs and other information requirements in Unit Costs of Health and Social Care 2013
If we, local authorities, run the services in house, there would be no need for the 10%+ profits for investors in the private companies enjoy, and the money could be used to deliver services, it aint rocket science, unless you own a business thats making money out of providing services our councils should provide.
Government reports have already dispelled the myth that services can be run more cheaply in the public sector
One must also ask the question why 80% of LAs and this number has increased year on year have withdrawn from operational delivery
Finally- the ‘market’ responds and offers what the customer wants – the customer shapes the market and this is 100% where the state is the only customer
“One of the students challenged us to explain why we were so concerned about private companies making a profit from providing a service which is clearly needed.”
I don’t see where in the article the question is answered. Are we concerned? If so, why don’t the Local Authorities provide the service? Is it because the private providers are cheaper? Or that they provide a better service? Or both?!
This is political, Harjinder.
If the funding comes from the ‘public purse’ then profits made are like a subsidy.
e.g. We pay you a million for this service, you do it for 800 thousand and stick 200 thousand in your pocket. If you had put only 100 thousand in your pocket then the service (and the children) would be 10% better off.
We’re looking at a service where those who run it are living a luxurious lifestyle at the expense of the children they ought to be helping more. In order to maintain their profits, corners are cut and the children diminished by it.
Instead of making child welfare at the core of their enterprise, there’s always that push to ring fence profits.
Wouldn’t you just iterate your argument until all services are completely nationalised?
Which goes back to my original question, why don’t the Local Authorities provide the service? One can only assume that they are more expensive, of an inferior quality, or perhaps both.
Harjinder, my answer to your question, ‘Why don’t the LAs provide the services?’ is that LAs simply don’t want the hassle. Managing and staffing children’s homes is complex and fraught with potential disasters. When things go wrong with young people in care they can go catastrophically wrong. I suspect that LAs would rather pass this responsibility on to other sectors notwithstanding their squeezed budgets.
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The paucity of central and local government statistical information regarding children’s residential care home costs limits clear analysis of private care home profit margins. However, as a current and long-standing RSW I would suggest that potential and actual profit margins in the sector are significant. In London I worked as an agency RSW in a number of privately run children’s care homes. One of these was owned and managed by a former lawyer who explained to me that he had given up his legal work to run the care home because with the former employment “there was no money in it”. Another privatel home in which I worjed was owned and managed by a father and son who were formerly accountants. I currently work in a Sheffield private children’s home. I would describe the services and provision at this home as barely adequate and the rates of pay as very poor. Currently the owners of thus home are receiving local authority reimbursement for two ‘residents’ neither of who are actually currently residing at the home. One of these residents has elected to stay with a relative most of the time while the other is serving a four month prison sentence. My strong impression from these working experiences is that for many private care home providers profit margins are likely to be significant and therefore the ‘business’ is generally a lucrative one.