Home care market review Q4 2014 by Simon Gifford

UK Home Care Pricing Research Factors impac6ng on pricing and compe66on in the domiciliary care market in the UK December 2014 For more informa+on contact: Simon.Giﬀord@atl-‐cs.com © Atlan(c Customer Solu(ons 2014 Page 1

Introduc6on to document In order to put into context the prices being put forward by providers in the current OBC procurement process, a short inves(ga(on was undertaken to understand the history, current posi(on and future trajectory of home care pricing. A web-‐search was undertaken supported by an analysis of HSCIC (NASCIS) data, an independent survey and and an analysis of relevant reports wriOen on the topic. The overall conclusion is that •  Historically Local Authori(es have been able to hold home care rates at a constant (real) level through their purchasing power and so forcing providers to be more cost effec(ve in delivery. •  The recession allowed this state to be extended somewhat longer than might have been the case without it. •  However, providers (supported by LA’s) have taken the level of effec(veness to extreme levels such that the system is recognised as being unsustainable and poten(ally puTng users at risk (call length and care worker condi(ons being two examples). •  Provider profitability levels have resulted in almost no innova(ons in the industry and even obvious technology-‐ driven improvement opportuni(es are seldom inves(gated. •  All these factors are systemic and have resulted in a nega(ve reinforcing cycle of squeezed margins and worsening customer service •  With the ending of the recession care workers have other work opportuni(es: and together with pressure to pay at least minimum wage and deliver beOer service, providers are beginning to push back and asking for higher rates and more selec(vely choosing for which contracts they wish to bid. •  These changes are happening as the demand for home care is under pressure in terms of increasing hours per person and increasing complexity of need; within a backdrop of an aging popula(on •  Each LA has its own “micro-‐economy” with respect to home care and certain LA’s are more suscep(ble to these pressures than others.

ASC spend growth vs GDP growth

ASC growth predicted to increase substan+ally over next few decades

ASC spend

GDP growth

If the following predic(ons are correct: •  SCIE: ASC as a % of GDP grows from 1% in 2010 to 3% in 2015 •  UK GDP growth predic(ons of 2% pa up to 2105 Then ASC spend will move from about £14bn in 2010 to about £106bn in 2050 (About 5% growth pa) Note: to put this into perspec(ve, if we applied these growth rates to the RBWM ASC spend, current costs of 30 million would increase to 220 million by 2050.

Growth of OP popula6on

One of the drivers of growth in ASC spend is growth of OP popula+on

The impact of this OP growth is compounded by the increasing average age of the aging popula(on and the resul(ng increase in complexity of their care and health needs. There will be even greater pressure on home care as Councils and Health Services strive to keep people out of hospitals and residen(al care facili(es Sources: SCIE

Home care as % of total OP spend

Home care spend has not risen as quickly as overall OP ASC spend

Residen6al versus Home propor6ons

And so now represents a slightly smaller % of overall OP spend

Note: OP propor(ons tracks total propor(ons

Home Care hours per user

Home care hours per user have been increasing

Another key trend is that although numbers of users and overall hours have been decreasing, the hours per user have been increasing. This reﬂects the greater complexity of user needs which is a combina(on of stricter FACS criteria, reduc(on in the use of residen(al care and an aging popula(on. Source IPC market analysis

The Home Care industry

The structure of the home care industry results in low profitability A classical analysis of the Home Care industry demonstrates the challenges faced and how the players have reacted. •  There are limited barriers to entry to this market and so there are many new entrants •  The biggest buyer of services are Local Authori(es who have used their nego(a(ng power to cap prices and keep them low. Systems such as CM2k have also (ghtened controls over payments. An alterna(ve market are self-‐funders who have a limited nego(a(ng posi(on and so prices are higher to this group. •  The main subs(tutes take the form of family and friends to care for the user. Telecare and equipment though are also a growing source of subs(tutes for hours-‐based care. •  The main suppliers are labour (care workers) who have limited nego(a(ng power. Suppliers have therefore squeezed this cost to the limit. •  Rivalry at a local level is quite intense with many players bidding for new LA contracts – and with the advent of comparison sites, even self-‐funders are star(ng to search for beOer value. All these forces have resulted in low margins with the exis(ng players making profits through squeezing their only source of flexibility – care workers. Classic examples are low pay (some(mes at minimum wage) and zero hour contracts. This has resulted in high turnover of staff (56% leave within 2 years; SCIE) and an unskilled workforce. Both of which systemically increase costs of providers. The outcome is that for many years there has hardly been any innova(on and users receive a minimum service in terms of quality and (me. © Atlan(c Customer Solu(ons 2014 Page 8

The Home Care industry

The proﬁtability is now under even greater threat Building on the previous analysis, new pressures are arising: •  The bargaining power of suppliers is increasing: •  Pressure is being applied to providers to improve the pay and condi(ons of the care workers •  As the UK moves out of recession, care workers have new work opportuni(es and many are happy to switch to less demanding work for the same or beOer pay (eg working in supermarkets) •  Local Authori(es are seeking more innova(on from providers and asking for new style of service – outcome based commissioning is one example of this. There is a cost to providers in making this kind of change – and limited capacity within providers to design new opera(ng models. •  As more users have complex needs there is pressure on hiring a more skilled (or at least beOer trained) workforce. •  The new Care Act is threatening to have an impact on pricing to self-‐funders through a number of mechanisms It is not surprising therefore that providers are beginning to push back at Local Authori(es and star(ng to ask for higher prices and support in running their businesses.

The Home Care Market

A market of fragmented, small players does not lend itself to economies of scale

10 largest home care providers: 16% of the market

Home Care Market

Private and voluntary 84%

55% of providers have >80% of business with LA’s

£ 5,5 billion pa

25% of providers solely work with self-‐funders

6 million hours per week

Market fragmenta6on

Even the largest provider has less than 5% market share

In an industry where overheads and ﬁxed costs represent a low percentage of revenue, the opportuni(es to gain economies of scale are not obvious. There might be opportuni(es in technology-‐driven eﬃciencies but: •  Are there players large enough to invest in such innova(on? •  Does it make sense innova(ng around a system that is apparently broken?

Average home care rate (external provider) in England Home care rates (real) have remained ﬂat over last 10 years Average Home Care Unit Costs Total adults

£ per hour

Source: NASCIS data – all adult client groups & older people, gross cost, external providers.

Actual average home care rates

15 14 13

Deﬂated (CPI) average home care rates

12 11 10

04/05

05/06

06/07

07/08

08/09

09/10

10/11

11/12

12/13

13/14

In real terms, home care rates have remained steady over the last decade, although there has been varia(ons around the mean in diﬀerent years. Within this (me-‐frame, number of hours have increased but number of users have decreased (ie increasing hours per user) – see later graph – through a combina(on of aging popula(on and stricter implementa(on of eligibility criteria. © Atlan(c Customer Solu(ons 2014 Page 12

Micro-‐economies

There are diﬀerent drivers of rates within diﬀerent areas

•  LA’s have their own micro-‐economies from a home care perspec(ve. Factors inﬂuencing prices are: –  –  –  –  –  –  –  –  –  –  –  –

Socio-‐economic level (average and devia(on) Wealth (average and standard devia(on) Popula(on numbers Popula(on density Equivalent job opportuni(es for care workers Popula(on age Number of self-‐funders Number and nature of suppliers Dependency of suppliers on LA LA management and sophis(ca(on LA size LA philosophy re home care © Atlan(c Customer Solu(ons 2014 Page 13

Rates across the country

There is a 40% swing in rates between the highest and lowest cost areas

Intra-‐regional diﬀerences

Even within the same region, microeconomics lead to signiﬁcant diﬀerences

Source NASCIS via Laing & Buisson © Atlan(c Customer Solu(ons 2014 Page 15

35.00

30.00

25.00

.00 617 -‐ Slough 708 -‐ Lambeth 613 -‐ Milton Keynes 512 -‐ NoTngham 612 -‐ Buckinghamshire 619 -‐ Wokingham 618 -‐ Windsor and Maidenhead 726 -‐ Havering 811 -‐ Poole 809 -‐ Dorset 734 -‐ SuOon 621 -‐ Southend on Sea 616 -‐ Reading 418 -‐ Telford and the Wrekin 615 -‐ West Berkshire 819 -‐ Swindon 609 -‐ Suﬀolk 705 -‐ Hammersmith and Fulham 316 -‐ Liverpool 204 -‐ Barnsley 719 -‐ Brent 209 -‐ Bradford 305 -‐ Bury 724 -‐ Haringey 716 -‐ Barking and Dagenham 620 -‐ Essex 733 -‐ Richmond upon Thames 810 -‐ Bournemouth 805 -‐ Surrey 407 -‐ Coventry 732 -‐ Redbridge 308 -‐ Rochdale 702 -‐ Camden 813 -‐ Portsmouth 108 -‐ North Tyneside 625 -‐ Bedford Borough 110 -‐ Sunderland 913 -‐ Plymouth 725 -‐ Harrow 509 -‐ Leicester 727 -‐ Hillingdon 614 -‐ Bracknell Forest 412 -‐ Wolverhampton 325 -‐ Blackpool 306 -‐ Manchester 217 -‐ North Lincolnshire 313 -‐ Wigan 904 -‐ Gloucestershire 411 -‐ Walsall

2013/2014 rates per NASCIS

There is a range of hourly rates across England Average gross hourly cost for home help/care provided by others

40.00

10 LA’s above £20,00 per hour Note: this is all adults, not just OP

20.00

15.00

10.00

5.00

Page 16

Pressures on rates

Pressures to hold down rates are outweighed by upward pressures Home Care Costs Na6onal

Cost per hour

Council budgets

Provider compe66on

Index (100=11/12)

16.500

108

16.00

106

15.500

104

15.00

Increasing complexity

14.500 14.00

Demand for care workers

13.500

Different LA’s will be at different levels and facing different degrees of pressure

11/12

12/13

Care worker salaries Demand for innova6on

Health 102 integra 6on 100 Self-‐funder 98 pricing 96

13/14 Year

Current issues (2014) Care Act Improving economy 15 m calls © inute Atlan(c Customer Solu(ons 2014 Minimum wage Provider proﬁtability Page 17

Source NASCIS Home Care all adults paid to external

Conclusions LA’s will come under increasing pressure to increase rates from its providers based on increasing cost pressures that they face – Care Worker condi(ons and Care Act implica(ons being the two major ones However, new models (such as outcome based commissioning) are being designed that can change the underlying dynamics of the industry and allow for a newer, beTer way of providing home care in a way that increases user independence, increases levels of care and ul+mately reduces demand on the system. For more informa+on contact: Simon.Giﬀord@atl-‐cs.com