This report will explore the following key issues regarding the residential care industry in the UK:

• What are the key determinants driving the residential care industry?

• Was the market affected by the financial crisis and how has it recovered since? Has there been any structural changes as a consequence?

• How has the government influenced and shaped the development of care homes?

• What are the key issues the industry needs to address to fully benefit from any favourable market conditions and future trends?

• Has the industry reacted to the care home scandals?

• What does the future hold for the UK’s residential care industry?

A number of sub sectors of the residential care for the elderly market are covered in this report:

• Homes with nursing (previously known as dual registered homes) are defined as accommodation registered to provide residential care and nursing care.

• Local authority residential homes are also known as Part III homes under the National Assistance Act of 1948. Places are allocated through social workers/the social services department.

• Nursing homes, which are registered with the District Health Authority, offer full-time nursing facilities. Government statistics no longer draw any distinction between nursing homes, which offer nursing care for all patients; and homes with nursing, which may not.

• Private residential homes are operated by private individuals and companies. Those providing accommodation for four or more people are registered with the local authority under the Registered Homes Act of 1984. Those premises caring for fewer people are registered with the local authority under the Registered Homes (Amendment) Act of 1991.

• Sheltered housing typically comprises self contained accommodation specifically designed to cater for the needs of the elderly. Many schemes have a resident warden, while others utilise alarm facilities. Houses are either purchased or rented by occupiers.

• Voluntary residential homes are operated by charities and religious organisations and are registered with a local authority.

Some numbers in tables do not add exactly due to rounding.

The term billion is used to represent one thousand million.

MBD publishes a range of reports on the UK healthcare market. The trends in the residential and nursing care market are analysed in detail in The UK Residential Care Market Development, while the market for home care is covered in The UK Domiciliary Care Market Development.

Reports are researched and written by MBD’s in-house, specialist business-to-business consultants. Research is based on both an analysis of official information and on original, trade research, providing both a quantitative and qualitative view of the market. MBD’s unique range of frequently updated reports provide an integrated body of ongoing research, enabling deep understanding of the prevailing trends and of the drivers of these trends based on trade opinion.

The following abbreviations have been used in this report:

The supply side of the market has been distinguished by provider type, while the demand side is split by funder type. The independent sector includes private providers and voluntary providers, while public providers include those managed by local authorities and the NHS.

The market comprises private individual buyers, self-funders, and public purchasers (local authorities or the NHS). Although a number of local authorities retain ‘in-house’ services, the vast majority of places are now contracted-out in markets to independent sector providers.

Despite a significant increase in the number of adults aged 64 and under receiving social care in the last decade, growth in the elderly population remains a key driver of the UK’s residential care market.

According to forecasts by the ONS, the number of pensioners in Britain is set to reach 18.2 million by 2040 – 24% of the total population, even including the planned rises in the state pension age. More significantly, the number of over75s, who are both substantially more likely to need care and typically require more intense care, is expected to grow by 94% over the same period.

The following table illustrates the changing make up of the UK population over the last three decades.

Table highlights:

• 84% of the UK’s elderly population resided in England in 2014, roughly in line with England’s share of the total UK population. 8% of elderly people live in Scotland, by 5% in Wales and 3% in Northern Ireland.

• Between 1995 and 2014, the UK’s elderly population grew by 24%, more than double the 11% growth in the total population over the same period.

Figure 7: Elderly population in the UK, 1995, 2005 and 2014 (000 people)

Source: MBD analysis of ONS data

During the 1980s, an increase in the number of elderly people, coupled with a decline in long-stay hospital provision, led to rapid growth in the number of people accommodated in private homes. This led to marked growth for the private residential care sector, with the wide availability of social security benefits helping to facilitate expansion.

Throughout the 1980s and early 1990s, a legal loophole led to the social security budget, rather than local authority funding, being used to pay for long-term care for older people. However, this only funded care in private care homes, which experienced a boom as a result.

From 1993, central government gave LAs grants to pay for nursing, residential and other forms of community care, including housing, but only on the condition that 85% had to be spent on care homes and other community care services not run or owned by LAs. Successive governments also denied LAs sufficient capital funds to either build or maintain their existing residential care homes, which led to large numbers of publicly-owned care homes being transferred to the private sector to own and run as new care standards were introduced.

The care in the community reforms of the 1990 NHS and Community Care Act, which was implemented in 1993, were designed to redirect care away from institutional settings towards supporting people in their own homes wherever possible. As a result, growth in the domiciliary care sector has outpaced residential care in recent years. Alongside Compulsory Competitive Tendering, which was in effect during the 1980s and 1990s and required local authorities to review tenders for services from the private and voluntary sectors, the care in the community reforms were intended to create a ‘mixed economy’ in care provision, with local authorities purchasing services and the independent sector delivering them.

Tony Blair’s Labour government built on these reforms with the introduction of Best Value in 2000, which remains in effect today. Under the Best Value framework, local authorities are required to challenge the need for the service to be provided, compare the service offered with the best available, consult with the local community, and ensure competitive tendering is undertaken. By 2014, an estimated 93% of local authority commissioned residential and nursing care was provided by the independent sector.

The Health and Social Care Act 2008 introduced the Care Quality Commission (CQC) as the regulator for all health and adult social care services in England, replacing the CSCI. Social care services in Scotland have been regulated by the Care Inspectorate since 2011, when it replaced the Care Commission. In Northern Ireland, all health and social care services are monitored by the Regulation and Quality Improvement Agency (RQIA), which has carried out the role since 2003. Welsh health and social care services are regulated by the Care and Social Services Inspectorate Wales (CSSIW).

CQC regularly inspects homes to assess whether they have met essential quality standards, which care homes are required to meet fall under five categories:

• Standards of treating people with respect and involving them in their care;

• Standards of providing care, treatment and support that meets people’s needs;

• Standards of caring for people safely and protecting them from harm;

• Standards of staffing; and

• Standards of management.

The residential care market has traditionally been seen as a cottage industry, with large numbers of small, owner-managed homes operating alongside a few (but increasingly important) major operators. In the years leading up to the 2008 recession, there was significant acquisition activity by large corporate providers, such as Bupa, Four Seasons Healthcare and the now-defunct Southern Cross.

However, the decline in property values and downward pressure on care home fees by local authorities after the recession slowed expansion, with both factors playing a role in the collapse of Southern Cross, the then market leader in the residential care sector, in 2011. This temporarily broke up the traditional market structure, but the residential care market has somewhat recovered after the financial crisis and during the economic recovery, as house prices increased once more – especially in London and the south east. The market has returned to its previous structure of low levels of provider concentration, and around 90% of care homes are now privately run.

The government public sector spending cuts implemented since 2011 have restricted local authority budgets, which has affected some of the largest players in the market, including Bupa, Four Seasons Healthcare, and HC-One – all of which rely far more heavily on providing care to local authority clients than the industry average.

Prior to 1993, the system was demand-led, with anyone who met social security means-testing requirements eligible for state funding to pay for their care, regardless of their level of need. Local authorities now assess both people’s means to pay for care and their level of need, which is rated as low, moderate, substantial or critical. The lower levels of finances that local authorities can provide to social care has led to stricter eligibility criteria to gain access to LA-provided care . Since the introduction of new minimum eligibility criteria from April 2015, only those whose care needs are rated as at least ‘substantial’ are likely to be eligible for any support from their local authority in the majority of UK regions- with even these clients possibly required to pay ‘top-up fees’ towards the cost of their care.

The Welfare Reform Act 2012 led to the abolition of the discretionary social fund, including community care grants, from 1^st April 2013. The community care grants and crisis loans were replaced by new ‘local assistance’, which is administered by local authorities in England and the devolved administrations in Scotland and Wales. However, the abolition of these funds drew criticism as the new funding is not ‘ring-fenced’ for social care alone, and there is no statutory duty on LAs to provide a minimum service or any sanctions if they decide to use the money for the provision of other services.

In May 2013, a new Care Bill was proposed to reform the law around care and support for adults. A year later, the bill received royal assent and became the Care Act. In April 2015, a large proportion of its provisions came into full effect. The act has introduced new reforms to the legal framework for adult care and will give more rights to those in need of care and support, while increasing the transparency of the funding system. The implementation of the Care Act has the potential to transform the relationship between self-funders, residential care providers and local authorities.

The nature of this change and the extent of the disruption to the existing market is likely to be determined by:

• The success of ‘contrived differentiation’ by providers as a mechanism to justify higher fees to self-funders;

• The effectiveness and activity of the media and consumer bodies in informing and empowering families in the care system; and

• The preference of families for taking on providers and local authorities to reduce their fee levels, in the context of average self-funder premiums currently predicted to be worth around £7,500 per year.

The voluntary sector has been particularly active in the sheltered housing sector, accounting for more than half of all sheltered housing units nationwide, partly due to rules on housing benefit. Since 1996, the amount of housing benefit claimants could receive has been limited based on average rents throughout the local area.

Sheltered housing tenants are exempt and can receive housing benefit up to the full cost of their rent. However, to prevent private landlords from abusing the exemption, it only applies to tenants of non-profit landlords. Sheltered housing tenants are also exempt from the spare room subsidy – often referred to as the ‘bedroom tax’.