A new investigation by Sam Baker looks at concerns of a ‘dysfunctional’ sector where big firms dominate the response to a growing social crisis
Large private companies are accused of “profiteering” from the increase in children needing care, as new data reveals how the number of looked-after children has grown by 24% since 2010.
Steve Crocker, President of the Association of Directors of Children’s Services, accused providers of “profiteering” and slammed bosses of private providers who were “getting rich off taxpayers’ money”.
Crocker, who was responding to a report from the Competition and Markets Authority (CMA) on children’s social care, said he was “surprised” the CMA did not recommend limiting “the profiteering that is happening” from children’s homes providers.
The CMA report found a “dysfunctional” sector needed an overhaul to tackle high prices, scarce placements and provider debt levels.
The increased need for children’s residential care, combined with spiralling costs and a dependence on the private sector has led to some local authorities feeling they have no choice but to pay whatever a private provider demands – putting pressure on council budgets.
Speaking to former children’s commissioner Anne Longfield for her 2020 report into private provision of children’s social care, one local authority officer said that “private homes will charge what the market will allow.” Local authority commissioning teams know immediately when the asking price is excessive, they explained, but “you’re going to have to take it because…there are no other options.” Another accused providers of “charging absurd prices.”
Meanwhile, private equity investment brochures advertise the increase in vulnerable children as offering “favourable demographics”.
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New Deals, Big Profits
The attractiveness to big business of children’s social care was evidenced in a deal achieved in June 2022, when the founders of industry leader Caretech agreed to a £1.2 billion takeover to delist the company from the London stock market.
The size of the deal is indicative of the profit margin increases of Caretech’s children’s homes operation, which contributed nearly one quarter of their total revenue last year.
Caretech operates children’s homes through a subsidiary called Cambian Childcare Limited, whose latest unaudited accounts show a gross profit margin of more than 40% in 2020, despite being less than 30% a year before. In 2018, a year before Caretech took over, Cambian Childcare’s gross profit margin was less than 20%.
Cambian Childcare’s growth in profits is partly driven by a decrease in the company’s cost of sales, which decreased by just under 10%, while turnover increased by more than 10% reaching over £100 million. This is unusual – in normal markets it is more often the case that cost of sales increases when sales (or in these examples, children being referred to their care) go up, thereby keeping the gross profit margin roughly the same.
Cost of sales are those that could be associated with money spent on an individual child’s care, although the reduction could also relate to other efficiency savings.
The report by the CMA found that there was little difference between the quality of care between private and public providers, although the Longfield report quoted one staff member at a privately run children’s home who said that “spending on children was reduced after acquisition” and that the activity budget for children had been cut to an amount that “doesn’t go very far”.
The report does not specify the name of the provider and there is no reason to think it would be Cambian Childcare.
A further driving force behind the rise in profits is the amount spent by local authorities on children’s residential care, with expenditure on looked-after children increasing by £1.3 billion since 2012/13. The average cost per looked-after child has increased by 11% in real terms, from £60,032 in 2012 to £66,608 in 2020, with most of this growth focused on residential care. As costs to local authorities went up and up, children’s home providers reported average operating profit margins of 22.6% from 2016 to 2020.
As alleged in the Longfield report, private providers can charge what they like for residential care, with resource-squeezed local authorities in urgent need of placements having little options but to go with what is on offer.
Giving evidence to the Commons Education Committee in March this year, former Conservative children’s minister Will Quince described the behaviour of some providers as “profiteering”. While the CMA found that the average price of placing a child in a private children’s home was approximately equal to that for a council-run home, they also concluded that “the primary driver of these cost differentials was in higher staffing ratios and costs in local authority provision.”
There is no implication of any wrong doing by the providers themselves, but gross profit margin increases of this scale could be an indication of a poorly regulated, uncompetitive market.
Sector Dominance
One way that current regulation can reduce competition in the market is that it allows a company to become the dominant provider in specific regions to exploit local authorities’ reluctance to place a child out-of-area.
Keys Group, one of the largest children’s social care providers, has targeted several of England’s regions one-by-one each year since 2017, according to successive strategic reports. Keys’ latest audited accounts report a gross profit margin of more than 30% in 2020 - up from 24% in 2019.
Keys’ expansion strategy is typical of companies controlled by private equity firms who favour high levels of borrowing against property. Currently, Keys’ total debt exceeds the company’s total assets by more than £46m - up from around £39m in 2020. Keys did not respond to Byline Times’ request for comment.
High levels of debt in the market have drawn heavy criticism as it can signal a greater likelihood of insolvency. In such circumstances, the CMA warned that “children in that provider’s care could suffer harm from the disruption, especially if local authorities were unable to provide alternative, appropriate placements for them.”
Carolyne Willow, director of campaign group Article 39, is concerned about the very existence of profit in the sector. “Public funds intended for the care and protection of vulnerable children are instead falling into the pockets of shareholders,” she told Byline Times. The CMA found that private companies are profiting on average £910 per child every week, which Willow says “could transform lives at the individual child and family level. Cumulatively it is an indefensible syphoning off of resources which our children’s care system desperately needs.”
Ofsted has rated many Cambian-run homes as “outstanding” and “good”, however not all homes received glowing reviews. At one home in Dorset the regulator reported that “the safety of children in this home is seriously compromised” at an inspection in April this year. The home was given an ‘inadequate’ rating and served with compliance notices.
Although “sufficient action [had] been taken” to address the safeguarding issues at a subsequent monitoring visit in June, Ofsted reported that the progress had still “yet to be embedded.”
At another Cambian home, subject to an Ofsted interim inspection in March, agency staff were hired without evidence of DBS checks. Managers also failed to follow a risk assessment for a member of staff with a conviction of actual bodily harm. Ofsted reported that “the quality of care afforded to children is inadequate.” The compliance notices issued at the inspection had been met by the time of Ofsted’s monitoring visit in May but a spokesperson for Caretech said the company “acts promptly to remedy any deficiencies in its service.”
Keys-run homes have also faced criticism. At a home inspected last October, one child’s bedroom had no curtains. While progress had been made by the time of a subsequent inspection in January this year, the home was “not yet delivering good help and care for children and young people.” Keys were contacted for this article but the company did not respond.
Nonetheless, the largest private providers of children’s homes are likely to continue reporting vast profits unless the incoming Government acts on the recent care review’s recommendations. The review, which called for a windfall tax on the largest children’s home providers, predicted that current trends will see 100,000 children living in care by 2032 (up from 80,000 currently), at a cost to local authorities of £15 billion (up from £10 billion currently).
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