How warehousing of the elderly led to a crash

On 25 May I used my first ever opportunity to speak in the National Assembly to ask for a Government statement about the looming crisis at the private provider of residential care of older people, Southern Cross. Almost two months earlier my attention had been drawn to the problems by a telephone call from a journalist at the Financial Times. Over the years my views have not regularly been the subject of attention by the FT. However, this call came as the result of research I had carried out five years earlier into the residential care sector.

The background to the difficulties in residential care services for older people is one which, while relatively brief in time, has been continuously turbulent. Essentially, the story begins with the 1990 Community Care Act and the Faustian bargain at its heart.

On the one hand, it provided the vehicle through which a set of essential Thatcherite ambitions were to be achieved. ‘Monopoly’ welfare services were to be broken up and transferred out of the public sector, while previously free services (provided in the NHS) were to become ‘fee’ services, by being shifted into the means-tested social care sector.

On the other hand, the vehicle through which these transformatory changes was to be brought about was the much hated local authorities. The compromise was to transfer budgets for these services to local councils, but to make it a condition that 90 per cent of such funds had to be spent on contracting for services, rather than providing them in-house.

Against that background, it is hardly surprising that a boom followed in the private care home market. Private providers were attracted by the guaranteed demand from an ageing population, matched by what appeared to be a guaranteed stream of government funding. Over the next 20 years the nature of provision altered radically. The former pattern of small-scale, family run homes were largely bought up by far fewer, but far larger companies.

However, it was at the start of the last decade that the market moved to even greater consolidation, with what the Financial Times, in 2004, called “frenzied private equity activity in the sector”. In September 2004, the New York-based equity giant, Blackstone, acquired the Darlington-based, New Zealand-originated company, Southern Cross Healthcare for £162 million. Southern Cross had been in the hands of another private equity owner, West Private Equity, for barely two years. Blackstone thus became the owner of 160 residential care homes, providing 8,200 beds.

In a little-noticed market manoeuvre, at the time, Blackstone then sold off the free-holds of the homes it had so acquired, in order to obtain funds to finance further care home acquisitions. Three months after buying Southern Cross it purchased the second largest UK-based owner of private nursing homes, Surrey-based NHP, in a cash deal of £564 million. NHP owned more than 350 care homes with 17,400 beds throughout the UK. It also managed a further 165 homes through its subsidiary, Highfield Care.

It is important to be clear that such equity buy-outs are motivated by one thing only – the prospect of rapid and rising profits. Blackstone was not an organisation motivated by an interest in social welfare. Later in the same week that it acquired NHP, it also bought a French cinema group, a German chemicals company and the Dutch telephone directory supplier VNU. Residential care was simply another commodity from which profit might be extracted, only this time with the added advantage that such profits were being supplied by the public purse.

By the time the equity acquisitions of 2004 were completed, the public sector monopoly of 30 years earlier had, essentially, been replaced by a monopoly in the private sector. Mrs Thatcher’s Hayekian-derived promise of a highly competitive market, in which a plethora of small suppliers would strive for business by providing highly cost-effective, relentlessly customer-focused services had given way to a very different world. This was one in which a small number of dominant suppliers would provide large-scale warehousing of older people, with very little choice for either purchaser or user.

How is it, then, that the heady days of assured profits of 2004 have turned into the crisis of 2011?

Today Southern Cross owns 750 residential homes, employs 44,000 workers and offers care to 31,000 residents. Some 70 per cent of those living at Southern Care properties have their fees paid by local authorities. In the Welsh context, Southern Cross is a substantial, if not by itself a monopoly supplier. From Carmarthen eastwards across southern Wales, the company runs some 34 homes with the greatest concentration in the former county of Mid Glamorgan. Bridgend has four Southern Cross homes within its boundaries, providing residential care for 235 older people. Within Cardiff there are a further four homes, providing 280 places.

The problems facing the company have been apparent for more than a year. In the nature of these things, as information about its difficulties has mounted, so this has compounded the problem, as local authorities, in particular, have looked elsewhere to place elderly residents.

However, what precipitated Southern Cross’s troubles into a crisis was the 2004 decision to sell its free-holds. Today the company pays some £250 million annually to 80 different landlords. When it posted half-year losses of £311 million earlier in May, and warned that, without change, it did not have enough cash to survive beyond the end of June, it looked to a re-negotiation of rents to bale it out of trouble. A committee was set up, involving its major landlords, to find a way ahead.

That search for agreement failed. Yesterday Southern Cross announced what amounts to a unilateral decision to cut the rents it pays by 30 per cent for a four month period. The company said it was confident that this ‘summer platform’ would allow a long-term restructuring to be concluded, supported by a ‘critical mass’ of its landlords.

However, within hours one of its major landlords, the suitably named Bondcare, poured cold water on the announcement suggesting that it did nothing to solve the problems faced by Southern Cross. Even less directly interested commentators pointed out that the plan amounted only to a deferral of payment (now, presumably, with interested added on), with little to inspire confidence that a more secure solution would be found by September.

What lies at the heart of this distressing story? Essentially, it is a political debate about the nature of ownership. Here, two essential propositions compete for supremacy. On the one hand, there are those who believe that ownership matters. This perspective is shared by two sides of the political spectrum, by the framers of the original Labour Party constitution, and also by a Thatcherite view of society.

Socialism is a creed which is based in the original Clause Four objective of ‘common ownership of the means of production, distribution and exchange’. From an entirely separate part of the ideological spectrum, Mrs Thatcher drew on a set of propositions from the Austrian economist Joseph Schumpeter to shape her privatisation agenda. Here, ownership very clearly mattered. Taking assets which had belonged to the public and transferring them into private hands would bring with it, the theory went, a whole set of benefits which ownership conferred, especially in releasing innovation and the ‘dynamic vitality’ of free enterprise. Quite certainly, these are the arguments which underpinned the transfer of residential care from a service which the public sector provided, to one in which it became the responsibility of the privately-owned, profit-seeking sector.

On the other hand, Prime Minister Blair regularly argued that ownership was irrelevant. Nobody was interested, he insisted, in who provided a service, so long as the service itself was of a satisfactory standard. The state’s responsibility was to secure a service (by paying for it) and to use the power of regulation to ensure quality. Over recent weeks it has seemed difficult to turn on the television or the radio without hearing supporters of the current Westminster coalition making the same argument in relation to its troubled health service reforms. There is no need to be concerned about the bogey of privatisation, spokespeople say, because ownership is not the issue. Patients don’t care what lies behind the service, so long as the service is available and provides the treatment they require. ‘Any willing provider’, say its supporters, is simply a statement of agnosticism about ownership – because ownership doesn’t matter.

Indeed, it comes as a useful warning to listeners to note that, the more the individual appears to possess, the less important they apparently believe possession to be. The more the acres roll away from their own front door, the more anxious they are to assure the rest of us that ownership is matter of utmost triviality.

Unsurprisingly, my own view is that, by contrast, the Southern Cross crisis is simply the latest in a recent line of developments which shows that ownership matters very much indeed. At a UK level, depositors in Northern Rock or the Royal Bank of Scotland, to name but two, who were faced, in 2008, with the prospects of their savings going down the Sewanee surely understood that ownership mattered. So did the then-Labour Government when it stepped in to take control of the companies and so guarantee their deposits. In Wales, the Welsh Government’s decision not to use the PFI to pay for capital projects in the health service, for example, is rooted in the belief that ownership matters – that public assets, purchased with public money, belong in public ownership.

Southern Cross demonstrates all these issues in high relief – both because of the direct public interest in its operation, and because of the vulnerability of those who depend on its services. If the company were to cease trading, then – in Wales at least – we can assume that local authorities, those welfare states of the last resort, will attempt to come to the rescue. For example, Bridgend is reported as already drawing up contingency plans for the on-going care of Southern Cross residents.

It is a fundamental tenet of socialism that we each of us owe a duty of care, not simply to those we know – to family, friends and neighbours – but to strangers, those whom we will never meet, and never know, but whose welfare, we understand, is intimately bound up with our own. And, in a clear sign that instinctive socialism remains alive and well in Wales, Bridgend’s plans extend not simply to the 70 per cent or so of Southern Cross residents for whom the local authority has a direct responsibility, but for those 30 per cent of self-funders who, otherwise, would be left alone and high and dry.

There is a line which goes directly from the day room to the board room. At one end, the talk is of care, at the other of cash. At one end there is concern about quality of service, at the other quantity of profit. As the difficulties facing Southern Cross mount, and the solutions have to be found, once again, through the collective strength of public provision, the approach taken to social policy in post-devolution Wales looks more relevant than ever.

Mark Drakeford is Labour AM for Cardiff West.

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