The Southern Cross affair shows that it is not sensible to expose to untrammelled market forces crucial and very personal services such as the care of older people.
Should we be surprised? The argument is that the market and competition drives efficiency and customer focus. The reality is that the market is driven by the motivation to make money. The two are not the same. They are not even always compatible. Even when the cliff edge is approaching the head long rush for profit seems unstoppable. Just look at Southern Cross.
Southern Cross owns and runs 750 care homes for older people, many of whom have dementia. It has 31,000 residents and employs 44,000 staff. It is a big business. In some communities it is one of the largest local employers and has cornered the market in residential care. It has also been very ambitious, growing rapidly and taking over smaller care home groups. Its ownership has also changed several times as the business is sold on. Care of older people has become a commodity to be traded amongst international, in this instance US, private equity and venture capitalists.
Southern Cross took a financially motivated business decision back in 2007. It sold its properties to an investment fund. In so doing it lost control of its estate and of its capital base. It became more vulnerable and less secure. It also increased its costs as it now had to pay rents on all the properties it previously owned. Why did it do it? The answer is I don’t know, but at the time looking in from the outside it seemed a very risky business model.
Firstly, I assume it was based on projecting a continuing growing demand for residential care for older people and also on year-on-year increases in the funding to meet this demand. Bad call. While the money-movers who now owned Southern Cross anticipated continuing growth other money-movers in the banking and finance system were taking even bigger risks and inventing bizarre financial instruments to repackage debt and loans. As we now know, it all imploded. Banks are not lending, are seeking to contain bad debt, and the government is cutting public expenditure, some of which would have been used by local councils to buy care home places from Southern Cross.
Secondly, presumably Southern Cross sold its properties to raise a capital receipt. This was probably in part used to fund Southern Cross’s continued expansion, with which it assumed that it would generate even larger profits. Why is it so often assumed that bigger is better? Over-reaching is dangerous when the business strategy has inherent risk built within it.
Thirdly, the owners of Southern Cross are not in it for the care of older people. They also are not rooted in local communities, nor even necessarily in the UK. They are in it for profit. Both Southern Cross and the property company who bought the care home buildings and sites each presumably saw a way of making more money for their investors and shareholders. That is what they are supposed to do. The rental agreement signed by Southern Cross was for upward increases in rent, and with a reported annual rental bill now of £240m. This is a significant contributor to the half-yearly losses of £310m.
So what lessons here? Lesson one is to recognise that the for-profit private sector is just that. It is a sector driven by profit. Lesson two is that the market can fail as well as bloom. It is not sensible to expose to untrammelled market forces and decision making crucial and very personal services such as the care of older people. It at least requires some reserve publicly controlled capacity as a fall-back safety net. Lesson three: not-for-profit providers are not driven by the profit motive and when commissioning crucial care services local councils ought to consider who will be taking service and business decisions and with what motivation. The commitment of unseen and unknown international financiers will be to the bottom-line return on investment and their own wealth creation, not on the services which are essentially a vehicle for this profit creation. Not-for-profit providers are much more likely to be committed to the service and to stick with it. It is their rationale and motivation.
So what will happen now? Presumably there is a lot of paddling under the water by government ministers and civil servants, seeking to get Southern Cross and its financiers and its landlords to reach an agreement which leaves the Southern Cross care homes viable and the care of over 30,000 older people undisrupted. The same ministers and civil servants are probably also thinking hard about what the implications would have been if this was a profit-dominated provider of critical health care and local hospitals. After all, this is where current government policy is headed. Maybe the Southern Cross crisis will be a timely wake-up call.
Ray Jones is professor of social work at Kingston University and St George’s, University of London, and from 1992-2006 was director of social services in Wiltshire.
