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Care home fees - setting costs and making savings

Councils face a double bind: less money to spend plus the need to care for a growing elderly population. As they struggle to control residential and nursing care expenditure, councils are hampered by a lack of visibility of providers’ underlying costs – making it very difficult to determine whether care home fees represent value for money for the tax payer. Meanwhile, care home providers are becoming more litigious when councils seek to limit fees.

The Pembrokeshire judgement shows that councils can lose these cases unless they can show that decisions are underpinned by a clear strategy, robust analysis and open engagement with providers. 

To help commissioners gain the insight they need to determine a sustainable fees strategy, PA Consulting Group has developed a unique financial benchmarking tool that presents a user-friendly analysis of local care home costs, which can be set up in a matter of weeks.

Avoiding just 1% in increased fees can save the average council hundreds of thousands of pounds a year. Dorset County Council has already been able to agree a no-inflation fee by using the PA tool to agree with local providers that an uplift was not justified.

Collecting the data and interpreting the information

A standard questionnaire collects data on running costs from care home providers. We recommend that councils mandate completion of the questionnaire as a condition of doing business. The anonymised data is then summarised and presented on a simple dashboard showing providers’ most significant costs, such as staff, property and consumables. The dashboard makes it clear what the highest, lowest and average of these underlying costs are across all care homes in the database

This enables commissioning staff to compare easily an individual provider’s costs to other care homes in the locality, highlighting where those costs are out of line with the rest of the market. The approach shifts the focus of the negotiation away from why the council should pay a higher fee and onto how the provider can better control the costs that drive it.

Using the information to set fees

Councils can use the tool to identify a target fee rate based on setting a reasonable value for the underlying costs in their locality. The values councils choose are a matter for internal agreement. As a starting point, we recommend costs should be set at the 30th percentile, because an average of 30% of providers can achieve or improve on this. Hence this is a ‘stretch’ target that all providers should be encouraged to work towards. Profit, return on capital employed and occupancy levels can all be ‘dialled in’ to the dashboard independently, on top of the benchmarked costs.

Commissioners can now engage with providers confidently to agree fees, knowing that this transparent and rational approach to negotiation, using providers’ own information, can protect them from the threat of litigation. Specifically:

  • commissioners can see if any cost elements are out of line with the local benchmarked levels. For example, if nursing staff costs are higher than the target, this could be because the provider has opted to employ a richer than average skill mix, or to pay above the market pay rate. The commissioner can explore this with the provider and agree if this cost should flow through into higher fees or not

  • if a provider asks for a fee increase, commissioners can quickly evaluate if the request is justified. For example, if electricity costs rise and a provider asks for a fee increase to cover it, entering the electricity cost increase into the tool will show the commissioner what scale of fee increase, if any, is warranted.

Using financial information as a basis to set future strategy

As councils seek lower cost alternatives, the demand for publicly funded residential care beds will decline and councils should develop a clear fees strategy to support their overall long-term aims in this context. For example, councils may wish to set fees with the aim of driving down supply over time. The PA benchmarking tool provides a basis on which to start discussions with providers about whether they should exit the market or switch to more specialist provision, such as dementia care.

Many councils are exploring ‘extra care’ – largely independent living with on-site support. The tool can be used to help commissioners to determine whether these alternative arrangements are going to be sustainably lower cost than residential care.

Several UK councils including Wiltshire, Poole and Dorset are already saving money using PA’s benchmarking tool.

To find out how your council could save money on residential care-home costs,  contact us now.

Steve Carefull
Adult social care
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