What's Wrong with Financialised Adult Care?

This paper aims to provide a bilan on outsourced provision by financialised firms in a major UK industry. Adult care was chosen because it is a substantial outsourced activity which, for example,  employs some 6% of the workforce; the activity is heavily dependent on tax payer public funding because 90% by value of local authority adult care is outsourced to private providers. Financialised chain operators have now built significant market shares in residential homes and domiciliary care: in residential, the top 10 chains account for 11% of care homes and 21% of beds with the four biggest chains each having 125-250 homes.

The paper is based on follow the money research and interviews with senior managers in the largest  financialised providers.  Our argument is that that the problem is not the profit motive and the extraction of private value per se but the absence of social value which arises from an imbalance  between 3 kinds of innovation (technical, financial and social). Technical innovation which raises productivity is largely irrelevant in care because of basic activity characteristics; unlike  manufacturing, caring involves a relationship with labour as output and input and without repetition and flow within a standard operating environment ( see Himmelweit 2005).The problem then is that chain providers are not engaged in social innovation but have an exaggerated appetite for financial innovation which reduces state revenues, passes costs on to the state and freezes the form of provision.

The social problem is not private profit and value extraction per se. Removing all the for profit operators and putting their private extraction into the social pot wouldn’t go anywhere near solving the current UK crisis about funding adult care: if all the private operators were collectively making 4-5% ebitda on sales revenue in 2010 that is no more than a quarter of the value of the 2010-2014 austerity driven revenue cuts in local authority care budgets. Furthermore, capital costs account for up to 40% of total costs in residential, and a non-profit mutual in residential would have to borrow to buy or build care homes and then make some charge for capital tied up in property. 

However, profit extraction is only one element in the social value balance sheet:

(1) The only easily available cost reduction for private providers is a once and for all gain through breaking pay and conditions  after outsourcing which undermines the position of unionised public sector workers. But, broadly considered, from the state’s point of view, this is a zero sum game  which incidentally undermines care quality by encouraging rapid turnover of an undertrained and ill paid workforce.

The game is zero sum because pay cuts make savings in the local authority care budget at the expense of increasing the central state’s bill for child care, housing benefit and in due course old age pensions. Adult care has become a major contributor to the new Speenhamland and the growing British problem about the welfare dependent working poor: in 2011 Kings College estimated that 150-220,000 workers were not receiving the minimum wage and by 2013 HMRC was investigating 120 care providers for evading the law; a Select Committee recently claimed that 1/3^rd of adult care workers are on zero hours contracts.

(2)  Financial innovation to boost net profit and limit state claims has been pressed using organised money  techniques for boosting margins on equity and limiting downside risk. Hence, aggressive leverage with cheap debt + op co/prop co structures using tax havens  are standard practice for financialised providers who minimise all their tax obligations except national insurance.

Financialised operators also typically have exit in mind in an industry where building and selling on chains is much more reliably profit making than operating chains There are no economies of scale but it is always possible to expand by replication and add extra dom care branches or residential homes. Chain building is lucrative because the chain consolidates financial results from multiple sites, financial markets love a growth story and corporatised residential homes sell at higher P/E ratios. Operating chains is perennially troublesome because operations go wrong very easily if unit management of branches or chains is not up to the job

 Financialised providers are not interested in social innovation such as changing the form of home visit or residential care, relating commodified and unpaid care etc. The financialised providers when interviewed had a very narrow contractually blinkered understanding of the business of adult care. Their imagination was limited to importing immigrant dom care workers from Eastern Europe which interviewees complained was expensive and complicated as new arrivals require housing, need to drive etc. ; or in residential care they envisaged exporting the decrepit to South Africa or Thailand where wages are so much cheaper.

The problem with financialised providers is that they have a simple margin driven view of private advantage which limits their social usefulness.