UK Care Homes: Nursing a bifurcated industry back to health

The UK’s for-profit care home sector is evolving into a sharply bifurcated industry. Legacy businesses are failing at an increasing rate, as exacting regulatory scrutiny and financial headwinds create a surge in involuntary closures and insolvencies. Simultaneously, capital flows into the sector are rising, spurred by long-term demographic trends, growing demand for specialised care facilities, and improving market conditions. 

The contrasting fortunes within the UK care home industry are expected to widen further in the year ahead. In this three-part article series, we explore the market forces dividing the sector with a focus on:

• Challenges of legacy care home stock: Examining the systemic issues plaguing older care homes, including financial, staffing, regulatory, and structural challenges.
• Reforms and timing: Analysing proposed reforms for the UK adult social care sector, including the government’s new Commission, its timetable for recommendations, industry criticism of delays, and the urgent need for sustainable funding and workforce strategies.
• Investment appetite for best-in-class product: Highlighting the growing domestic and international investment appeal of premium care homes, driven by technological advancements, demographic shifts, policy support, and opportunities for innovation.

Structural challenges weighing on legacy care homes

The UK’s private care home sector faces mounting pressures from escalating financial burdens, workforce shortages, and unsustainable fee structures, all of which are pushing legacy providers closer to crisis. Rising demand for social care and heightened regulatory scrutiny are compounding these challenges, leaving many providers unable to adapt or survive.

Escalating Financial Pressures
The combined impact of changes to employer National Insurance Contributions (NICs) and National Living Wage (NLW) increases, introduced in November’s Budget, has significantly heightened financial strain across the sector. Many operators are already grappling with sharp rises in costs, compounded by high energy prices and insurance premiums. Over three-quarters of care homes (77%) are now operating with minimal reserves, forcing operators to scale back on planned maintenance and capital investments, according to a survey of over 1,180 care and support providers undertaken by the Care Provider Alliance (CPA). According to the same survey, 22% of homes plan to shut entirely, while 57% intend to hand back contracts to local authorities or the NHS, underscoring the precarious state of the sector.

Legacy care homes are further hampered by unsustainable fee structures. Local authorities frequently pay fees below sustainable levels, leaving operators reliant on cross-subsidising costs by charging higher fees to self-funding residents. However, this model is increasingly untenable, particularly in regions with fewer affluent residents. Care homes in these areas, which are more dependent on publicly funded residents, face increased insolvency risk. 

Acute Staffing Challenges
Persistent workforce shortages exacerbate these operational difficulties. Recruitment and retention remain critical issues, as low wages, limited career progression opportunities, and challenging working conditions make it difficult to attract and retain staff. Many operators are forced to rely on expensive agency staff, further deepening financial instability. According to the Nuffield Trust, 64% of care homes may need to consider redundancies, which will place additional strain on an already overstretched workforce. Chronic staff shortages, worsened by an 81% drop in overseas worker visas, severely limit providers’ ability to deliver essential services. Legacy care homes, in particular, lack the financial resources to compete with newer facilities that offer better wages and working conditions, exacerbating staff shortages and service challenges.

Risk of Market Collapse
Without urgent government intervention, the sector faces widespread disruption. The Nuffield Trust warns of a potential cascade of market failures, with closures driving increased pressure on remaining providers, local authorities and emergency services. Hospital discharge delays, already significant, are likely to worsen, particularly in regions with inadequate care capacity. Smaller independent operators, who dominate the fragmented market, are especially at risk. Market consolidation and a transition to a more sustainable funding model, supported by swift government policy, is necessary to avert “large swathes of the market collapsing”, as the Nuffield Trust warns.

Modernising legacy care homes
Private care home providers must implement disciplined management strategies to maximise operational efficiency and optimise funding sources. BTG Advisory offers expertise in financial restructuring and strategic management to help care providers stabilise operations, manage costs, and develop sustainable strategies. Our services include restructuring management, capital raising, refinancing, business exits, and profit improvement analysis.

Our team can also conduct independent business reviews and advise on business model modernisation, including implementing a shift from residential to home-based care, where feasible, to reduce operational costs. We are also experienced in negotiating revised funding agreements with local authorities. BTG Advisory works closely with providers to prioritise continuity of care and preserve essential services during challenging market conditions.