Examination of Witnesses (Question Numbers
580-592)
MR CHRIS
HORLICK AND
MR WILLIAM
LAING
19 NOVEMBER 2009
Q580 Mr Syms: Is there some merit
in thinking about financial products that combine pension insurance
and long-term care insurance to try and combine the two?
Mr Laing: This was a live issue
of debate a number of years ago when people were very flush with
pensions and if you looked at what was available by way of property
assets and pension assets, it seemed a good idea to look at. There
was a pension policy which was introduced at the end of 1990s
by a company called Cannon Lincoln, which has long disappeared
into history in which the amount of pension payable would be variable,
so that if there was a trigger, an event, which meant that care
was needed then the pension would be increased, doubled or whatever.
My understanding is that under Inland Revenue rules this was declared
inappropriate and the product simply had to be removed. In order
to enable a pension pot to be used for funding long-term care
you would have to have a change in those Inland Revenue rules
to allow variable payouts from pensions. Pension pots are viewed
as being less promising at the moment because I think it is recognised
that there is less pension money around.
Mr Horlick: I would agree that
it is definitely something worth looking at and I would also agree
that the Inland Revenue rules need to be changed in order to incentivise
the industry to look at that. I think there is probably something
in it.
Q581 Dr Taylor: To William, we have
talked about care home fees and I think you mentioned earlier
£540 per week. You have got a way of calculating fair care
home fees. Am I right on that figure? In your paper you go into
more detail about different schemes.
Mr Laing: The figures I have quoted,
we have a model for working out what a fair fee is. We look at
all the costs. Our calculation is that for a provincial residential
home outside the London area £540 a week would be a fair
fee for a good quality care home that meets all of the most recent
standards and £670 a week for a provincial nursing home.
Q582 Dr Taylor: Right. I think you
also earlier on said that that split pretty well half and half
into hotel and care costs.
Mr Laing: This is according to
the report footnote referenced in the Green Paper. I would not
say that that is necessarily an appropriate division.
Q583 Dr Taylor: What sort of level
of return would you expect care home owners to get?
Mr Laing: Let us distinguish between
return on revenue and return on capital.
Q584 Dr Taylor: Is this that magic
acronym EBITDAR?
Mr Laing: EBITDAR, yes—
Q585 Dr Taylor: Which I am only just
beginning to understand.
Mr Laing: Earnings before interest,
tax, depreciation, amortization (of goodwill) and rent.
Q586 Dr Taylor: Thank you!
Mr Laing: In other words, just
call it operating profits.
Q587 Dr Naysmith: Everyone has their
own jargon!
Mr Laing: The figures that were
mentioned in the last accounts Southern Cross earned a 28% return
on revenue and for Barchester it was 28% as well. The figure of
17% comes from Care UK but that is a mix of other services as
well. I would say that a 17% return on revenue is totally inadequate
for a care home operation. The reason why is because of the high
capital costs of a care home. If we now look at return on capital
employed, our fair price model assumes that a reasonable rate
of return is 12% on capital, so if you look at how much it costs
to put a care home into operation, you have to build it, you have
to get the land, start-up costs and so on. I cannot remember the
exact figure but it might be £75,000 per bed or something
like that, then 12% on that gives you a reasonable profit level.
That actually works out at something like the high 20s in terms
of return on revenue, so a 12% return on capital is more or less
a high 20s return on revenue. Why do we say 12%? It is very simple.
You look out in the market-place and say how much are investors
paying for care homes? For a good quality care home at the moment
post credit crunch they might pay an eight times multiple of operating
profits. So if investors are expecting to buy at eight times their
operating profits, if you take the inverse of that, that implies
they are looking for a rate of return of 12% on capital. It is
as simple as that. It is the only market-related measure of what
a reasonable rate of return is of which I am aware. If you want
to look at it another way and say why 12% when the bank rate is
now 0.5?%—because running a care home is a moderately risky
business. Some care homes do fail; some care homes do close; you
can mismanage it; it can all go wrong. You can take on a lease
and be unable to pay your rent. That is the basis of it. If you
think 12% is reasonable and all the figures flow through then
you will come to a conclusion that a high 20s return on revenue
is also reasonable.
Q588 Dr Taylor: Is there evidence
that some of the larger corporate providers are making excessive
profits?
Mr Laing: On the basis of what
I have just said, no, the large corporates are making good profits
but I would not say they are making excessive profits.
Q589 Dr Taylor: Not excessive?
Mr Laing: No.
Dr Taylor: For an economist to explain
something that I actually understood is absolutely brilliant so
thank you very much.
Chairman: Is this a first Richard?
Dr Taylor: It is a first, absolutely.
Q590 Charlotte Atkins: Mr Laing again,
your report says that personal budgets "held by councils
on behalf of users" are now being pushed because progress
on direct payments has been so slow. Could you maybe elaborate
a bit more about that? Is that because direct payments have failed?
What has happened there?
Mr Laing: I do not think they
have failed. If you take a direct payment that implies you take
on all the responsibility as an employer and it is too much hassle
for a lot of people to take on. Individual budgets are a way of
extending the whole idea of having personal control over budgets
but make it more hassle free.
Q591 Charlotte Atkins: So you think
that would work better especially for elderly clients?
Mr Laing: Yes because then you
have your individual personal budget which might be held by a
local authority for example but is there for you to use without
necessarily being an employer yourself.
Q592 Charlotte Atkins: Absolutely.
You also say that personalisation will lead local authorities
to seek to move towards spot purchasing and therefore shift the
risks rather than block and cost and volume contracts. What evidence
have you got of that, and do you think that this will lead to
local authorities having less value for money?
Mr Laing: The reason why they
would want to and they are moving away from block contracts is
because under personalisation they can no longer guarantee to
deliver the business into the hands of the people that have blocked
contracts because individuals will have a choice of provider and
therefore they want to reduce their risks. What evidence is there
of this? Again, this is anecdotal. We had a domiciliary care conference
the other week and one of the people I was speaking to was a domiciliary
care provider and he said if they lose a block contract that is
not the end of the story for them. What they can do is go to their
customers with whom they have a direct relationship and persuade
them to move over to direct payments or individual budgets. In
that sense, that reinforces the idea that the local authority
cannot simply take a block of business away and give it to somebody
else. Would it result in poorer value for money for local authorities?
I think this goes back to a question that was asked of the previous
witnesses, and to what extent local authorities are or should
be using preferred providers. I think inevitably local authorities
are going to seek to control the financial consequences of choice
and the worry would be that individuals would take their own money
and do their own deals with individual providers of domiciliary
care services. Naturally local authorities are going to say that
is fine but we do not want you doing deals which would raise the
rate that is being paid from £13 an hour to £15, £17,
£20 or whatever so inevitably local authorities are going
to want to exercise some sort of control in terms of a list of
appropriate providers who have agreed to charge within certain
bounds. That is inevitable.
Charlotte Atkins: Thank you.
Chairman: That completes this session.
I must say we have been super efficient. Thank you very much indeed
for coming along and helping us with this inquiry.
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