Care homes all over England are closing because housing associations can't afford to run them and neither can councils. The number of elderly people is soaring – but how will we will look after them, and who will pay?
It was supposed to be a business expansion that would also be a rewarding experience. But when housing trust London & Quadrant set up its own care homes five years ago, the reality was far from fulfilling.

"It was difficult to achieve the quality we wanted for our customers because it was difficult to get good staff on the salary we could afford," says London & Quadrant's group director of human resources, Sally Jacobson. "The finances were so finely balanced, it was impossible to set pay at the rate the work deserved."

So, in 2001, L&Q sold its five care homes to Ashley Homes, the care division of Shaftesbury Housing Association. L&Q has not bought any other homes since, sticking instead to its core business of sheltered and general housing.

"In the last two or three years I haven't heard of any other registered social landlord going into the business because it's very hard to achieve quality within budget," says Jacobson.

Rising demand
L&Q is not alone in getting out of residential care. In Birmingham, since 2001, 80 homes have closed. In the past five years, between 700 and 1000 homes run by independent providers – charities, housing associations and private owners – have closed, mostly in the South.

Few are being built to replace them.

The issue of older people's housing, both sheltered and non-sheltered, is in the spotlight this week after the publication of a Housing Corporation policy document on the subject. The report recommends that elderly tenants have more accommodation choice; but exactly how there will be more choice, with more and more homes closing, is not clear.

The elderly population is soaring while care homes places dwindle. The London School of Economics published a study last year, Projections of Demand for Residential Care for Older People in England to 2020. It predicted that the number of older people in care could rise from 375,000 in 2000 to around 460,000 by 2020. Where are these people to go? Peter Fermoy, of the Independent Health Care Association, says: "Lots of care homes are operating at very high – almost dangerously high – levels of occupation. With changes about to come in demographics, there will need to be changes in provision. But if the closures continue, that provision will have shrunk to almost dangerous proportions."

The main reason for this situation is money – or rather, the lack of it. Councils pay care fees for 249,000 people in independent care homes. These are upwards of £260 a week for each person, and on average, are between £268 and £385. But those fees often fall short of the real cost of care by £75 to £85 a week, according to William Laing of care analyst Laing & Buisson. That forces providers to sell up while simultaneously discouraging potential new providers from entering the sector. In fact, the Joseph Rowntree Foundation estimates that the difference between what councils pay and what high-quality care actually costs is as much as £385m.

Housing associations and charities may have to cross-subsidise care from their other funds and this is a drain on resources. John Belcher is chief executive of the Anchor Trust, one of the UK's largest care providers with 96 homes.

He says: "Last year we made a small operating surplus on residential and nursing homes, but in previous years we had to cross-subsidise to the tune of something like £3m. That could be used for other services. If you're a small provider, you don't have the ability to cross-subsidise so you're going to be put out of business."

Squeezed budgets
The system pulls council resources between care of children and the elderly, leaving older people last in the queue for resources. Budgets are tight and departments must choose between providing more places or raising fees.

Liz Railton, director of social services for Cambridgeshire council, says: "We have put £2m into fees, but the more money we put into fees, the less we can put into the number of places we provide."

Between 700 and 1000 care homes run by independent providers have closed in the past five years, mostly in the South. Few are being built to replace them

Among Cambridgeshire's problems are wages pushed up by high inflation, increased expectations of care and the price of land – problems familiar to many other councils. Railton fears the situation could get worse if the Supporting People budget, for which lots of vulnerable groups will be competing, only grows at the rate of inflation. Health secretary Alan Milburn has pledged an extra £300m from 2001 to 2003 to alleviate bed blocking, where people are kept in hospital after they should be discharged because there are not enough places in homes. This move is welcome, says Railton, but she fears the funding gap is so large that even £300m is unlikely to fill it.

Additional financial burdens came with the Care Standards Act of 2000. Its requirement to train staff means they must now get qualifications like NVQs in care. Milburn pledged £70m to fund this, but many homes still cannot afford it. The act also proposed new regulations on room sizes and shared facilities, but these prompted so much criticism from experts fearing they were forcing homes out of business that they are likely to be withdrawn.

Staff shortages
Potential care providers are also put off by the difficulty of recruiting care staff. Staff are often paid minimum wage rates, currently £4.22 an hour, and turnover is therefore high. Brian House, chief executive of Abbeyfield, the country's seventh largest provider of residential care, says: "We have great difficulty getting nurses to work in nursing homes as we are competing with primary care trusts and specialist work." Many homes rely on agency staff, so they have to pay an agency fee as well as wages. To make matters worse, care staff don't qualify for key-worker housing, making them hard to recruit in high-cost housing areas.

There are plenty of ideas about what can be done, but plenty of problems as well. Some providers say ringfencing social services money to create a fixed pot for older people's services would help. But this is unlikely, given the government's emphasis on giving councils more freedom to spend as they choose.

In June, William Laing proposed a care homes modernisation grant that would give homes more money as they upgraded to meet the Care Standards Act. Although the law's space standards are likely to be ditched, the grant could be linked to quality targets independent of the act. The amount paid to each council would depend on the quality of care provided by the homes within its boundaries. Providers welcomed Laing's idea, but the government is unwilling to pay.

Simon Weeks, policy leader for older people at the Local Government Association, has a particular suggestion for small homes, among which closures have been especially high as they have greater unit costs and less ability to cross-subsidise.He suggests they work in partnership. "Ten small providers could come up with a package which is attractive to a local authority purchaser," he says.

By far the most popular solution for many in the sector is the increased use of "extra care" – where tenants live in their own flats in sheltered housing but have a care package provided by social services. It is often cheaper to run than residential care and is funded partly from transitional housing benefit – soon to be Supporting People – and partly from the community care budget, which provides all the funding for nursing homes. Providing older people with extra-care packages early on could reduce the numbers who need acute care later.

It can only be a good thing to give older people the choice of a range of care models. Anchor chief John Belcher says: "People living in their own homes need quality domiciliary care. There should be quality extra care and sheltered housing and, when people's needs become too great for this, quality residential care homes." Extra care can only work up to a point because buying in different intensive care packages for individuals gets expensive. Also, there will always be those who want or need residential nursing homes.

The consensus is that a shift towards extra care could ease the pressure, and that demand could be met as long as no more homes close and the number of extra-care and home-care places increase.

Government and local authority policy is indeed shifting towards extra care. Health secretary Alan Milburn set a target of 50% more extra-care homes by 2005. Many local authority homes are turned into extra-care homes run by housing associations. While extra care has many positive aspects, turning care homes into extra-care developments shrinks the pool of facilities providing full-time residential care. Local authorities pay their own homes more than they pay private providers, including housing associations – sometimes 50-75% more – so selling homes to RSLs saves councils money in fees.

Homes go to court
Meanwhile, some homes have resorted to drastic measures. Feeling that local authorities are not listening to their plight, some providers have gone to court to increase their fees. In August, a Competition Commission tribunal ruled that North and West Belfast Health Services Trust demanded unfair terms in its care contract from private provider Bettercare. It expected council-funded residents of Bettercare homes to pay £30 a week towards their care but did not ask residents of council-run homes to do the same. The ruling meant local authorities should not pay private providers less than they pay their own homes.

Extra care and more negotiation seem most likely to help to ease the funding crisis – but providers are keen to emphasise that in the fight for more funding, providers don't lose sight of the fact that care is, fundamentally, about looking after vulnerable people. In the worst scenario, elderly people could be sent to homes further away, or bed-blocking could increase. Whatever funding wrangles occur, whatever legal decisions are made, until more care is available, it is these people who will continue to be the real victims. As private care home owner Mike Smythe says: "Most owners of homes who've been in business for a while have a mortgage on their homes and can turn it back into capital so they wouldn't be destitute.

Where does the money come from?

Nursing care is funded from the Department of Health’s community care budget. The housing and basic care elements of extra care come from transitional housing benefit. From April, basic care, such as shopping, will come from Supporting People, rent will come from housing benefit and personal care will come from the community care budget. Transitional housing benefit and Supporting People funds go to housing departments and community care goes to social services. Both departments divide it up among service providers. Local authorities set a fee that they will pay residential care providers, sometimes 50-75% lower than that for their own homes. Independent providers must meet the shortfall themselves. Three-quarters of people in care will have some or all of this fee paid by the local authority. The remaining people will pay their own fees, sometimes by selling their houses.