How much will the latest rise in the National Living Wage cost you in this coming fiscal year and how much extra will it add to your weekly bed cost?
In this post I will recap the financial impact of last year’s rise of 6.2%, the financial impact of this month’s rise and the cumulative impact if you didn’t increase your fees (whether for new clients or when reviewing current clients) last year.
These national wage rises account for your biggest annual cost increase by far (before coronavirus struck) and, as you well know, there is a plan to continue these increases to 2024. The overall financial impact on your care home will be crippling if you don’t address this.
Read on and download a free tool to assess the financial impact on your care home.
Last April the NLW rose by 6.2% taking this hourly rate from £8.21 to £8.72.
For a 30-bed nursing home, with an overall staff cost of £90,000 a month, an overall 6.2% rise will have added £5,580 a month to the overall staff costs and increased its annual staff bill by around £67,890.
Of course, all of your staff won’t increase by 6.2% but for simplicity’s sake I’ll use these NLW rates for all staff in these examples.
That’s £1,302 a week, which depending on this home’s client type, is the equivalent to between 1 and almost 2 bed fees.
That’s an immediate loss of 1 or 2 equivalent beds if they didn’t address this with fee increases.
If this was a 50-bed nursing home with a monthly staff cost of £150,000 then the monthly increase would have been £9,300 or £2,170 a week.
The annual increase would have been £113,150. This is cost off their bottom-line.
According to LaingBuisson, the average bed fees paid nursing homes in England in 2020 was £764. If these example nursing homes were on these average fees, then last year’s NLW rise cost rise is the equivalent of nearly 2 bed fees for the 30-bed nursing home and nearly 3 bed fees for the 50-bed home.
For balance, I also calculated for a 30-bed and a 50-bed residential home with a monthly staff cost of £55,000 and £84,000 respectively.
Based on these figures, the 30-bed residential home’s weekly staff cost increases by £796 and the 50-bed by £1,215 a week.
According to LaingBuisson, the average fees paid to residential care homes in England in 2020 was £596. This 30-bed home’s staff increase cost is the equivalent of 1.33 beds and for the 50-bed home, the equivalent of 2 bed fees.
When you see numbers worked out like this, I hope you see just how much of a financial impact these annual rises can have and how important it is that you work this out for your care home.
If you did work this out for your care home, did you then work out how much you need to increase your fees by to cover this extra cost?
Did you increase your fees, for new clients and during client reviews, that included your increased costs? If you didn’t then what percentage of last year’s profit did you lose to this extra cost?
Now that the NLW has increased again, how much more will your staff costs increase by?
More to the point – have you got it covered?
Before I continue – the images shown here are taken from my NLW cost calculator, which you can download for free and use to calculate the impact the NLW rises have had on your care homes.
This Year’s NLW Rise
This April the plan was to increase the NLW by 5% to £9.16. Probably because of the pandemic, the NLW rose by 2.2% to £8.91 instead.
What would this 2.2% rise mean for our 30-bed nursing home who at the end of 2019 had a monthly staff bill of £90,000?
Recall that the 6.2% rise took the monthly staff cost from £90,000 to £95,580. The additional 2.2% rise this year will have increased that staff cost to £97,683 – a monthly increase of £2,103. That’s a weekly increase of £491.
(Remember, for the sake of the maths we’re assuming all wages rise by this amount and staff numbers and positions haven’t changed.)
Clearly this NLW rise doesn’t compare with the previous year.
But what if this care home hadn’t increased its fees to compensate for these increased staff costs in the previous year and doesn’t this year? In this case the overall increase in staff cost will be 8.4% from two years ago and equate to £1,793 a week.
How many bed costs (not fees) would that amount to for your care home?
For the 50-bed nursing home that had an average monthly staff cost of £150,000 in 2019, the 6.2% increase would take the cost to £159,300.
The 2.2% rise would increase that to a monthly staff cost of £162,805, an increase of £818 a month.
Again, if nothing was done to address the previous 6.2% rise then the overall weekly staff cost for will be £2,170 + £818 = £2,988.
If the overall increase since 2019 hasn’t been addressed, then the £2,988 increase is the equivalent of 3 or 4 bed fees.
I hope you notice I’m comparing these care home’s cost (not fee) increases to equivalent average bed fees.
Even though we don’t know the LaingBuisson average bed fees for 2021 yet, we do know that some LAs ad CCGs want to pay between £700 and £1000 for what they call ‘Standard Dependency’ clients.
I talked about this and the potential losses to care providers in my previous post New Contracts – The Route to Insolvency?
The 2.2% rise of £818 alone is more than the £700 lower limit. (And expect the referrer to need a good reason why they should pay you above this lower limit.)
For the 30 and 50 bed residential homes, the images below show the 2.2% increases and equivalent costs. Again, the overall costs could be the equivalent of multiple bed fees.
For the 30-bed care home the increase across two years equals £1096 – the equivalent of nearly 2 beds on the average £596 fee. For the 50-bed care home the two-year rise equals £1,673 – the equivalent of just over two average £764 bed fees.
If you’ve read my other posts and reports then you’ll know I’m all about the numbers. If you don’t know your numbers, then you can’t strategically manage these kinds of cost increases and the huge financial impact on your care home.
But if these numbers are making you a little cross-eyed don’t worry; what’s key is that you get the message and you work out these staff cost increases for your own care home and then set out a plan to address them. And feel free to use this tool to help you.
Beyond This Year
As you know the Government has a plan to increase the national living wage over the coming years. The plan was to reach a NLW of £10.50 by 2024 – 5% this and the following two years and 4% in April 2024.
Whether the government will increase one of these percentages to compensate for the ‘low’ increase this year I don’t know.
But if we stick with these future percentage increases, then from the April 2020 rise of 6.2% to 2024 the overall increase in staff wages will be 22.4% and the NLW £10.22. (Remember, this could increase one year to reach £10.50 and an overall rise of 25.2%.)
The image below shows these overall staff cost rises through to 2024, for the 30-bed nursing home.
Aside from this year, this example nursing home will see NLW rises each year that equates to a weekly cost increase the that is greater than the upper limit fee that some LAs and CCGs wish to pay for ‘standard’ nursing care.
That’s a total increase across the 5 years of £5,134 a week.
Using the LaingBuisson average weekly bed fee for nursing homes £764, this 5-year total increase is the equivalent of nearly 7 weekly bed fees.
For the 50-bed nursing home example, aside from this year, the year-on-year weekly increase is nearly £2000.
As the table shows overall it’s a weekly staff cost increase of £8,557.
Again, using the bed fee of £764, this 5-year total increase is the equivalent of 11 weekly bed fees.
For the 30-bed residential home, the year-on-year increases are more than the average bed fee and the total increase across the 5 years is £3,157.
Using the average LaingBuisson figure of £596, this 5-year figure is the equivalent of over 5 weekly bed fees.
Using the average LaingBuisson figure of £596, this 5-year figure is the equivalent of over 5 weekly bed fees.
For the 50-bed residential home the year-on-year increases are almost double the average bed fee and the total increase across the 5 years is £4,792. The equivalent of 8 average weekly bed fees.
The point of showing you these overall 5-year increase examples is to try and press home that you can’t simply soak up these staff cost increases year-on-year.
Every year your costs increase and every year you need to have a plan on how you intend to increase your revenue so that these cost increases don’t impact your profit and hence the financial health of your care home.
The Way Forward
The bottom-line is that every year your weekly staff costs could be rising by the equivalent of one or more bed fees. That’s the same as reducing your occupancy by at least 1 bed each year without reducing your costs.
The only way you can cover these costs rises is to increase your fees.
Each year these staff costs increase overnight but of course you can’t simply do the same with your fees. You can only include your increased costs when you take on new clients or have a (current) client review because their care needs have changed.
(Another reason why I say in my report, Will Your Care Home Survive This Crisis?, this sector is set up to make you fail – your customers have too much power. In pretty much all other sectors, rises in cost result in immediate rises in prices.)
So, for a while you will have to absorb this extra monthly cost and essentially subsidise some of the care your residents receive. (And you know that any annual uplift from your local authorities won’t cover this increase.)
You need to strategically plan for these cost rises rather than wait for them to happen and then react to them.
If you haven’t planned for this year’s hike, then your only options are to make sure you calculate your staff and fixed costs (including your ‘coronavirus’ cost) to get your overall running cost and divide that by your usual occupancy level.
Then you make sure that you have this extra cost included when you set fees for new clients and carry out fee reviews with current clients.
Taking the above 30-bed nursing home example, this year’s staff cost increase of £491 a week, divided across 30 residents is an extra £16.37 a week to add to each resident fee. Not a huge amount when you look at it like that but it’s still an annual added cost of £25,532 for the year and isn’t trivial.
Of course, if this care home didn’t take last year’s 6.2% increase of £1,302 then the total increase across the two years of £1,793 equals an extra weekly cost of £59.77 per resident.
If you didn’t start increasing your fees earlier in the year to compensate for this NLW rise, it’s not too late. Just start now – work out your overall staff and fixed costs and workout that overall running cost increase across your residents.
Next year as you approach the new fiscal year work out what your increase is going to be – as you see in above images the tool will help – and add the increase to your running costs for new fees and fee reviews.
Don’t wait for the increase to take place, and then react – strategically plan for it and get as many of your current clients reviewed as you can and set new fees that cover your increased costs.
Know your numbers. Stay on top of this annual cost increase. Use the NLW Costs Calculator to help you.
It’s important that you know your numbers because unless you earn 30%+ profit margins, then these (and other) cost increases will hurt you financially.
Your local authorities expect you to be happy with no more than 10% profit margin. If you accept their fees you won’t even make that. The best you can hope for is to break even.
Not least because you have suffered an extra unexpected cost in the last 12 months with the pandemic. I calculated that the pandemic has cost care homes at least 10% of their revenue.
Know your numbers. Keep your care home business financially healthy. Deliver quality care.