The Coronavirus pandemic has tragically left care homes with too many empty beds. If you have empty beds how does it make you feel?
Does it stress you enough to consider filling for whatever fee is offered simply because you think a filled bed is at least bringing in some income and is therefore better than the bed staying empty?
What’s the financial impact of having empty beds in your care home?
If you want to know how to work out the financial impact of having empty beds is having on your home and whether you should accept a low fee just to fill one then read this post.
Having empty beds in your care home is understandably a real worry. Your costs are high, and you’ve lost a significant amount of income.
If you’ve had an empty bed for a few weeks and a referrer then offers you a person for a fee that only covers your costs, or a best only returns a small profit, would you take that person? I’d understand if you did. After all, with a filled bed, you are receiving some kind of an income that will at least cover your costs and surely that’s better than an empty bed that is generating zero income? Yes?
Well…no…not in the long run.
You will most probably provide this person with the care they need for a number of years and even if his or her care needs don’t change you know your running costs will increase. A breakeven, covering-your-costs fee will become a become loss-making.
And whilst that bed is filled with this person who is, to put it bluntly, a financial burden, you have no opportunity to fill the bed for a fee that is enough for you to cover your running costs, the cost of the delivering the care the person needs and to return a healthy profit.
First off, an empty room is cheaper to run. No cleaning, heating or maintenance costs. No meals, snacks or drinks and no care delivery. Your fixed costs can reduce appreciably.
One empty bed won’t make much of a difference to how you manage your staff but if your clients normally need help with personal care or at mealtimes, then fewer dependent clients can make a difference in your staff costs – fewer pickup shifts, fewer agency staff and so on.
There’s the logical response. But meanwhile you still have an empty bed costing you money, so you need a little more than this.
If you’ve read any of my posts or reports you’ll know that I’m all about establishing as much certainty as possible, so that you can make more informed decisions.
No finger in the air guessing and hoping.
What you need is a clearer picture of the overall financial impact of this empty bed and whether filling it for a low rather than holding out for the right fee makes sense.
In my report, , I use example 30-bedded residential and nursing homes in my mathematical arguments. In this case, I’ll use the example residential home to take you through the actual financial impact of empty beds and use maths to address the empty bed or low fee argument.
In the report I show how I worked out that the running cost for a residential client, needing no extra care beyond very basic care, was £521.05. I’ll stick with this cost and not reduce it as would be realistic for an empty room as I outlined above.
In their Annual Care Cost Benchmarks, LaingBuisson found that in 2020 the average fee councils in England paid residential care homes was £596. So, I’ll use that figure as the realistic fee that this residential home receives for all its 30 residents. I’ll also assume that all clients in this care home have the same basic residential care needs and therefore cost the same £521.05 to care for.
On this fee and at this costs, the care home makes a small 12.6% profit of £74.95 on each resident.
By-the-way, these numbers were calculated before the pandemic. In my report, , I show that the cost of this pandemic would reduce this £74.95 profit to an insignificant £9.09.
On a cost of £521.05 this care home’s ideal fee should be £762.97. This is based on adding a 2.5% ‘future cost rises cushion’, because your local authorities and CCGs won’t discuss an increase in your fee simply because your running costs have increased. (Another problem with this sector which isn’t for here but which I discuss in length in the , report.)
This 2.5% cushion takes your cost to £534.08. Add a healthy 30% profit margin and you have an ideal fee of £762.97.
(If you think 30% is too high a profit margin, right now Coronavirus is wiping at least 10% off your revenue. What profit margin does that leave you with? It’s wiping off around 11.5% off ours and last week one of our nursing homes had to carry out daily LFD tests because of a positive result, which temporarily increased the cost and cut in profit by 20%.)
Ok, let’s get back to the empty bed argument. There are a couple of ways we can look at this;
1. How long can a care home keep a bed empty before it will make an overall annual loss on that individual bed?
2. How many empty beds would it take to wipe out the care home’s entire profit for the year?
A single Empty Bed
How long will it take to recoup the loss you make on an empty bed and how much would you return over the 12 months from when it became empty?
Say, the residential care home has an empty bed for 4 weeks and then in a panic to want to fill it, the registered manager takes a person for the average English council fee – their usual fee – of £596.
Recall that the home makes £74.95 profit after its weekly running cost of £521.05 is taken off. For the first 4 weeks that the bed is empty, the provider has to still pay 4 weeks of running costs which is £2,084.20 (4 x £521.05).
Over the remaining 48 weeks, the care home makes a total profit of £3,597.60 (48 x £74.95). Take off the initial 4 weeks loss and, as the table shows, the year’s actual profit on that bed is only £1,513.40.
How many weeks would the bed need to be empty before the care provider makes no profit on it over the entire 12 months?
As this table shows if the bed is empty for 7 weeks and then fills for that fee of £521.05, it will not be able to make up the loss for the rest of the 52-week period.
You see that after the remaining 45 weeks the bed is still financially in the red by £274.60. In fact, it will take another 4 weeks into the following 12-month period (49 weeks in total) before the bed returns a profit.
It will take 49 weeks of occupation for the bed to return to profit after those initial 7 weeks that the bed was empty!
This clearly shows why care providers who accept these average bed fees are so financially weak and vulnerable.
Remember, this is the average fee that councils in England are paying residential care homes. This is not a hypothetical fee.
But what if the provider doesn’t panic and holds out for the required target fee of £762.97?
When the bed is empty the running cost is the same as above at £521.05 but recall that when the bed is filled for the required target fee, this cost increases because we have added the 2.5% future cost-rise cushion or ‘Impact Analysis’ (IA).
So, the bed cost, when occupied becomes £534.08 and, on a bed fee of £762.97, the profit is, at a healthy £228,89.
To do a direct comparison with the above example let’s keep the bed empty for 7 weeks and see the impact.
As before, 7 weeks empty results in a cost to the provider of £3,647.35. The provider then fills the bed for the target fee of £762.97 and returns the weekly profit of £228.89. Over the remaining 45 weeks of the year the bed still manages to return an annual profit of £10,300.05 (45 x £228.9). Take off the initial 7 weeks loss of £3,647.35 and the actual annual profit across the 52-week period is £6,652.70.
The care provider still makes closer to £7000 profit on the bed over those 12 months versus a loss of £274.60 if on the average referrer fee.
Not only would the bed still make a much larger profit, but it would return to profit quicker – in this case within 11 weeks.
That’s 11 weeks to recover from a bed that has been empty for 7 weeks if on the right fee versus 49 weeks on the average referrer fee.
How long would the bed actually need to be empty for in order for it to not be able to return a profit over the 12 months?
As this table shows, the bed would need to be empty for 16 weeks for it to make no profit across the year.
But the following week – week 53, or the 37th week of occupation, the bed would tip back into the black and the provider would once more begin to return a healthy profit (£2228.89 – £96.76 = £132.13).
You see how much more financially resilient the care home is when it receives the right fees?
It can stay empty for longer and return the bed to profit far quicker.
This highlights how quickly an empty bed can become a loss for many months for a care provider if their bed fees are at the levels that councils want to pay.
Multiple Empty Beds
What about the overall financial impact on the care home? How many empty beds would it take to tip the care home overall into the red?
Recall, for this 30-bedded care home, an empty bed has a weekly cost of £521.05. If we spread that empty bed cost across the remaining 29 occupied beds, what impact on the profit across your other beds does this have?
Divide the £521.05 empty bed cost across the remaining 29 residents. (Remember, for simplicity, all residents are on the same fee.) Each resident will cost an extra £17.97 a week until that bed is filled. (£521.05/29 = £17.97.)
Recall that on the average English council bed fee of £596 for each resident, the care home would be making a 12.6% profit of £74.95. £17.97 extra cost across these remaining 29 residents would therefore reduce that profit to a tiny 9.6% profit of £56.98.
2 empty beds increase the cost across each of the remaining 28 residents, by £37.22 per bed – a profit margin of only 6.3%.
As you see, it only takes the cost of 4 empty beds to turn the remaining beds from each making a profit to each making a loss. Now the care provider is making a loss on each resident of £5.21 a week.
So, on the average referrer fee of £596, this 30-bedded residential care home slips into the financial red if it has 4 or more empty beds.
What if the care home was receiving its target fee of £762.97 for all of its residents? The cost of the empty bed is the same and so the extra cost of £17.97 per remaining 29 residents reduces the provider’s profit margin to 27.6% for each resident. That’s still a healthy profit.
On a profit margin of 27.6% you can afford to hold out a client on the right fee and not feel pressured to take a client for a low referrer fee that will make you a loss every week, month and year that they occupy that bed or at best will make you an insignificant profit that does nothing to alleviate your financial struggle.
A financially resilient care home can handle temporary drops in profit like this.
So, how many beds can this care home handle on the healthy target fee of £762.97? Because it is receiving bed fees that return a healthy 30% profit, the shared cost on the remaining beds don’t tip them, and hence the home, into the red until it has 10 empty beds.
I know it’s pretty obvious that the higher the fees the more a care home can cope with its empty beds, but please just take a minute to see what a difference this illustrates and how much more financially resilient it makes the care home.
Especially when it comes to how long it takes a bed on the average fee that councils pay to not return to profit after only a few short weeks empty, compared to one that is filled at the right fee.
Do you use numbers like these in order to make more informed decisions?
You can panic and think that a bed is not covering your £521.05 weekly running cost, or you can see the big picture and know you can soak up losing 2.4% off your profit for each resident.
On the right fees your care home can handle more empty beds for longer and more quickly recover once beds are filled.
If having empty beds has traditionally stressed you and if you have accepted low fees in order to fill them then I hope I have persuaded you to think twice, to not panic and to do your numbers so you can make the right decisions.
I also hope that I have demonstrated just how financially vulnerable care homes are if they accept the average fees that councils pay. (For a nursing home this average council fee is £764.)
If your care home accepts these kinds of fees then, especially with the devastating cost of Covid-19, now, more that ever is the time to review these fees your residents are on versus the fees they should be on.
As you see, it is vital that you know your costs because only then can you work out the impact of empty beds and fill them for the right fees.
Your care home has never known worse times. If it is to survive you must set the right fees. If you need help to work out what your costs are and what fees to set then check out the Care Fee Calculator and try it out for free.
