It’s coming up for that time of year when new draft contracts and overviews of proposed fees will start to appear from councils and CCGs.

You have to make some vital decisions that could have huge consequences on the financial viability of your care home(s). Regardless of whether you run a residential care home or a nursing home, you must know what you’re signing up to.

I’ve written this to help you better critique the information and understand the potential impact of signing-up to these contracts.

I’ve seen a ‘Qualification Information’ document from a group of CCGs regarding the ‘provision of NHS fully funded complex care nursing home placements’ and I’ve done some maths to highlight the potential impact on care homes that sign up to their proposals. This is hugely important, so please read to the end and follow the maths that I set out.

In this proposal the CCGs set out 3 tiers of dependency:

  • Tier 1 – ‘Enhanced’,
  • Tier 2 – ‘High/Complex’ and
  • Tier 3 – ‘Extremely Complex’

In the document they go on to highlight the fees they would pay for each client, the length of the contract and their terms and conditions. What they don’t set out is what care provision is expected to be provided within these tiers.

For mental health and learning disabilities, they propose to pay the weekly fees as shown in the table below. As you see in the table, in addition to the costs there is also an obligation to deliver care and nursing hours each week.

Looking at the fees themselves, the initial reaction from some care providers we spoke to was that they look reasonable – your initial reaction may be the same. And this is why it’s vital that you do the maths for your home because as you’ll see the proposed fees are not nearly as ‘fair’ as the CCG group make out.

To reach these figures the CCG group have used an average ‘blended’ care rate of £14.00 per hour and a nurse rate of £18 per hour.

The first issue with their maths is that these rates don’t include ‘on-cost’. On-cost is the additional cost to an organisation of employing someone, such as tax, and insurance. Depending on the industry and position this on-cost can range between 25% and 40%. For our care homes we add on 30% to cover our on-costs.

This is a real cost to you as an employer and you must include this because such a big percentage of your overall costs is your staff.

So, their care hourly rate when 30% on-cost is added becomes £18.20 and for a nurse, £18 becomes £23.40 an hour.

For Tier 1 residents you need to provide 40 hours of care, which multiplied by the on-cost hourly rate of £18.20, gives a weekly care cost of £728 per resident. For nurses that cost comes to £292.50. This makes a weekly combined cost of £1020.50. The table below shows the costs for all the tiers.

As you can see, this would leave you with £172.50 for each of your Tier 1 clients, less for Tier 2 and for Tier 3 you’d be making a loss.

The reality is that regardless of the tiers, at their hourly rates and the hours of care you need to provide, you will lose money on that client because no account is taken of your other staff, such as domestic, kitchen, management and of your fixed costs such as utility bills, maintenance, training and so on.

Based on a 40-bed nursing home I calculated an example ‘other staff’ cost per client of £178.21 and fixed costs of £91.30. Of course, you should add your own.

When you add up your care, nurse, other salary costs and fixed costs your overall cost for the Tier 1 client in this example is £1290.01. The table below shows these calculations and also for the other tiers.

As shown in the next table below, your cost per Tier 1 client would be £97 over the fee your CGG are willing to pay. In this example you would be subsiding that person’s care to the tune of nearly £100 each week. Over a year that would amount to a loss of £5,044.52.

If all of your residents fit into this Tier 1, you would be looking at a loss of over £200,000 a year.

Of course, your average care and nurse rates might well be less. But I based these calculations on this group of CCGs own numbers in order to show how their own numbers simply don’t stack up.

The point is that you need to do your own calculations and not just look at the fee they are offering and think it’s good simply because it’s more than you previously received.

For the sake of fairness, if I left the nurse hourly rate at £18 (plus on-cost) and reduced the care average hourly rate to £10.10 (plus on-cost) then, in this case, your breakeven cost per client would reduce from £1290.01 a week to £1087.21 and instead of a £97 a week loss, your Tier 1 client would give you a £105.79 profit. Great – a profit.

Now, before you smile and think, great I’ll make a profit – this is just under 10% profit. This is not a healthy profit

Your Local Authorities and CCGs think it’s OK for you to make a profit of between 8% and 15%. I recently saw a survey from one local authority where they ask what your profit expectation is. Check out the image.

They clearly don’t understand business, which is why you clearly cannot simply accept the figures they present and hope they’ll be enough for your business.

If you make low profits like this, you won’t be able to afford to pay for any unexpected problems such a leaking roof or broken lift (both or which happened in one of our care homes in recent months). You won’t be able to deliver more than the care they need – no events, extra living well activities, healthy food.

And what about your late payers? LAs don’t have a great reputation for paying on time and it can take weeks or even months of chasing to get paid. At 10% profit, cash flow is going to be very tight if you don’t get paid on time.

With that kind of profit, you will also not be able to secure any kind of loan from a bank. They will only loan to businesses returning a healthy profit and that means at least 30%.

So, what fee should you be demanding? Based on their hourly rates (with necessary on-cost of 30%), I added 2.5% Impact Analysis before calculating a fee based on making a 30% profit. Impact Analysis is a percentage you should add to cover future cost rises such as NLW, fuel and food for which your referrers will have no interest in discussing a fee increase over.

2.5% on top of the £1,290.01 breakeven cost comes to £1,322.26. 30% profit then gives a fee of £1,888.94.

In this example, to be a financially healthy care home a fee of £1,888.94 is needed, not the £1,193 offered.

The annual revenue and profit numbers shown in the table are based on 40 clients with similar needs on the same fee of £1,888.94. This is the kind of revenue a financially healthy care home of this size needs to make and the kind of profit it needs to return.

By-the-way, if you think I calculated 30% profit wrong and the fee is too high then click this link because I didn’t and you may well be not receiving the profit you think you are.

What the CCG Group in this case have also not considered is how many clients you have and therefore how many care and nursing staff you’ll need to deliver the hours of care they stipulate you must deliver.

So, guess what? I did the numbers… and the results are even worse.

For the Tier 1 clients, you will have to provide 40 hours care and 12.5 hours nursing per week. This equates to nearly 5.71hrs (5hrs 43mins) care hours per client in a 24-hour period. I based my calculations on a day comprising two 12-hour shifts and that the 5hrs 43mins would split 4 hrs for the day shift and the remaining 1hr 43mins for the night shift.

That means 1 carer can care for 3 clients (3 x 4hrs = 12hrs) during the day. For a 40-bed, fully occupied home this would equate to needing 20 carers (not including annual holidays, etc) – 14 carers in the day and 6 carers for the night shift. Using the same method I estimated you would need 7 nurses – 5 day and 2 night.

How many? I know, that’s about double the number of carers you should need for basic nursing. But this is how the maths works out if this home is to deliver these stipulated hours each day and night to 40 clients.

Based on these calculations and the CCG hourly rates, to deliver all that care to 40 Tier 1 clients, your weekly Care staff cost comes to £61,152 and for nurses, £27,518.40. A combined cost of £88,670.40.

That’s nearly double the combined fee you would receive.

And let’s hope you don’t have any Tier 2 and 3 clients.

If this example nursing home signed-up to this contract it would without doubt eventually have to close through insolvency.

So, you see how much worse the numbers are when viewed from how many hours of care you have to deliver to each client and how many clients you have. This is because this CCG group has taken no account of how many clients you have and hence how many care and nursing staff you would need so you can deliver the care and nurse hours you would have to deliver if you signed up to their contract.

Again, my message here isn’t about the numbers themselves, it’s about making sure you work out what fees YOU need and don’t at first glance think their proposed fees sound reasonable. Please, do the maths.

Do not accept their numbers without doing your own calculations.

Regardless of whether your authorities are introducing a tiered system or not you must calculate the fee you need, for each individual person in your home, that is based on their needs and not based on some tier level that your referrers want to squeeze them into.

Start by doing the maths for your own clients. Review the care they deliver and calculate the cost of that care against your average care and nurse cost with on-cost added. And do it based on the new National Living Wage that will be with us soon.

Attend these draft contract meetings and discussions and compare their proposed fees with your own calculations.

But if you aren’t sure how to calculate the fee you really need for each of your clients or if it feels like a daunting prospect then click this link because I’ve just launched the Quality Care Calculator that will do these calculations for you based on your own costs.

All care providers need to calculate the fees they need and be strong enough to say no to fees that will cripple them financially. Know what fees you need and don’t sign up to contracts that will cause you so much financial harm that you will struggle to survive and will go out of business.

Time to do what’s best for your care home and those who live in it.

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