We now know that next April the National Living Wage is to increase by 6.6% from £8.91 to £9.50 for those aged 23 and over and by 9.8% from £8.36 to £9.19 for those aged 21 to 22.
What impact will this have on you as a care provider?
More to the point, what do you intend to do to make sure this huge cost rise won’t financially harm your business?
Hang on Chris, this is 6 months away. Why do we need to think about this now? Well, when’s a better time? If you think about this now and do some what if analysis like I’m going to show you then you’ll know how long you’re likely to need to make sure you are in the best position you can be when it arrives.
What if you didn’t do any preparation? Unfortunately, too many people do nothing. It’s in our nature to put things off until it’s too late.
So, let’s leap forward 6 months – its payroll time and you now know how much extra this is going to cost you each month. You haven’t done anything to prepare for this huge increase and your financial pressures are the same as or worse than (with increasing costs of utilities and food) they were 6 months ago.
How do you feel? Worn out? Sick, wondering how you’re going to manage? Wondering if it’s time to throw in the towel? Hoping you’ll make do?
Or do you feel ok because you made a decision 6 months ago to prepare for this impending rise?
Of course, the right answer is to prepare for this rise.
So, what will the financial impact be on your care business be?
First, take your current average monthly staff bill and increase it by 6.6%. In reality you’ll have people under 23 on lower rates and more experienced staff and on higher rates but a simple 6.6% across the board will give you a good enough indication of the financial impact.
I first wrote about this in a post back in May 2020 after the NLW rose by 6.2% taking this hourly rate from £8.21 to £8.72. I showed the impact of the NLW then and I think it would also be good to show the accumulative rise since then. This would cover those who have had no fee increases since then.
In May 2020I used the example of a 30-bed nursing home with an overall staff cost of £90,000 a month prior to the April NLW rise and showed that this would mean an increase of £ 1,288 a week, or £5,580 a month or £66,960 a year. (See first table below.)
That could easily be the equivalent of a bed fee gone right there.
In this example, this rise would increase each resident’s cost by £43 a week or £2,232 a year. (Bottom separate table in this image.)
For a 50-bed nursing home with an average monthly staff bill of £175,000, the 6.2% rise equals an increase of £2,504 a week or £10,850 a month or £130,200 a year. This works out to be the equivalent of £50 per resident a week or £2,604 a year.
Last year the rise was predicted to be a similar amount in order for the government to reach its goal of £10.50 an hour in 5 years. But because of Covid, the rise was reduced to 2.2%.
Now the rise has been announced to be 6.6%. What Does that mean for these two example homes?
Come next April, the 30-bed nursing home will see a monthly rise in staff costs of £6,447 or £1,488 an annual rise of £77,365.
In the Cost Per Resident table you see that this £1,488 a week rise is the equivalent of almost £50 a week extra cost per resident or £2,579 a year.
But for any residents this home has had since April 2020, you see the accumulative weekly increase (including next year) will be £108.69.
But since April last year that resident will have cost an extra £3,073 by the end of March next year (£2,232 + £841). By the end of March 2023 that resident’s cost will have increased by £5,651.94.
So, if this care home hasn’t increased its fees for any residents since April last year and doesn’t for the coming April then across 30 residents, that will be a cost rise of £169,558.
No wonder so many care homes go out of business.
Here are the numbers for the 50-bed home.
Under the same scenario as above, no fee rises for 50 residents between April 2020 and April 2023 means a rise in cost of £329,696.
I hope you see why you need to do this exercise for your own business and do what you can to increase your fees so the next rise doesn’t actually hurt your business.
Also, you are going to struggle to back date your fees to cover previous year rises. Don’t do the same for this coming year’s rise.
Even though these aren’t your numbers, they may not be a million miles off. Do these numbers open your eyes to something you haven’t looked at hard enough? Is it revealing?
I do hope so because this is too important to ignore and your numbers may work out to be too big to easily swallow.
And this is just your staff costs. What about your utilities and food? Everything is going up.
The tables above come from an excel tool I created for our nursing homes and which is available for free. So, if you want a breakdown of what the next 6,6% rise and those predicted for the coming years then feel free to use it.
I’ve also extrapolated this table a further two years to 2024-25 and used predicted percentages to reach the government’s current goal of a £10.50 an hour NLW.
Your unique challenge – unlike most other businesses – is that you can’t simply increase your non-private bed fees. You are tied into unhealthy contracts and your customers – your LAs and CCGs – have an unhealthy power over the prices you set.
But if for years you have been accepting the kind of low fees that your LAs and CCGs want to pay then now really is the time to stop before it is too late and you go out of business.
If you’ve read my other posts like When is Enough Enough? or 5 Reasons Why You Must Know your Care Home Costs or my report, Will Your Care Home Survive This Crisis? you know I’m all about the numbers.
When you know your numbers you have so much more control over your business and have the visibility to make sure it is sustainable rather than simply hope it is.
If you don’t know your numbers, please make it a priority. Prices across the board are increasing too much for you to simply soak them up. If you’re still not convinced then please do read my post or report or both.
Moving on – having worked out how much your costs will rise what next?
Review Your Fees
You know what your fees are now and you know that you need to increase them so now is a good time to review them and the impact of the cost rise on the profit you currently make on each.
Does each fee return a healthy profit against your current running costs and the cost of the care you deliver?
If you haven’t reviewed your fees for a while then I would simply review them all and prioritise your lowest profit fees as the ones to address first.
Just as a quick reminder – the two key things you need to know…
Know your average care and nurse hourly costs (average hourly rate plus employer on-cost) as shown in this table below.
You need to separate them from the rest of your staff as they are the ones delivering care and you need to accurately calculate the cost of this care based on the time it takes for tasks to be carried out.
Don’t forget to include employer on-cost, which is a real cost to you and must be taken into account. In this table the home has added 30% to the nurse and care average hourly rates. 25% to 30% is right for this sector.
Know your running costs (fixed and staff costs) because this gives you your minimum breakeven point for each client.
Within this running cost a certain amount of care can be delivered each day to each resident. (Your monthly care (and nurse) staff bills divided into days and by the number of residents.)
For example, this (different) 50-bed nursing home has monthly care and nurse costs as shown below, which when divided down into weeks and across the 50 residents, gives a weekly cost that equates to care time each resident can receive.
Divide into days and by their average hourly costs (taken from the table above) and the table below shows that each resident can receive 4 hours of care time and an hour and 20 minutes nurse time each day as part of your running cost.
I call this Basic Care and covers all tasks including paperwork and other duties carers may have such as domestic. Since the pandemic it should also cover tasks like checks, testing and visitor escorting.
For residential care this basic care allocation is probably enough and the running cost per resident (minimum breakeven point) will cover all ‘care’ costs.
For nursing homes Extra Care will almost certainly be needed.
It is important that you know what falls into the realms of ‘basic care’ for each client so that once that time is hit you then start to calculate any additional care as extra care and reach a new individual breakeven point.
For example, if a person’s ‘basic’ care has been allocated but it doesn’t include the Personal Care that you have assessed this person needs, then this ‘extra’ care needs to be calculated, and added.
In this case, 20 minutes Personal care by two carers, twice a day works out to take 9hrs 20 mins a week and cost you £108.08 to deliver. That’s £5,620 of Personal Care a year.
These are the kinds of calculations you need to make if you want to establish what your costs are per client and set an accurate fee that includes a healthy profit.
Having reviewed your fees for each of your clients. And calculated how much the NLW is going to increase your client costs by, you can then make an informed decision as to what you need to do.
But what if you don’t follow my advice and work out these costs and increase your fees?
What if in April this 50-bed nursing home hadn’t worked to increase its fees. In this case by increasing the hourly rate staff by 6.6%, the overall staff costs per resident rises from £719.32 to £765.71. (See image below.) A rise of £46.39 per resident per week.
That’s a weekly increase across 50 residents of £2,319.50 and an annual increase of £120,614. Again, I know these aren’t necessarily your numbers but if you don’t do this exercise for your care service then you won’t know its impact.
It’s all about knowing because only then can you do something.
Assuming you can’t reduce their ‘basic’ care then that extra cost comes out of your profit or your pocket.
And what about ‘extra’ care?
The 9 hours 20 minutes of Personal Care would rise from £108.08 a week to £115.27 a week. That rise of £7.19 a week, which is £373.88 a year.
You might well think £7.19 a week cost is going to have little impact if that was the only cost rise. But first, it’s still a cost that you have to find. And second, what other extra care does that person need that will increase? And third, that’s just for one client.
So, now you have the extra running cost per resident of £46.39 a week plus extra personal care of £7.19 giving a total increase of £53.58 a week or £2,786.16 a year.
If all residents needed similar extra care that works out at an extra £144,880 a year cost for this home if it doesn’t increase its fees.
Remember, this is just the NLW, and doesn’t take into account your other cost rises such as utilities and food. And if you haven’t yet calculated the cost that coronavirus has had on your business, then now is a good time to do that too. And yes, we have a calculator that can help.
Of course, if your review has highlighted that you have some loss-making fees then you need to speak to your referrer immediately. You should never be subsidising the care a person needs.
Next, if you have clients on fees that return very low, single-figure, profit margins then chances are, when you add the NLW rise that’s coming and your other cost rises, these fees will in fact become loss-making.
And so on…work through your clients and the fees you receive and prioritise them according to the returns you are making. If too low now – big priority to address before these cost rises hit.
And this is why you need to do this exercise now. This gives you time to do this important costing exercise and prepare for conversations with your referrers.
And now we get to the crux of the issue…
Your referrers – your LAs and CCGs – don’t want to review fees if the care needs of a person hasn’t changed. But it’s time to change that.
Costs have increased dramatically and every year the government increases the NLW but doesn’t compensate you for these increases. They are having their cake and eating it.
It’s time to discuss the need to increase your fees.
If a client has been with you for a long time, say more than a couple of years, then your referrers should be pretty open to discussing these ‘evergreen’ clients with you. I know of one local authority that expects people who go into care homes to pass away after a couple of years and so understand if their original fees need to be reviewed even if care hasn’t changed. We have clients who have been with us for around 7 years.
In these ‘evergreen’ cases the National Living Wage Calculator can help you demonstrate just how much the cost of a client has increased in the last couple of years and how much it will increase overall from next April because, as you see in the tables above, it shows the accumulative, year on year increase, as well as the increase from the year before.
(Remember that doesn’t include the rises in your fixed costs.)
For those who haven’t been with you that long, your referrers should still recognise that costs have started to increase dramatically and will again come April.
If your local authorities and CCGs at first resist your need to increase then keep at it. Don’t take an initial no for an answer. Remember, their goal is to stay within budgets and they will almost certainly resist increasing your fees without pressure from you.
You have to decide where you draw the line. For those clients who it turns out are, or will come April be, loss-making and your referrer refuses to consider the fee you’ve calculated you need, then my line would be to serve notice on them. This kind of decision is of course yours to make.
And if you’re concerned about empty beds, again knowing your numbers will help you make informed decisions. This blog post will also help.
If you currently have clients who’s care needs haven’t changed and who are on fees with very low margins like 10%, it’s one thing reviewing the fees and increasing them so that they stay at 10% as your costs increase. (That you should do.) But it’s another to try and increase your fees so that your profit margin increases to say 20%.
You may be on sticky ground if you try that and your referrer may well have every right to say you should have set a higher fee, with a healthier profit margin in the first place.(I know one local authority’s head of commissioning who recently said she wished providers submitted real fees and that they are often too low.)
You could argue you tried at the time but were pressured into accepting a low fee but how a retrospective conversation like this could go I can’t say.
My reason for raising this is to again, emphasize the need to do this this time round if you didn’t last year or the year before and also to highlight how important it is that you get this right first time with new clients. Don’t bow to pressure to reduce and turn a healthy profit into one that makes you financially vulnerable.
Now, really is the time to address your low fees for current and new clients.
Know your numbers and know the impact of these cost rises so that you have all the information you need to present a strong argument.
Right now, the average occupancy is at 89% and rising. The NHS have way too many beds blocked by people who should be in care homes or receiving home care. But they aren’t because for one thing the sector currently has a chronic staff shortage.
So, if you can take a new client then set the right fee and stand your ground – they need your beds. (Make sure these people have had a negative test first though and refuse to take anyone who hasn’t.)
Keeping your care homes and services going has been a hard slog for years with the sector underfunded and in crisis. Nothing the government has announced is going to change that and has simply shown that, compared to the NHS, we really aren’t that important.
So, know your numbers, prepare now for the rises that are coming and stand your ground when discussing the need to increase your fees.
And we have tools to help you.
You’ve seen the National Living Wage Calculator in action and know how that can help you.
If you don’t have a tool to record your costs then here’s what we use in our homes. The Running Cost Calculator will build up your monthly average costs over time a lot more – worth checking out.
You also saw the purple tables showing average hourly costs being used to work out how much care tasks cost. This is our Quality Care Calculator and definitely worth a look at.
The Quality Care Calculator costs the equivalent of a few pence per bed per week and you get a 14-day free trial so you can actually use it to review all of your fees without paying a penny and then cancel if you decide it’s not for you. (I’d be surprised if you did.)
So, it’ll cost you nothing to try out and help you to know what fees you should be setting for your current residents.
Please review this now. April may seem a long way off but it’ll be March before you know it and then the pressure will really be on. Do this now and take you time and get it right. To your success.