Southern Cross mark 2: Vulture capitalists still getting fat on the care home racket
Back in the summer of 2011, the country’s biggest care home provider, Southern Cross, collapsed in a welter of debt. This outfit, entrusted with the provision of care to 31,000 elderly and vulnerable people, instead concentrated single-pointedly on the pursuit of speculative profits. An article published in LALKAR at the time explained how the provision of care morphed into a property-speculation racket (‘Southern Cross: How capitalism abuses the elderly’, Lalkar, July/August 2011).
“Once there was an extensive network of care homes owned and run by the state. Whilst by no means perfect, they had the advantage of a degree of local accountability. However with the spread of privatisation, many homes previously run by the state now entered private ownership. As such, they now became first and foremost business propositions rather than social resources, presenting a prime target for capital investment.
“They combined two great sources of revenue: rents underwritten by tax payers and vast quantities of real estate. True, the rents brought with them a duty of care in regard to the elderly inhabitants, but by cutting corners on staff training and keeping wages low this unfortunate drain on profits could be minimised. More troublesome was the chain which bound the operational side (running the homes and farming the inmates’ rents) to the property side (the profits to be derived from the buildings and land through their sale, rental or employment as collateral). It was this chain which the US equity capital group Blackstone successfully broke after it took ownership of Southern Cross in 2003. So successful was its exercise in escapology that in 2006 Blackstone was able to sell Southern Cross on at four times the original value, banking a billion pounds in the process.
“In order to go on milking upward of £500 a week from each of the homes’ 31,000 inhabitants (subsidised by the tax payer when personal savings dwindle below a given threshold), there had to be a roof over their heads. Blackstone’s billion pound brainwave then struck: why bother owning the property when you can sell it at a profit and then rent it back? That way, you could swell your coffers with sales revenues and still get to use the premises for selling cheap care at expensive prices.
“During those last-ditch boom years, as tottering credit mountains and inflated share values still dominated the landscape, a wheeze like this seemed like a cast-iron licence to print money. The small print on the deal which raised the rent Southern Cross would have to pay to its new landlord by 2.5% every year seemed a trifling matter when stacked up against the vast sums to be had up front from property sales. Indeed, the fixed rise of 2.5% looked like a real bargain, given that the boom-time retail price index stood at 5%. Anyway, if all else failed, demographic trends would surely guarantee an endless supply of old people whose rents, driven up by the intensifying competition for places, would be backed up by state subsidy. Meanwhile the company could concentrate on expanding its empire, borrowing to make new acquisitions rather than spending to raise the standards of care. Indeed its capital expenditure fell from 8.3 per cent of revenue in 2006 to 3.7 per cent in 2010.
“When 2008 came along, all these calculations went awry. Property values and the retail price index both declined, but the rent demands continued to rise relentlessly by 2.5% every year, costing the company something approaching £250 million a year, a quarter of its turnover. Meanwhile, whilst the aging population has continued to swell as predicted, the welfare state upon which privatised health and care providers have so profitably battened over the years is preparing to shut up shop. Competition for places does indeed drive up the profits to be made from residents’ fees, but only if the elderly can afford to pay. With local councils of all political stripes wielding the austerity axe, the age of guaranteed state subsidy for rack-renting landlords is passing, whether in the field of housing benefit or care provision.”
Fast forward to today and we find that the care home industry continues to be dominated by vulture capitalists operating through off-shore shell companies, dodging taxes, swelling dividends and treating the care of the elderly as just one more juicy avenue for speculative investment. A recent article in The Times explains that, after the collapse of Southern Cross, one such venture capitalist, Dr Chai Patel, was on hand to build a new empire on its ruins, headed by a company called HC-One (Alex Ralph, ‘Care homes tycoon Chai Patel reaps soaring dividends’, The Times, 13 October 2020).
HC-One grabbed 240 care homes in what Patel bragged was his biggest gamble and “an Everest I wanted to climb”. HC-One duly took its place as Britain’s biggest care home operator, by 2019 overseeing 348 care homes.
Scratch the surface of Patel’s business activities and you immediately find yourself in a hall of mirrors, a world of shell companies whose lineage is well-nigh impossible to trace. So HC-One’s immediate parent turns out to be Libra Intermediate, based in the tax haven of Jersey. In turn, Libra Intermediate’s parent is FC Skyfall, based in the tax haven of the Cayman Islands. To complicate matters further, Dr Patel conducts his market activities through Court Cavendish (CC), an investment vehicle in which he holds a 90% stake. CC’s dividends swelled by £43 million over the past three years.
As well as supplying social care management and consulting services, CC has a luxury safari business and invests in start-ups, a diverse investment portfolio to say the least. In 2018 it sold its share of Care Management Group (a learning disability and autism care provider), garnering £57.8 million in profits. In another boost to its coffers, CC last year charged FC Skyfall, the ‘grandparent’ of HC-One, £2 million of ‘transaction and asset management fees’.
Whilst the byzantine maze of shell companies makes it near-impossible to follow the money trail, or even to work out who is paying what to whom and why, the eye-watering sums passing from hand to hand clearly demonstrate that the opportunities for capitalists to make a killing out of the care home industry have not been diminished by the passage of years.
In the case of Southern Cross, what triggered its collapse was the banking crisis. It remains to be seen whether the pandemic will similarly herald the decline and fall of Dr Patel’s seedy empire. For the moment, HC-One sees it as an opportunity to wring more money from the public purse, seemingly with some success.
In April this year HC-One asked for a number of government handouts, trying to syphon off some of the £3.2 billion promised to local authorities, and has reportedly accessed a separate £600 million ‘infection control fund’. In a clear case of the pot calling the kettle black, Chai Patel in June took time out from counting his millions to take the government to task for “clearly miscalculating” the risks to care homes posed by the pandemic and “under-prepared for the resource requirements needed to respond to the virus”.
Judging from HC-One’s performance in operating the Home Farm care home in Portree on the Isle of Skye, the pot was black indeed, and the problems began long before Covid struck.
“Before Covid-19, an observable pattern of repeated failure by HC-One at Home Farm can be identified. The January Inspection Report found that staffing was so ‘inconsistent’ that there should not be new admissions to the care home until it was fixed. It stated that there were infection control risks, and raised questions about the management of wound care plans for residents at the home, saying they ‘had not been fully implemented, were not always followed and had not become established enough to be effective at the time of this inspection.’
“The chairman, Sir David Behan, has refused to directly answer questions about whether the requirements placed on HC-One on staffing and infection control in January were fulfilled by 30 March. The decision of the CI [Care Inspectorate, the regulator in Scotland] to seek to revoke their registration following the latest round of inspections and NHS Highland taking over operations and beefing up the number of experienced staff speaks for itself. Clearly, the extent of the spread of Covid-19 in Home Farm, where almost all residents have now been infected, is out of the ordinary even a country where care homes have been so badly hit as Scotland. CI will have to answer questions as to whether they acted too late, but clearly it raises concerns about HC-One’s management of care homes not just at Home Farm but in general.” (‘Home Farm, and why the failures in care homes run deep’, Source Direct, 15 May 2020)
It should be noted that Sir David Behan, mentioned above as the CEO of HC-One, also happens to be a former head of the CQC, the body charged with the regulation of the care industry. No doubt his former experience as gamekeeper is proving useful in his current job.