Home / Resources & Guidance / How Care Provider behaviour can drive low fees paid by Local Authorities

Why are local authorities paying low fees that are below the cost of care?

It is incredibly important that independent care providers understand how their behaviour in agreeing on rates with local authorities can impact decisions made by local authorities when setting fee levels for individuals and applying inflationary uplifts to their standard rates.

The Care Act 2014 requires a local authority to set a Personal Budget to meet the needs of every individual for whom it commissions services. The Care Act defines the Personal Budget as:

a written statement provided to a person with Care and Support needs (or a Carer with Support needs) which specifies: The cost to the Local Authority of meeting the eligible needs it is either required to do (under its duty) or decides to do (under its powers)”

A local authority will determine the value to set for a Personal Budget in several ways, one of which is based on the price a local authority can purchase similar care for locally to meet the needs of the individual.  If a care provider accepts a resident at a local authority rate below the cost of providing care, it is reinforcing the local authority’s perception of how much care costs and validates the Personal Budget set by the authority thus perpetuating low rates for everyone.


Why do care providers accept residents at fee rates below the cost of providing care?

Care providers accept local authority-funded residents below what it costs to provide care for various reasons.  They may have a full staffing complement with an empty bed and filling that empty bed will not require additional staffing, and as such the revenue is seen as a contribution to its surplus, profit, or reduced losses. [This view may be considered short-term in some respects, as when higher funded residents leave the care home, the provider can be left with a deficit or increased deficit because they accepted an underfunded resident previously and must maintain the same staffing complement and could be considered as being potentially anti-competitive].

In an ideal world, the local authority would pay the actual cost of care.  Affordability is generally the reason for a local authority being unwilling to pay the actual cost of care but in some cases that is not a sufficient reason.  The average gap nationally between the rate paid by a local authority and the cost of care as reported in the recent 2022 Fair Cost of Care exercise, was just over £200 per week per resident for the period 2021-22.

If care providers continue to accept residents at rates below the actual cost of providing care, the local authority will continue to be entitled to place residents at that fee level, as it matches their Personal Budget which is set at the rate they can purchase care for locally. This unsatisfactory approach becomes self-perpetuating, to the detriment of the whole sector.

If providers ceased accepting residents below the actual cost of providing care, local authorities would be forced to pay the actual cost of providing care.  In its simplest form, if a local authority cannot set Personal Budgets and purchase beds at rates which are below what it costs to provide care, it will need to increase the Personal Budgets it sets to the amounts at which it can purchase care in accordance with the Care Act 2014.


So why don’t providers stop accepting underfunded residents?

Some care providers are under significant financial pressure due to recruitment challenges, the cost of energy, agency labour, and the cost of living, and are struggling to sustain their organisations. Such providers may view new residents, even at fee rates which do not cover all their costs as a solution to meeting some of their financial challenges, and accept underfunded residents, where doing so does not materially increase operational costs to help to plug a short-term revenue gap which is necessary to sustain their service. However, underfunded local authority fees create an unsustainable position for the provider unless it can offset the loss which it would normally do by way of cross-subsidisation from private paying residents.


How can a provider influence the approach of local authority underfunding of packages of care? 

Providers must comprehend and admit their part in the fee setting process and their power to influence the fee paid by a local authority is determined partly by their actions over the longer term, and understand that continuing to accept underfunded residents, can endorse an underfunded Personal Budget, thereby assisting the local authority to meet its Care Act duty of meeting the residents assessed and eligible needs.

One way a provider can influence the rate paid by a local authority is by not accepting residents below the cost of providing care.

It is acknowledged that providers face great difficulty because if they do not accept an underfunded resident, another provider is likely to do so, further reinforcing the local authority’s entitlement to set the Personal Budget at an inadequate rate.

Given that accepting rates at less than the actual cost cannot be sustainable, it would be wise for providers to choose not to support the inequitable status quo in which local authorities routinely fail to acknowledge the true cost of sustainable residential care and rely on private payers to subsidise the public purse.


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