Scotland’s social care sector: The financial evidence that is driving change

Scotland’s social care sector: The financial evidence that is driving change Report by Jo Armstrong, May 2017 Summary A key focus for the Scottish Council for Voluntary Organisations (SCVO) is the sustainability of the third sector in Scotland. Social care amounts to over a quarter of the sector’s turnover, and 34% of voluntary organisations in Scotland are involved in social care-related activities. Sustainable social care is therefore crucial to the sustainability of the third sector as a whole, as well as being absolutely pivotal for the health and wellbeing of individuals in Scotland. The debate surrounding social care is fundamentally about ensuring a sustainable future for social care which guarantees choice, control and high quality social for the people of Scotland. SCVO recently commissioned Jo Armstrong - an independent business economist and honorary professor at Glasgow University Business School - to conduct this financial analysis of third sector organisations operating in and around social care.   View as PDF - Funding challenges facing care providers - Jo Armstrong  

1. Key Messages

Funding 1.1   The Scottish Government’s TOTAL Revenue budget (RDEL)^[1] is projected to fall £1.1 billion in real terms between now (2016-17) and 2019-20, a real terms fall of over 35% (see Figure 1). This will present a severe challenge for the Scottish Government on what services to favour and when. 1.2   Local authorities’ gross spending per capita on Adult Social Care has fallen from its peak in 2009-10 of £700 to £680 by 2013-14, a real terms decline of over 3% in 4 years (see Figure 3). Assuming the Scottish government’s budget allocations to local authority mirror historic allocations of funds available (ie, based on the Scottish Government’s Draft Budget 2016-17) and demand for services continues to rise, this per capita allocation will fall, increasing the pressure for additional co-payments or that ‘extra’ quality will be more at risk. 1.3   Adult Social Care spending has seen its share of the total Social Work budget fall. Local authorities will have to ensure they continue to meet statutory services and may well have to deal with taking back in-house services that are ‘handed back’ if care providers cannot deliver with smaller budget allocations. Demographics and Demand 1.4   The latest Scottish population projections confirm continued population growth, but it will be an increasingly aging one. By 2030 the total population is projected to increase by 5%, the 75+ cohort will grow by more than 40% and those 85+ will increase by almost 60% (see Table 1). Costs 1.5   Organisations providing care and support across all user types (not just those in the older age groups) face doing so whilst also having to accommodate increasing cost pressures. The built-in increases in the National Living Wage provides a benefit to front-line staff but at the same time adds to the financial pressures on employers. As an illustration, if wages account for around 60% of total expenditure of the 30 largest Scottish-based care providers, their total turnover would need to rise annually by around 2% in real terms by 2020 just to meet these cost pressures alone. Reserves 1.6   Just under three-quarters of the smallest Scottish-based charities have had to dip into their cash reserves to cover operating losses in at least one of the last 3 years. If the total funding available from the public purse remains constrained, this suggests charity Trustees and Directors will increasingly need to assess their operating models to ensure costs remain affordable; which may include handing back or existing some or all of their services. Plan Bs! 1.7   Against this financial and demographic background, it is obvious that social care service providers will have to increase incomes, reduce non-wage costs or reduce service levels (eg, quality) to remain financial viable. Given the continued budget challenges facing all of Scotland’s local authorities and health boards:

• is it reasonable for all care providers to assume they can and will secure the necessary increases in their incomes?

• given the size and extent of cuts and efficiencies many providers have already accommodated, can all providers secure the necessary reduction in operating expenditures or are the regulatory requirements and quality thresholds now setting a floor on the minimum costs necessary to provide a service in the sector?

• can those in need of care and support pay higher charges or cope with the imposition of co-payments to retain the services and providers they want?

1.8   The answer to these questions will inevitably vary by provider and user alike. However, do Trustees now need to be considering less comfortable, more radical options in their financial planning process and do they have adequately developed and truly viable plan Bs up their sleeve should they have to cope with all the factors outlined above turning against them? Data caveats 1.9   This high level analysis looks at the financial figures relating to adult social care in Scotland, Scottish and local authority data and OSCR returns for the top care providers (classified as such in the Scottish regulator’s database) up to 2015/16. The analysis is aimed at highlighting key issues and underlying high level trends that those operating in and with the sector need to be considering as part of their strategic planning process. Inevitably, the relevance of the analysis may be of lesser importance to some organisations than for others. Notwithstanding this caveat, all organisations relying on public sector funding will have to be planning for some or all of these severe financial pressures.

2. Reasons for undertaking this analysis

2.1   As the funding available for the provision of care services across Scotland is and remains under severe pressure, the financial sustainability of many providers is now being severely tested. Some level of structural change seems all but inevitable. However, given the speed at which this is likely to happen, are we certain the outcome will deliver an optimal or even acceptable level and quality of service for all users and those in need of support? 2.2   Scotland’s third sector providers of care and support services have and continue to deliver their varying brands of assistance for Scotland’s most vulnerable citizens. This is despite the increasing and sometimes conflicting challenges of rising demand for services and tight, or even falling, public sector budget settlements. Delivering this care and support without diminishing service quality is and continues to remain a vital feature for most providers. Ensuring the care and support provided is also what users want (ie, is truly bespoke), may also challenge the more traditional ‘business models’ of service provision. 2.3   Nonetheless, large scale contracts with local authority commissioners continue to be the norm even after the introduction of legislation to drive self-directed support and individual budgets. However, such contracting arrangements are changing and not just because funding is falling. The drive for increasingly individualised services alters the contracting arrangement between users, providers and local authorities. Individuals in need of support will have more of a say in how and what care arrangements are to be procured (even if they do not directly make the final payment or manage the funding involved). As a consequence, care providers now more than ever need to be attuned to these needs and wants, adapt their internal systems to suit and not expect users and customers to adapt their expectations to fit in with existing working practices. 2.4   The structural change this outlook suggests is now needed would be difficult enough in times of plenty. To deliver against a backdrop of budget cuts just adds to the challenge. Each service organisation’s response will inevitably vary; there is no one solution or business model that is ‘ideal’ for all organisations to adopt. However, if there is a common understanding of the financial outlook within which all will need to operate, discussions will allow opportunities to arise that, to date, have not been viewed acceptable or possible. 2.5   The purpose of this paper is to outline the various financial issues that will need to be taken into account when looking at such challenges and so aid and help inform the debate on how third sector organisations can influence the shape of inevitable change in social care in Scotland. 2.6   Section 3 offers some conclusions that arise from a high level, initial analysis of key financial data^[2] that are and will continue to drive and affect the sector (details of which are provided in Appendix A and B) and then raises some initial issues to help start the necessary discussion.

3. Conclusions and issues for discussion

Conclusions 3.1   If local government retains its 2016-17 % share of the Scottish Government’s revenue (RDEL) budget, this would take its Scottish government revenue grant support down to £9 billion by 2019-20, in inflation adjusted prices. This represents a cut of over one quarter since the high watermark of 2010-11 or, a further 5% in real terms from 2016-17 (see Figure 5). This clearly illustrates the on-going financial pressure facing all of Scotland’s local authorities and so why they will continue to look to their 3^rd sector providers to manage some of their financial pain. 3.2   Social Work and Adult Social Care spending has plateaued at around £3.9 billion and £2.9 billion per annum respectively (in real terms) since 2008-09 (see Figure 2). Again, this clearly signals the financial challenge to individual business models; how to meet increasingly bespoke services which may require changes to working practices? If internally generated reserves are not available then accommodating cost cutting will be essential or, providers may need to step back from delivering the extent and breadth previously undertaken. 3.3   Notwithstanding the clear drive to personalisation of care, Self-Directed Support budgets still account for only 6% of total Adult Social Care spending in 2013-14 (see Figure 4). This does not mean service provision will not be bespoke and individual to the user and their needs. Legislation continues to offer users and carers the opportunity to receive such a service, irrespective of what budgets fund it. Care providers are adapting their business models to accommodate such an approach. The implications on the on-going financial sustainability for some providers in this adapted environment may be open to question as ‘surpluses’ on individual contracts become increasingly difficult to divert to ‘loss’ making services. 3.4   The introduction of the National Living Wage (NLW), although welcome for employees, represents a particular risk for the budgets and operations of social care organisations over at least the next three years. The commitment to the living wage is somewhat undermined by the fact there is no requirement on local authorities as part of the agreement to increase wages to the new NLW rate when it is announced in November. However, if organisations are to commit to this higher rate, this will require budgetary planning and considerations. 3.5   The NHS has national wage bargaining which is not the case in the social care sector. Paid for social care (as distinct from ‘free’ care from friends and relatives) is rationed via strict eligibility criteria. NHS care is also rationed, but through increased waiting times. The funding models for both type of care and support vary markedly. Whilst it is still unclear quite how the new health and social care arrangements will affect the funding for social care providers, is it prudent to assume all care providers in this new world will secure the funding needed to fully compensate them for their increasing living wage obligations? Issues for discussion 3.6   Whilst the results of this simple analysis of the finances of Scotland’s largest care providers represents a snap shot over the last 3 years, it nonetheless provides evidence of the financial strains being experienced; more than 60% of all charities in the sector have experience a deficit in at least one of the last 3 years. With local authority and Scottish Government budgets remaining under severe pressure, should care providers be planning activities on the basis of being certain of securing adequate income increases or how do Trustees robustly challenge any such assumption? 3.7   The impact of these financial pressures appears to be focussed more on the smaller charities. Around 70% have had an operating deficit in at least one of the last 3 years as compared to only 30% of the largest and just over 50% of those or with a turnover of £10 million or more. The flexibilities available to ensure financial sustainability are inevitably fewer for smaller charities specifically, there are fewer costs to cut. If the only alternative open to Trustees is then to close down or drastically scale back the quality and/or the size of their operations, what does this mean for issues such as user choice and service innovation? 3.8   Just under three-quarters of the smallest charities have had to dip into their cash reserves to cover their losses in at least one of the last 3 years. The wage costs pressures facing all are well known, with a 25% increase in the current national living hourly wage rate in the pipeline for 2020. With pressure on incomes and depleted cash reserves, Trustees have to ask can the necessary efficiencies savings be delivered across all other costs areas to ensure they remain solvent for the longer term and, if not, what is there plan B? APPENDIX A Background Evidence: Public funding, demographics and finance pressures Scottish Government budget Figure 1: Scottish government resource DEL budget, 2010-11 to 2019-20, £ billion Note: figures to right of dotted line are Scottish government projections Source: Scottish Government, Draft Budget 2016-1

• The Scottish Government’s TOTAL Revenue budget (RDEL)^[3] is projected to fall £1.1 billion in real terms between now (2016-17) and 2019-20, a real terms fall of over 35%;
• What is now accepted as the high water mark for revenue spending in the Scottish government was 2010-11. The total real terms expenditure in that year was £27.5 billion. In the subsequent 4 years, the budget never exceeded £27 billion;
• From 2015-16 onwards, the real terms value has, or is projected to fall year-on-year. Whilst in cash terms the Resource DEL is projected to be around £26-26.5 billion, in inflation-adjusted terms, it is projected to fall to £24.6 billion by 2019-20;
• If this 2019-20 figure is the outturn spend it will mean the Resource DEL budget has fallen by almost £3 billion in real terms since 2010-11, a real terms fall of over 10.5%;
• The new fiscal framework that the Scottish Government now has to work within adds to the uncertainties underpinning these projections.

Scottish population Table 1: Projected population of older people in Scotland, 2014-2030

	2014	2030	% change
ALL Scotland (000)	5,348	5,624	5%
Population 75+	433,235	640,129	48%
% of ALL	8.1%	11.4%	41%
Population 85+	114,375	187,219	64%
% of ALL	2.1%	3.3%	57%

Source: Audit Scotland, 2016; National Record of Scotland, 2016

• Scotland’s population is set to grow by around 5% between 2014 and 2030 whilst also aging;
• The population aged 75+ is projected to reach over 640k, an increase of almost 50% in the 16-year period and by 2030 will account for more than 11% of the Scottish population;
• The cohort aged 85+ will all increase in importance rising by almost 65% to 187k and account for over 3% of the Scottish population by 2030;
• Multimorbidity is also a growing concern for providers, with health services often organised to provide care for single diseases or conditions. Recent analysis has shown that there are more people in Scotland with multimorbidity aged below 65, than there are aged 65 and over.

Local authority spending on care services Figure 2: Gross spending on Adult Social Care, 2003-04 to 2013-14, £ billion, 2013-14 prices Source: Scottish Government, 2015

• More than three-quarters of all social work spending is used to fund adult social care;
• Gross spending on social work services has plateaued in real terms at around £3.9 billion since 2008-09 (its peak year was 2009-10);
• Gross expenditure on adult social care rose 18% in real terms between 20013-04 and 2009-10; up from £2.47 billion to £2.92 billion. Since then it has remained at around £2.9 billion annually;
• So, as a consequence (at least in part) of the public sector finance cuts, the rate of growth in local authority spending on both social work activities and on spending on adult social care experienced in the first half of this decade, has not been maintained;
• Since many social care providers are reliant on their incomes from local authority contracting, it is this financial uncertainty that all providers need to plan for in the event local authorities seek to continue to need to share the pain of their own financial challenges.

Adult Social Care per capita Figure 3: Gross spending on Adult Social Care, 2003-04 to 2013-14, Per Capita Source: Scottish Government, 2015

• Gross Spending per capita also rose annually between 2003-04 and 2009-10; from just under £620 to just under £700 per person (see Figure 3). This represents a 13% real terms increase over the 6-year period;
• It is clearly the case then, that as demand for services rises within a fixed or even falling budget total, the send per capita is going to fall.

Adult Social Care by service type Figure 4: Percentage of gross spending on Adult Social Care, by service type Source: Scottish Government, 2015

• In the decade 2003-04 and 2013-14, local authority gross spending on adult care for those in a Care Home rose marginally as a share of the total, up from 37% to 38%;
• Home Care support has risen, up from 22% to 25% as a share of total gross spending;
• Notwithstanding the increased focus on Self-directed Support (SDS) over this period, gross spending on SDS remains low at 6% of local authority gross spending on adult social care;
• Assessments spending has experienced a substantial fall in the share spending from 14% in 2003-04 to 9% in 2013-14.

Illustrative set of Local Government Funding Projections Figure 5: Scottish Government’s Revenue support funding & projected allocation to Local Government (ILLUSTRATIVE ONLY), £ billion, 2014-15 prices Source: Scottish Government, various budgets; Scottish Parliament (2016); own projections

• The Scottish Government’s Draft Budget 2016-17 provides totals for the Revenue DEL in inflation-adjusted terms, which is set to fall to £24.6 billion (2014-15 prices), a decline of £2.9 billion over 2010-11 or a real terms fall of almost 11%;
• If revenues from Non-domestic rates income (NDRI) remain at 2016-17 levels in cash terms (see below), AND local government retains its 2016-17 share of the total, then the local government revenue grant support might also be expected to fall, from £11.6 billion in 2010-11 (2014-15 prices) to £9 billion in 2019-20, a real terms fall of £2.6 billion or almost 30%;
• Non-domestic rates income (NDRI) has become an increasingly important source of funding for the Scottish Government to fund local authority grant support; in 2010-11 NDRI accounted for less than 20% of local government support but by 2016-17 this is set to reach almost 30%;
• The Scottish Government has historically signalled local authorities would not be exposed to any shortfall in projected NDRI, ie, the Scottish government guaranteed the total grant support proposed. The draft budget 2016-17 indicates NDRI is projected to fall in both cash and real terms between 2015-16 and 2016-17 (see Figure 6). This illustrates the new challenges facing the Scottish Government; it has to raise more of its own funding from taxes and growth measures that are set in Holyrood which may or may not raise the projected funding required.

Figure 6: Scottish Government’s Revenue support funding for Local Government, 2010-11 to 2015-16, £ billion (2014-15 prices) Notes: NDRI is the non-domestic rates income that the Scottish Government use to part fund Scotland’s local authorities. The dotted line represents a break in the time series following reclassification of Police and Fire grant support. Source: Scottish Government, various budgets; Scottish Parliament (2016) APPENDIX B Income and expenditure data of Scotland’s care organisations^[4] Turnover Table 2: Turnover of Scotland’s Largest Social Care providers, 2015

Turnover	Total No of charities	%	Total turnover £M	%	Number with increase over 2014	% increase
Greater than £50 million	10	4.5%	1,197	59%	7	2.7%
Between £10 million and £50 million	34	15.2%	728	36%	23	0%
Between £1 million and £10 million	108	48.2%	301	13%	72	3.7
Between £100k and £1 million	72	32.1%	48	2%	33	-1.8%
ALL	224	100%	2,274	100%	135	1.9%

Source: OSCR charity database

• Of the 224 in this cohort, around one fifth (44) have a turnover in excess of £10 million, of which, just under 5% (ie, 10) have a turnover of more than £50 million. The sector is therefore dominated by a relatively small number of large, or very large organisations;
• Of the 10 largest, all but one is classified by OSCR as being cross border, ie, is part of a larger UK-headquartered organisation. The implications of any policy proposals on these very large organisations would therefore need to be reviewed separately;
• Total turnover generated in 2015 was £2,274 million with the larger charities (ie, those over £50 million) accounting for almost 60% of this total; ie, £1,197 million;
• Three quarters of the organisations (ie, 190) contributed total turnover between them of £380 million (15% of gross turnover in 2015), and one third (72) less than 3% of the total.
• The average increase in turnover was 1.9% between 2014 and 2015, but there were variations:
  • those in the £1-10 million category fared better achieving an average increase of 3.7%;
  • the largest also achieved an above average increase at 2.7% increase,
  • those in the £10-50 million category received the same cash income in 2015 over 2014; and,
  • the smallest charities faced the toughest outcome, with an average fall in income between 2014 and 2015 of -1.8%;
• The smallest charities experienced a wide range in income change; ranging from as low -35% to a high of 122%. Whilst this one-year picture does not obviously reflect a trend, the variability is significant. Against a backdrop of continuing global pressure on incomes and rising costs (see below), planning for the longer-term is essential but is becoming increasingly difficult.

Surplus / deficit position Table 3: Turnover and Expenditure of Scotland’s Largest Social Care providers, 2013-15

	Greater than £50 million	Between £10 & £50 million	Between £1 & £10 million	Between   £100k & £1 million	ALL
No with a Deficit in 2015	2	9	42	27	80
% of total	20%	26%	39%	38%	36%
No with Deficit in 1 of last 3 years	3	17	65	50	135
% of total	30%	50%	60%	69%	60%
% with Lower Income in 2015	30%	32%	33%	54%	40%
% with Higher expenditure in 2015	50%	71%	77%	54%	67%
% with Lower Income AND Higher Expenditure in 2015	0%	12%	17%	19%	16%

Source: OSCR charity database

• Critical to the long-term financial sustainability of the sector and each individual organisation an ability to generate a level of operating surplus to ensure adequate levels of unrestricted cash reserves^[5] but the cash pressures on many in the sector are becoming apparent;
• Of the 224 charities analysed, more than one third (ie, 36% or 80 organisations in total) generated insufficient operating income to cover expenditures in 2015. This rises to 60% (or 135 organisations) who have been unable to cover their annual expenditures with operating income in at least one of the last 3 years;
• This deficit challenge appears to be more marked among the smaller charities; in 2015, almost 40% of the smaller charities (ie, with turnover between £100k and £10 million) had an operating deficit in 2015 (ie, 27 organisations) and the number rises to between 60% and 70% (ie, 50 organisations if this is extended to a deficit in at least one of the last 3 years;

• Perhaps not too surprising a finding, two-thirds of ALL charities experienced an increase in their operating expenditures between 2014 and 2015. Also, even though the largest charities fared marginally better, there was still a 50% increase in operating costs of charities with a turnover greater than £50 million;
• Lower incomes contributed to the 2015 deficit in 40% of the cohort, by far the greatest cut in income was experienced by the smallest charities; almost 55% of this group experienced a cut in their incomes compared to only 30% of those charities in the largest group.
• Almost one fifth of the smallest cohort had to accommodate lower incomes with higher expenditures in 2015 over 2014. This is in sharp contrast to none in the largest group and 16% of all 224 charities.

^[1] Departmental Expenditure Limits (DEL) comprise revenue (resource) grants as well as capital grants and loans. Non-domestic rates income is classified as AME (Annually Managed Expenditure). ^[2] Extended analysis could include, for example, Scottish health spending, 3^rd sector specific support, DWP and EU-supported activities, Trust funding along with various forms of user charging. However, as a general indicator of financial trends this initial review uses revenue DEL support since it is the largest ubiquitous support for core activities in the care sector. ^[3] Departmental Expenditure Limits (DEL) comprise revenue (resource) grants as well as capital grants and loans. Non-domestic rates income is classified as AME (Annually Managed Expenditure). [4] The organisations used in this analysis are Scotland’s health and social care organisations as classified by OSCR in its online database. It is therefore important to note that some of these organisations will undertake more than social care activities but it is not possible to identify what share of their turnover and costs is purely social-care related. ^[5] The need for a surplus annually is less critical if there are cash reserve that readily available to accommodate short-term losses. The level of reserves Is for each individual Board of Trustees to agree.