2022 Sector Outlook

How long will staffing challenges continue to impact the care sector?

View our 2023 sector outlook for healthcare

Despite the undoubted challenges it continues to face, Steve Fergus sees some reasons for cautious optimism in the care sector over the longer term.

The pandemic continued to bring the long-term systemic challenges facing our care system into headline-grabbing focus in 2021, but it was very much a year of two halves.

The first few months of 2021 were, of course, particularly tough, with a continuation of the stresses of the previous year and the country in full lockdown.

However, as the vaccination programme rollout progressed, the pressure on elderly care homes and other healthcare providers eased somewhat and, critically, confidence came back to the sector and that allowed occupancy to start growing.

We certainly saw a big increase in new investment and M&A activity in the sector in the second half of 2021, as operators and investors switched their focus from the immediate concerns of surviving difficult trading conditions towards future growth plans. The investor community still regard the underlying dynamics of the care sector extremely positively and we should expect to see more new capital allocated to healthcare in 2022.

And despite its significant impact on the care sector, the pandemic has highlighted, as never before, the vital role of social care providers in the UK.

Ongoing challenges

Staff shortages hit all businesses across the care sector heavily in H2 last year, and this remains a challenging issue that will continue to test care providers in 2022. Mandatory vaccinations have also reduced the pool of available staff with a number of carers being forced to leave the sector for good, and now the spread of the Omicron variant has meant fully staffing care homes is tougher than ever.

We’ve seen further closures of care homes in the past year, but this has been offset by the continued development of new privately-funded facilities that we’re seeing in towns and cities up and down the country. The government support measures for the sector via the infection control fund has certainly assisted local authority funded care groups and the recent announcement that this will continue into 2022 is welcomed. However, until funding levels are improved it will be tough to attract new investment into the LA-funded marketplace.

Social care funding

Of course, one of the most significant developments to impact the sector over the next two years will be the government’s new adult social care funding reforms. Many operators have already been vocal in their criticism of the reforms suggesting that the new funding package does not go far enough and there are concerns about whether the new money will ever filter down to care providers in the form of increased fee rates.

Wage inflation driven by staffing shortages, increased energy bills and higher insurance premiums are all challenges that care operators are already dealing with and many are doing this from a reduced revenue base, with occupancy still not back to pre-pandemic levels. Government support has been forthcoming during the pandemic, but only a sustained increase in fee rates will make LA funded operators viable in the long term.

Staffing conundrum

Alongside the evolving funding landscape, recruiting and retaining staff will remain a critical issue for care-related businesses at all levels in 2022 as carers continue to be lured away by better pay in other sectors, like retail and hospitality, leaving many operators increasingly reliant on costlier agency staff.

There was hope that the situation may ease somewhat in Q1 as demand for seasonal staff in other sectors wanes post-Christmas. However, the impact of the Omicron variant has negated this, with many operators now simply unable to take on new residents, which is clearly putting a brake on future investment and growth plans.

We will see more recruitment from overseas and the Government announcement at the end of last year that care workers would be added to the shortage occupation list was warmly welcomed by the sector. This will certainly help fill some gaps, but the minimum salary requirements will mean that the lower-paid grades will still need to be filled locally.

As a result, over the longer term we expect to see growing interest and investment in technology solutions, such as robotics and AI, that can reduce dependency on staff or streamline some non-care functions. Of course, this isn’t necessarily about replacing people in one-to-one care situations, but driving operational efficiencies through better management of resources and services such as catering, or improving care plan management and communications between staff and visitors.

Ripe for investment

Despite the current uncertainties surrounding the omicron variant and the prospect of further restrictions, the sector appears ripe for investment in 2022 and beyond, given the underlying fundamentals of an ageing population requiring ever greater levels of health intervention and care support.

Indeed, we’re already seeing a substantial amount of interest from private equity investors driving a lot of deal activity, particularly in specialist care and children’s services.
Private hospitals, too, are likely to see a surge of demand and investment as NHS waiting lists grow as a result of the ongoing pandemic.

With increased investor focus on environmental, social and governance (ESG) issues, in very broad terms healthcare providers might be seen as ‘ticking the box’ due to their perceived social benefits. But the sector will increasingly need to demonstrate its ESG credentials to continue to attract that investment and will be under more and more stakeholder pressure to do so.

In summary, the struggle around staffing will continue to hamper all healthcare providers to some extent in 2022 and the sector will need to be innovative and nimble to capitalise on the growth opportunities out there. But there will be no shortage of interest in well-run, forward-looking operators as the new funding landscape emerges in the year ahead.

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