Allowances spur competition in nursing home sector

More beds, better facilities and a growing client base has meant that the nursing home sector has undergone a rapid transformation. Peter Lundy reports

The Irish nursing home industry has seen many changes in recent years, which include a significant increase in the number of new facilities, changes in design, the introduction of capital allowances for development and changing attitudes towards nursing homes generally.

Outlined below are some of the more significant of these changes to illustrate the changing nature of the nursing home industry in Ireland.

• Capital allowances

One of the main changes in the nursing home market in the last decade was the introduction of a scheme of capital allowances. This was designed to encourage the construction of a modern purpose-built private nursing home stock throughout the country. The aim was to improve the quality of the ageing stock and increase capacity. This would then free-up acute hospital beds through step-down care.

The scheme allowed for the capital cost of the construction / extension of a new private nursing home (exclusive of site cost, VAT and professional fees) to be written off against taxation. The allowable period is over seven years, at a rate of 15 per cent per annum for the first six years, with a balancing charge in the seventh year of 10 per cent.

Should the property be sold within its tax life, there is then a full claw-back of all of the allowances. The full amount of the allowances is then available to be written off against tax over the remaining tax life of the property, by the incoming purchaser.

This scheme has proved very successful and is still in place. It has resulted in the development of a substantial amount of new private nursing home stock, mainly on green-field sites. Most new nursing homes are single storey buildings close to urban areas, of a modern design with en suite single rooms. About 4,521 private beds have been added to the total since 1995.

Recently, capital allowances have been extended to cover additional care facilities. This has produced a number of integrated private nursing homes/villages incorporating elderly care cottages, nursing homes, healthcare centres, and day-care facilities - all attract capital allowances.

Without capital allowances it is doubtful if the increase in private nursing homes would have happened.

• Nursing home bed stock

There are about 26,300 long-term residential care beds in Ireland, divided between the private and public sector - around 56.7 per cent of these are provided by the private sector. The public sector accounts for the remaining 43.3 per cent or 11,354 beds.

In 1995, roughly 10,425 beds were provided by the private sector. The private sector has therefore increased bed capacity by 4,521 (43.3 per cent) over eight years. This equates to about 565 beds per annum or about 15 new nursing homes. This illustrates the success of the scheme.

Average occupancy is between 86 per cent and 89 per cent for the Republic of Ireland and the average age of the stock of homes is about 13 years, suggesting that most private homes pre-date the introduction of the scheme of capital allowances.

There are a few groups of private nursing home operators in the country, including Silverstream Healthcare Group, Mowlam Healthcare Group and Devey Healthcare Group. The majority of nursing homes are not branded and have individual identities. However, there are individuals who own and operate multiple homes.

• Oversupply of new bed stock

The rapid growth in the supply of new nursing home stock since 1997 as a result of the introduction of the capital allowance scheme has not been without pain for the industry. Older nursing homes are suffering from competition and many have gone out of business. Fee rates are also coming under pressure.

The continuance of the scheme of capital allowances is being challenged by the Irish Nursing Home Organisation whose members have benefited from the scheme but are now suffering because of the increased supply and falling relative demand.

It is anticipated that the supply of new nursing home beds - both private and public - will increase by up to 45 per cent between now and 2011 as a result of capital allowances (and the creation of public beds through PPP), if the current scheme is maintained or improved. This will lead to strengthening supply and falling demand with obvious consequences for the industry.

• Public private partnerships

The Government has planned to build additional nursing home beds (in tandem with the private sector sponsored by capital allowances). The targets set for the initial pilot scheme are 450 long- term care beds in the greater Dublin area including adjoining counties of Wicklow, Kildare, Westmeath and Meath and a further 400 beds in Cork and Kerry. These will be in units with up to 50 beds each and it is possible that these may be used in the main for step-down care when patients are discharged from acute hospital beds but are not capable of returning home to care for themselves.

The properties will be constructed by private expertise and funding, on sites owned by the state and will be operated and staffed by the local health authorities and leased back by the state over a minimum period of about 25 years.

• Nursing home sites and the planning system

Many modern private nursing homes are built in rural areas, close to large population centres to take advantage of comparatively cheaper sites.

Nursing home sites are relatively inexpensive compared to other commercial sites suitable for development. Nursing homes are "allowable" or "open to consideration" on some sites designated as green field/green belt/open space in a number of development plans.

As the site cost of the nursing home project is not part of the allowable expenditure for capital allowances, most promoters of such schemes are keen to minimise the outlay on the site.

• Fee rates

A rise in the wealth of the population together with the improving nursing home stock has led to an increase in weekly rates over the past eight years. Average fees are about €622 per week in Leinster with lower average fees earned in Connaught (west) at about €422 per week, Munster (south) at about €502 per week and Ulster (Northern Ireland) at about €450 per week.

Maximum earnings per week are about €825 and the tendency is for larger homes to have stronger occupancy levels and higher fee rates. Homes in excess of 60 beds have average weekly fee rates of about €727 and occupancy of about 90 per cent. Tax relief is available to a person who pays for private nursing care at the marginal rate, which makes higher fee levels more affordable.

It is interesting that these maximum fees have begun to stagnate. Many operators are experiencing difficulties in maintaining increased fee income.

This is as a result of the expanding supply of new beds and a cooling national and European economy.

Many modern private nursing homes do not provide specialist care beyond long-term nursing home care. This is because the additional resources and specialist expertise required to provide these facilities leads to increased costs, which do not result in increased profit levels. This is true where the nursing home is in a "green field" start-up situation, designed to take advantage of capital allowances.

• Sources of business

Many private nursing homes have strong links with regional health authorities and this provides a good source of steady occupancy at modest fee levels. There is a trend for vacated private nursing home beds under contract with regional health authorities to be cancelled following the vacation of a bed. For a private nursing home, which has a heavy reliance on this type of contract, this is very worrying.

Subvention by local authorities covers approximately 8,300 individuals in the country in 2003, at a cost of about €110 million. This is equivalent to about €13,253 per qualifying person on average, or about €254.86 per week per qualifying person. Subvention is generally measured on three dependency levels for long term residential care. For medium dependency the rate was €114.30 per week in 2002, for high dependency it was €152.40 per week and for maximum dependency it was €190.50 per week. Subvention is means-tested.

• Population distribution and age profile

Within Ireland there is an imbalance in population distribution. The trend is towards increasing urbanisation, geared towards the Dublin region and the counties of Wicklow, Kildare, Westmeath and Louth. This will lead to a stronger demand for new nursing home facilities in these areas. Customers for nursing homes will not be restricted to residing in homes within their local health board area but it is likely that they will want to be close to family and friends.

The population is ageing with an increasing amount of over 65s and a reducing working section. It is predicted that by the year 2011 the group of the population in the over 65 category will rise by approximately 25 per cent (107,000 people) over current levels. Historically, on average, 5 per cent of the population over 65 reside in long stay care homes. This will provide an additional demand for about 5,350 bed spaces by 2011.

• Barriers to future growth

The rise in the elderly population will put an additional strain on the working population from a social security perspective, due to a falling workforce and increased pressure on the reducing workforce. This will also put pressure on the ability of nursing home operators to generate an increasing income stream flow from fee rates.

The strong rise in fee income in the past has been assisted by enormous growth in equity in residential properties. In many cases houses have tripled in value between 1994 and 2003. The elderly who live close to urban centres will therefore have a substantial equity base to fund long-term nursing home care. However the younger population will struggle to support the ageing population as this equity base is eroded.

• Peter Lundy is senior surveyor, Consultancy Division, at Cb Richard Ellis Gunne