Development of nursing homes needs a helping hand as banks fail to fund sector

The private nursing home sector is a crucial part of State policy in relation to the care of the elderly and needs to grow significantly over the coming years if our health service generally is not to be put under even more pressure.

However, the growth in the number of beds that is required is not happening at the moment, largely because of problems to do with funding and the return on capital.

As there is a three-to-five year lead-in between a new nursing home project getting the green light and a bed being occupied, each year that passes without resolving the problem is a lost opportunity against a backdrop of an inevitable rise in demand.

“The two [domestic] banks are not functioning,” says one experienced nursing home owner and operator who has recently refinanced his bank debt using a foreign fund.

“The foreign venture capitalists and vulture funds seem to think the sector is sexy. There is a flood of money [from them] out there.”

Yet, says the businessman who does not want to be named, despite all the talk, and the apparent interest of the foreign funds, there is not that much new development happening. “People are thinking: hold on, be careful. Is there going to be the money to pay the bills?”

One of the core problems, in this businessman’s view, is the disconnect between the objectives of foreign funds and the view of the State National Treatment Purchase Fund (NTPF), which pays for most nursing home stays.

If these were “normal” times, a business might expect a commercial loan from a domestic bank at an interest rate of about 6 per cent.

However, the banks are not lending. International funds, on the other hands, are scouring the globe looking for lucrative returns. “These are billion-dollar funds run by accountants in New York, who are looking for the highest returns they can get. Ten to 12 per cent would be generous. [US fund] Lone Star is looking for 20 per cent.”

It is, the businessman says, easier to borrow €50 million in Ireland these days than it is to borrow €5 million.

The Irish nursing home sector is funded by the State’s “Fair Deal” scheme, with the NTPF negotiating prices with individual nursing homes. The fund, according to the businessman, uses a notional return on investment of closer to 4 per cent when deciding on price.

At the same time, the Health Information and Quality Authority (Hiqa) is introducing regulations and standards for nursing homes that are driving up costs. “There is only one purchaser out there [the State], so the situation is pretty tricky.”

Another operator says the business is one where, if you know what you are doing, you can make moderate, long-term returns. He would like to see differential pricing introduced, so the State would pay more for people who require greater care, and greater recognition of the need to achieve a proper return on investment.

What he would be most concerned about, he says, would be a temptation to try solve the problem with tax breaks. “The last time that led to a lot of money coming into the sector, and product being built in the wrong place. Investment needs to be care led.”

According to a report prepared last year by BDO for Nursing Homes Ireland, the group that represents privately-owned nursing homes, demographic trends indicate that a sharp rise in demand is coming down the tracks.

The number of people aged over 65 is due to grow by 38 per cent in the period to 2021, according to the report, Health's Ageing Crisis, Time for Action. The number of people aged over 85 years of age is to grow by 46 per cent over the same period. So there is going to be a dramatic increase in demand for nursing home beds.

As of March this year, there were 16,145 people in private and voluntary nursing homes and a further 4,867 in public nursing homes, according to the Department of Health.

The introduction of new standards by Hiqa means the State needs to invest about €840 million to bring its existing public beds up to scratch, while the achievement of the stated policy objective of providing 20 per cent of all long-stay beds could cost a further €850 million. Given the pressures on the public finances, that is a big ask.

The involvement of the voluntary sector, largely represented by religious orders, looks unlikely to grow significantly. Logic would appear to indicate the private sector taking up the slack.

In the years up to 2009, the system was creating about 1,000 new beds per annum overall. However, that dropped to 339 per annum in the period 2009 to 2012. According to the BDO report, by 2021 we could be facing a shortfall in beds of about 8,000, or 100 new nursing homes.

The Fair Deal scheme, under which the State takes a capped amount from a person’s assets and funds the rest of their nursing home needs, is a generous one by international standards. Whether it is a sustainable one is an interesting economic and political question.

The BDO report estimates that the scheme costs just under €1 billion per annum and will exceed €1.2 billion per annum by 2021.

At the moment, the private nursing home sector comprises a large number of smaller operators, though the trend is likely to be towards bigger groups and bigger nursing homes, for reasons of scale, not least so as to justify greater on-site medical services.

Over time, the development may be towards greater complexes, within which full-time nursing home care is just part of an elderly community complex catering for a range of post-retirement capabilities.

Any failure to provide the nursing home beds our ageing population requires is likely to prove very costly for Irish society, in terms both of money and of our health services generally.

As matters stand, a lot of elderly people who can no longer live at home and who cannot find a place in a nursing home, end up in expensive hospital beds. The BDO report says that, while a private nursing home bed costs about €750 per week, the equivalent cost for a bed in the acute hospital sector is €6,000.

The cost of addressing the needs of our ageing population in a planned way will be considerable, but the cost of not doing so will be a multiple of that.