Can care homes survive with privately funded residents cross-subsidising those who are state funded?

(by Morten Hviid) Care homes often take a mix of privately funded and state funded residents. Recent research by a leading provider of market information about the care home sector, LaingBuisson, assesses that the average fee per resident with a local authority (LA) assisted place fell short of what it costs care homes to provide the care by £104 p.w.. They also argue that the shortfall is picked up by private fee payers who are thereby providing a cross-subsidy. They refer to this as a hidden “care tax”.  The existence of this cross-subsidy is nothing new. The predecessor of the Competition and Markets Authority, the OFT, found the same in a report from 2005.  However, the size of the cross-subsidy is notable.  Even without assessing the strength of the new research, which is not publicly available, several aspects of this news story are worth pondering further.  Should LAs use any buyer power they might have when negotiating prices?  What are the consequences for the care market from the cross-subsidy?  Why are care homes willing to accept below cost prices?  These questions have added current importance because the CMA is undertaking a Market Study into the care home market.