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Irish nursing homes are ‘at a critical juncture. Something needs to be done’

Overseas firms that flooded into the Irish nursing homes sector are racking up losses as costs soar

A report published by the ESRI this month said 15 groups now control 38 per cent of the almost 32,000 nursing home beds in the country

Joe Brennan
Fri Jan 26 2024 - 05:52

Virtue Group, the nursing homes and home care group cofounded by former professional rugby player Cillian Willis and his brother Ronan, is on track to open its 14th nursing home this year in the picturesque village of Stepaside at the foothills of the Dublin mountains.

The 124-bed facility under construction will offer a private family dining area, hairdressing salons and a cafe, in addition to roof-level sittingrooms offering spectacular views looking out over Dublin city and bay, according to the developers.

But by the time the home takes in its first residents, the French elderly care company that acquired 70 per cent of Virtue in late 2020 may have checked out.

Emera Group, backed by Paris-based private-equity firms Naxicap and Ardian, recently quietly hired Goodbody Stockbrokers to explore a sale of its stake in the Irish business. The Willis brothers plan to retain their 30 per cent stake and continue to grow the business, potential bidders have been told.

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The French group is among a slew of overseas nursing home operators that entered the Irish market in the past five years, focusing mainly on Dublin and other large urban areas. It came at a time when many smaller private nursing operators in rural counties had been closing their doors – squeezed by rising costs and regulatory requirements, out-of-date facilities and, many would argue, insufficient bed rates under the Fair Deal scheme, where the State pays much of the cost of nursing-home care for patients.

A report published by the Economic and Social Research Institute (ESRI) this month said 15 groups now control 38 per cent of the almost 32,000 nursing home beds in the country. They now marginally outnumber the 35.5 per cent of beds under 226 owners of single nursing homes, the backbone of the sector for decades.

“All of these large operators in Ireland are private for profit,” the report highlighted, adding that “private-equity funds’ increasing participation in health and social care has also raised questions regarding incentive alignment between profits and resident outcomes”.

However, the potential exit of Emera underscores how the larger new entrants, even with much greater economies of scale than smaller players, have been caught out by inflation, rising interest rates on debt used for deals struck at a time of ultra-cheap finance, and soaring rents.

Most large transactions struck in recent times involved a sell-off of the underlying nursing home buildings to commercial property companies, including European stock market-listed real-estate investment trusts, where rent increases have been linked to the consumer price index.

The ESRI report concluded that it is vital, as the needs of an ageing population grow and evolve, that policies ‘harmonise financial incentives’ for nursing home operators with residents’ needs.

Many of the larger groups, which have been the drivers of much-needed supply amid closures of public beds and small private homes, are unprofitable. The four biggest, overseas-controlled groups in the State posted net losses between 2021 and 2022, according to their latest sets of accounts.

“Inflation has jumped by more than 19 per cent over the past few years. That’s a big unforeseen rental jump for operators that paid at lot of money to get into the market when consumer prices had been rising slowly,” said Cormac Megannety, head of the healthcare department at CBRE in Dublin.

“At the time when many of these deals were struck, a modern 100-bed would have been generating an ebitda [earnings before interest, taxes, depreciation and amortisation] margin of 20-25 per cent. Many of these are now working off margins below 10 per cent. Some of these may now want to get out of the market.”

An industry source familiar with Emera’s exploration of a sale said: “I’d be very surprised if others weren’t thinking along the same lines.”

Staff costs – which accounted for 60 per cent of nursing home running costs in 2022, according to industry group Nursing Homes Ireland (NHI) – are set to rise further this year with increases in the minimum wage (by 12 per cent to €12.70) and paid sick leave (from three days to five) and planned introduction of a landmark auto-enrolment pensions scheme. Still, the lobby group managed last week to secure a deferral for a period of a planned increase to the minimum annual pay for healthcare assistants from outside the European Economic Area, which is due to rise this month from €27,000 to €30,000.

Although the Health Service Executive (HSE) estimates that a further 11,000 beds are needed by the end of the decade to keep up with growing demand, a PwC report on the nursing homes sector published last summer said new developments are unlikely in the near term, as a surge in construction costs in recent years is unlikely to deliver the types of profit returns to justify the investment. This is backed up by several industry sources who spoke to The Irish Times.

Average development costs per bed in rural Ireland jumped 46 per cent to almost €162,000 between 2017 and 2022, while they soared 49 per cent to €191,200 in urban locations, according to the PwC report. Gráinne Henson, Bank of Ireland’s health sector head, said construction costs now can run as high as €250,000 to €300,000 a bed.

[ Who are Ireland's biggest nursing home groups? ]

It comes as almost 693 public-sector beds were lost between February 2020 and December 2022, which drove an overall decline of 336 in nursing home beds even as larger private operators were adding capacity, according the ESRI report. Still, some 530 new public beds in continuity nursing units are earmarked for completion by the end of this year.

“I feel we are at a critical juncture. Something needs to be done to provide extra capacity,” said Henson. “And while it’s fantastic to see the new public beds coming on stream, it’s ultimately going to be up to the private sector to deliver.”

Daragh Lane, a private-equity director with Cardinal Capital Group, which owns a majority stake in the State’s second-largest nursing home group, Mowlam Healthcare, took issue with the ESRI report, drawing on evidence from the United States that the introduction of private equity into the sector “often results in poorer outcomes for residents”.

“Comparing Ireland with the US is like comparing apples and oranges. Hiqa [the Health Information and Quality Authority] is a very strong regulator over the sector here, carrying out regular announced and unannounced inspections – something that’s not happening in other markets,” said Lane. “The Hiqa reports are published on their website and available for anyone to review. Mowlam has consistently achieved positive inspection reports. In this industry, your reputation is everything.”

The ESRI report highlighted that average State payments a week per bed in a public nursing home amounted to €1,670 in 2022 – 55 per cent more than the €1,075 average Fair Deal payment in private and voluntary homes. While the report noted there has been a narrative that public homes may cater to higher-dependency residents, it concluded “there is little evidence showing this”.

Tadhg Daly*, chief executive of NHI, welcomes the fact that Fair Deal rates have been on the increase recently, mainly as the National Treatment Purchase Fund, which runs the scheme, seeks to narrow the gap between payments to homes in rural and urban locations.

“But it’s off a low base. The State knows the costs of providing care. It’s spending between €1,800 and €2,000 a week per bed in public facilities. The new private bed rates are nowhere near that,” he said, noting that the national average stood at €1,139 at the end of last year.

“The big concern is that if things continue like this, you’re certainly not going to see more bed capacity being added – and there’s a risk of existing capacity declining.”

The ESRI report concluded that it is vital, as the needs of an ageing population grow and evolve, that policies “harmonise financial incentives” for nursing home operators with residents’ needs.

“It is crucial for the sustainability of the sector that a balance between the financial viability of providers, compliance with regulations covering health and social care needs, and the strategic planning of supply to meet demand across the country occurs,” it said.

For Daly, that requires the Department of Health, the HSE, Hiqa and NHI coming together around the table.

“We need a proper forum to work out collectively what the future needs to look like, what kinds of homes we want, where we want them and how they’re going to be funded,” he said. “We need acceptance at official level that we’re in a challenging position as a sector and that it’s going to be fixed. That alone would inject badly-needed confidence in the system.”

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times

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