Watchdog warns of market failure amid soaring children’s care home costs

Children’s residential care home costs in England have soared to almost double what they were four years ago amid what the public spending watchdog has branded a “market failure”.

The National Audit Office (NAO), said local authority spending on children in residential care rose from £1.6 billion in the year ending March 2020 to £3.1 billion in the year ending March 2024.

Residential care settings include children’s homes and so-called supported accommodation which can be used to house older children who might be able to live more independently.

Most of these settings are run by private companies, with the NAO concluding many are either funded or owned by private equity firms.

The rest are run by local authorities or the voluntary sector.

The NAO report, published on Friday, said: “There are no restrictions on the ownership of children’s homes – our analysis shows that seven of the 10 providers supplying most homes are ultimately owned or part-funded by private equity firms.

“Complex ownership arrangements can make it harder to understand providers’ financial position. This includes tracking providers’ profits, whether they reinvest profits, and those with high debt levels at risk of suddenly exiting the market.”

The Government last year announced a “backstop” law pledge, which would limit the profit providers can make, to be brought in if providers do not voluntarily put an end to profiteering.

Education Secretary Bridget Phillipson at the time said the Government will not hesitate to cap profits in children’s social care if firms fail to curb their gains, amid a warning from an MP in Parliament that vulnerable children had become “cash cows” for private equity groups.

The NAO said the huge rise in care costs did not match the more gradual rise in the number of children in residential care over the same period.

There were 16,150 children in such settings in England at the end of March, a rise of 10% over four years.

The watchdog said there was a “mismatch” between the supply and demand for places, which had “fuelled a dysfunctional market and cost increases”.

It said a shortfall in supply to meet increasing demand has led to local authorities competing for places and higher costs, and pointed out that private providers are able to choose which children to home “depending on the support needed or profit levels available”.

It added: “An effective market would give local authorities choice, lowering costs and provider profits, with providers investing and joining the sector.”

Previous estimates by the Competition and Markets Authority suggested the 15 largest private providers had average profit rates of 22.6% for children’s homes between 2016 and 2020, with prices increasing above inflation.

The NAO said the significant rise in costs for local authorities had contributed to councils’ budgetary pressures in recent years.

The watchdog warned that while the Department for Education has vowed change, it has neither set out what a “productive and resilient market” should look like nor collected “comprehensive information to better understand the causes of market issues”.

Gareth Davies, head of the NAO, said: “The residential care system for looked-after children is currently not delivering value for money, with many children placed in settings that don’t meet their needs.

“Local authorities are forced to compete for limited places in an under-supplied market, driving high costs.

“Our recommendations are designed to help DfE, and local authorities find better solutions for looked-after children while they tackle this market failure.”

Sir Geoffrey Clifton-Brown, chairman of the Public Accounts committee, said: “Skyrocketing costs for children’s residential placements have placed additional strain on already precarious local authority finances, with more and more children placed in inappropriate settings.

“Lack of co-ordinated commissioning, insufficient forward planning and mismatches between supply and demand have all fuelled a dysfunctional market, as local authorities compete for placements and providers drive up prices.

“Although DfE has taken some steps towards establishing a more productive and resilient residential care market, it must do more to implement timely and decisive measures, ensuring that children are provided with the right care, in the right place, at the right cost.”

Amanda Hopgood, from the Local Government Association – which represents local authorities, said the “astronomical cost of care placements also means there is less money available for councils to spend on the earlier help children so desperately need”.

She added: “We would also like to see greater financial oversight of the largest providers, with some making huge profits when money should be invested in supporting children.

“In the autumn Budget, the Government should ensure all councils receive sufficient funding to invest long-term into family help, child protection, and child in care and care leaver services.”