The crisis in social care in the UK does not have just one cause, nor one simple solution. Chronic underfunding, an ageing population, the Brexit-induced labour shortage and the devastation wreaked by Covid-19 have all played a part. But the problems forcing the care system to the brink of collapse don’t just come from a series of exogenous shocks – they are internal too. The very structure of the sector is unstable.

The growing involvement of private equity, hedge funds and real estate investment trusts in the care sector in recent decades has brought about a rise in the use of predatory financial techniques, justified in the name of enticing capital into a sector that the government has persistently failed to adequately fund. According to data from the Care Quality Commission, these firms now own one in eight care home beds in England.

A screen of financial jargon helps investors avoid public scrutiny, but a slew of recent reports has begun to detail the many tactics used to ensure “healthy” returns on investment – and the profound and troubling consequences that these strategies have for the care sector.

In 2012, the UK-based private equity firm Terra Firma Capital bought Four Seasons Health Care in an £825m debt-leveraged buyout, backed by US-based hedge fund H/2 Capital Partners.

Leveraged buyouts are a common technique used to increase return on investment. They allow investors to pay only a fraction of the purchase price using their own capital; the rest is covered with a loan. In theory, the target social care company then pays off the debt using their cashflow, increasing the equity portion owned by the investment firm, meaning a larger windfall for investors if the care company is sold on.

However, recent research has found that these kinds of buyouts are associated with an 18% increase in risk of bankruptcy for the target company. In the case of Four Seasons Health Care, onerous debt payments contributed to the company’s collapse into administration in 2019. Two of the other largest care home providers in the UK – HC-One and Care UK – have also undergone leveraged buyouts and, as a result, their corporate group structures remain saddled with significant debts.

The implications of this debt-heavy model are significant. Among the five largest care home chains backed by private equity in the UK, interest payments on leveraged buyouts and other debt obligations absorb about 16% of the average weekly bed fee.

But interest payments on debt aren’t the only additional cost some care providers face. Other strategies for increasing return on investment see investors selling off care home properties for a one-off lump sum, then leasing them back – sometimes from a new landlord, sometimes from other entities within the corporate structure.

Care UK’s accounts, for example, state that it paid £4.1m in rent in 2019 to Silver Sea Holdings – a company registered in Luxembourg, a low-tax jurisdiction, which is also owned by Care UK’s parent company, Bridgepoint.

These financialised structures demand an ever-growing revenue stream, not to fund more and better quality care or higher wages, but to keep up with growing interest repayments on the debts they carry and rising rents, and to line the pockets of investors, some of whom are astutely located in low-tax jurisdictions.

Current reform proposals do not even begin to touch these problems. The touted 1p increase on national insurance contributions to fund social care, while welcome, would be like pouring money into a bucket that someone has wilfully punched holes into. We have to stem the outflow too.

Tighter financial regulation of the sector could rein in extractivist financial practices, and in the short term should be used to do so. However, this misses an even more fundamental challenge: that the core characteristics of adult social care make it almost impossible to privatise successfully. The supposed benefits of the free market – quality innovations and cost efficiencies – simply don’t apply. The bucket itself is not, and never has been, structurally sound.

For starters, well-functioning markets rely on consumer choice: if a product or service is inadequate, you simply choose another. But unlike a phone contract, where poor service may inspire you to switch provider, the physical and emotional costs associated with moving between care homes – known as “transfer trauma” – can leave vulnerable residents with limited power to voice their concerns.

In addition, the time-insensitive nature of care work means that there are few opportunities for cost-efficiency savings without compromising working conditions and quality of care. After all, asking a care worker to spend less time with each client can only be detrimental for a service in which, as the economist Tim Jackson puts it, the “quality rests entirely on the attention paid by one person to another”.

These two features of the care sector mean that service quality and worker pay come into conflict with returns to investors. Independent studies appear to corroborate this, finding that both quality of care and wages are generally lower in for-profit care homes.

Signing-on bonuses to recruit new carers, piecemeal funding reforms and even improved financial regulation cannot scratch the surface of these structural challenges.

The competitive, for-profit model of social care provision has had 30 years to deliver on its promises of efficient, high-quality services. In that time, the crisis in adult social care has only deepened. Instead of driving innovation, increased competition between providers has undermined care quality. It is time to stop pursuing the same strategy and expecting a different outcome.

The care sector needs an overhaul. Not only do we need adequate long-term funding from central government, we also need to address some searching questions about the role of profit in the sector, and ask: who is benefiting from this dysfunctional model? And who, ultimately, is paying the price?