A cost-based weekly fee divides the home's costs, rent included, by the resident-weeks it expects, so the occupancy assumption sets the fee as much as the costs do.
A cost-based care home fee is the home's annual costs, including the rent or return on the building, grossed up for a management charge and a margin, then divided by the resident-weeks expected at a budgeted occupancy. On an illustrative 60-bed residential home with 3,637,089 of costs and rent, budgeted at 92 per cent occupancy, the fee is £1,404 a week. Staff are 61.1 per cent of it, and set the same budget at 85 per cent occupancy and the fee becomes £1,514.
Worked in full in Senior Living and Healthcare Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Operators build the fee this way to set their private rates; local authorities run the same arithmetic, under various names, when they assess what care actually costs; and an investor should run it too, because the rent is one of its lines. If the fee the market will bear is below the cost-based fee, something gives: the margin, the staffing or the rent.
| Input | Value |
|---|---|
| Registered beds | 60 |
| Budgeted occupancy | 92% |
| Care staff, loaded with employer costs | £1,950,000 |
| Other staff: manager, kitchen, housekeeping, administration | £520,000 |
| Premises and running costs: utilities, maintenance, insurance, registration | £380,000 |
| Food and consumables, per resident per week | £65 |
| Rent (£10,000 a bed) | £600,000 |
| Management charge, share of fee income | 5% |
| Operator's margin, share of fee income | 5% |
All figures are illustrative. Care staffing should come from the dependency of the residents, built up as in how many staff a care home needs, not from a ratio.
1. Residents = 60 × 92% = 55.2; resident-weeks = 55.2 × 52.14 = 2,878
2. Fixed costs = 1,950,000 + 520,000 + 380,000 + 600,000 = 3,450,000
3. Variable costs = 55.2 × 65 × 52.14 = 187,089; total 3,637,089
4. Revenue needed = 3,637,089 / (1 − 5% − 5%) = 4,041,210
5. Fee = 4,041,210 / 2,878 = £1,404 a week
Excel: =(Fixed+Res*Var*365/7)/(1-Mgmt-Margin)/(Beds*Occ*365/7)
| Line | £ a week | Share | £ a year |
|---|---|---|---|
| Care staff | 677 | 48.3% | 1,950,000 |
| Other staff | 181 | 12.9% | 520,000 |
| Premises and running costs | 132 | 9.4% | 380,000 |
| Food and consumables | 65 | 4.6% | 187,089 |
| Rent | 208 | 14.8% | 600,000 |
| Management charge | 70 | 5.0% | 202,060 |
| Operator's margin | 70 | 5.0% | 202,060 |
| Fee | 1,404 | 100% | 4,041,210 |
At this fee EBITDARM is 1,004,121 and rent cover 1.67x. The cover is an output of the fee, not a separate assumption: set the fee from costs and you have also set what the building can bear.
| Occupancy | Residents | Fee, £ a week | Against 92% |
|---|---|---|---|
| 85% | 51.0 | 1,514 | +7.8% |
| 90% | 54.0 | 1,434 | +2.1% |
| 92% | 55.2 | 1,404 | 0.0% |
| 95% | 57.0 | 1,362 | −3.0% |
| 100% | 60.0 | 1,297 | −7.6% |
Almost all the cost is fixed, so the fee is set as much by the occupancy assumption as by the costs. A home that prices at £1,404 on 92 per cent and then runs at 85 per cent takes 3,733,726 of revenue, makes EBITDARM of 710,873, covers its rent only 1.18x and loses 75,814 after rent and the management charge. The occupancy in the fee calculation is a promise the operator has to keep.
Rent is £208 per resident per week, and with the management charge and margin that apply on top of it, it accounts for £232 of the fee: without it the cost-based fee would be £1,172. That is the clearest way to see what the building costs residents. An owner-operator that prices without a return on its own property can undercut a leased home at the same quality, but only by giving that return away.
If the council pays an illustrative £900 a week for a funded resident, the gap to the cost-based fee is £504 a week, 56.0 per cent. Every funded resident is then priced below cost, and the shortfall is carried by self-funders, by a thinner rota or by the landlord's cover. How the mix of the two sets the actual average fee is worked in how payor mix changes a care home's average weekly fee.
Dividing costs by the registered beds. That assumes 100 per cent occupancy and gives £1,297, 7.6 per cent too low; few homes are full all year, because rooms stand empty between residents. The second mistake is to apply the margin to costs instead of to revenue: a 10 per cent mark-up on 3,637,089 gives 363,709, against the 404,121 that is 10 per cent of fee income, the base the management charge and margin are actually calculated on. Gross up by dividing, not by multiplying.
The book builds the fee card, the care hours and the cost per occupied bed into the rent a cover ratio supports; the whole home is modelled in the free workbook for this case.
Usually the majority. In the illustrative 60-bed home, care staff take £677 of a £1,404 weekly fee, 48.3 per cent, and other staff £181, 12.9 per cent, so staff are 61.1 per cent of the fee. Rent is 14.8 per cent and food and consumables 4.6 per cent.
Because nearly all costs are fixed, so they are spread over the residents actually in the home. The worked home needs £1,404 a week at 92 per cent occupancy, £1,514 at 85 per cent and £1,297 if it were always full. Pricing at 92 per cent and running at 85 cuts rent cover from 1.67x to 1.18x.
Divide the rent by resident-weeks, then add the charges levied on it. In the worked home a £600,000 rent is £208 per resident per week, and £232 of the £1,404 fee once the management charge and margin on top are included; without the rent the cost-based fee would be £1,172.
This article is one calculation from Senior Living and Healthcare Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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