A wage-floor rise is costed on paid hours, carried up the pay scale and loaded with employer costs, and then someone has to pay for it, usually the self-funders.
Cost a minimum wage rise on paid hours, not heads: hours paid at the floor times the rise, plus the hours of staff whose differential has to be kept, plus employer national insurance and pension on the extra pay. On an illustrative 60-bed home, a rise of £0.60 an hour costs £103,368 a year, 11.5 per cent of EBITDARM, and cuts rent cover from 1.67x to 1.48x. If the council raises its fee by 2 per cent, private fees must rise 4.8 per cent to pay for it.
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 →
| Input | Value |
|---|---|
| Paid hours a week at the wage floor: care assistants, kitchen, housekeeping, including cover | 2,400 |
| Floor rate, before and after | £12.60 to £13.20 |
| Senior carers' paid hours a week, at £14.00, differential kept | 400 |
| Nurses' paid hours a week, at £22.00, unaffected | 535 |
| Employer national insurance and pension on extra pay | 18% |
| Residents: council-funded at £900 a week / self-funding at £1,250 | 30 / 24 |
| EBITDARM before the rise | £900,000 |
| Rent | £540,000 |
The floor rates are illustrative, not the statutory National Living Wage in force in any given year; substitute the announced rate and the method is unchanged. Revenue is £2,972,145 a year at an average fee of £1,056, so EBITDARM is a 30.3 per cent margin and rent cover is 1.67x. The 18 per cent on-cost assumes almost everyone's pay is already above the national insurance threshold, so the whole rise attracts it. Where many staff work short contracts below the threshold the marginal rate is lower, which is why it should be computed per contract, as in how many staff a care home needs.
Weeks a year = 365 / 7 = 52.14
Floor staff: 2,400 h × £0.60 × 52.14 = £75,086
Senior carers, differential kept: 400 h × £0.60 × 52.14 = £12,514
Extra pay = £87,600; on-costs at 18% = £15,768
Total cost = £103,368 a year, £36.71 per resident per week, £1,914 per occupied bed a year
Excel: =(FloorHrs+RippleHrs)*Rise*365/7*(1+OnCost)
EBITDARM falls to £796,632 and rent cover to 1.48x, a loss of 0.19x of cover from one year's wage settlement. Nothing about the home's occupancy or quality has changed.
Spread evenly, the cost needs a 3.5 per cent rise in every fee. But the operator does not set the council's fee. Suppose the local authority raises its rate 2.0 per cent, £18 a week:
Council uplift = 30 beds × £900 × 2.0% × 52.14 = £28,157
Left for self-funders = £103,368 − £28,157 = £75,211
Private fee rise = £75,211 / (24 × 52.14) = £60.10 a week, 4.8 per cent, to £1,310
The 24 self-funders pay nearly three quarters of a cost created by the whole workforce. This is the cross-subsidy in care home fees, computed rather than asserted, and it has a limit: each private fee rise speeds the point at which self-funders' capital runs out and they convert to the council rate, which how payor mix changes the average fee shows takes back part of every increase.
| Rise per hour | Annual cost | Rent cover | Uniform fee rise | Private rise, £ a week | Private rise |
|---|---|---|---|---|---|
| £0.30 | £51,684 | 1.57x | 1.7% | 18.80 | 1.5% |
| £0.60 | £103,368 | 1.48x | 3.5% | 60.10 | 4.8% |
| £0.90 | £155,052 | 1.38x | 5.2% | 101.40 | 8.1% |
| £1.20 | £206,736 | 1.28x | 7.0% | 142.70 | 11.4% |
The private increase grows faster than the wage rise because the council's contribution is fixed in this table. At £1.20 an hour, self-funders would face an 11.4 per cent increase just to hold EBITDARM where it was, and a lease with a 1.40x covenant would already be in breach at the uncompensated level of 1.28x.
Costing only the staff on the floor rate, at their basic pay. On this home that gives £75,086, 27.4 per cent too low. It misses two things that every operator knows and most models leave out. Senior carers and team leaders will not stay £1.40 above someone they supervise if the gap closes to £0.80, so the rise ripples up the pay scale; and every pound of extra pay carries employer national insurance and pension. The second mistake is to apply the rise to full-time equivalents instead of paid hours with cover: holiday, sickness and training hours are paid at the new rate too.
For an investor in the property, the wage floor is a rent cover risk as real as occupancy. Model it as an annual event, with an assumption for the council uplift and a cap on how far private fees can move, and test the lease covenant at the result. The rent the cover implies, and what a 1.48x home is worth against a 1.67x one, is set out in what multiple cover and yield imply.
The book prices a change in employer costs before it is announced, contract by contract, and carries it through to rent cover and value; the rota and employer cost calculator is in the free workbook for this case.
Divide the annual cost by fee revenue for a uniform rise, then adjust for what the council pays. In the worked home a £0.60 hourly rise costs £103,368, a 3.5 per cent uniform fee increase; with the council fee up only 2.0 per cent, self-funders' fees must rise 4.8 per cent, £60.10 a week.
Because operators keep differentials to retain senior carers and team leaders. If a senior on £14.00 is not raised when the floor goes from £12.60 to £13.20, the gap narrows from £1.40 to £0.80. In the worked case keeping the differential adds £12,514 of pay a year for 400 weekly hours.
Directly, through EBITDARM, unless fees follow. In the illustrative home £103,368 of extra cost takes EBITDARM from £900,000 to £796,632 and cover on a £540,000 rent from 1.67x to 1.48x. A £1.20 rise would take cover to 1.28x, below a typical illustrative 1.40x covenant.
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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