The children’s residential care home costs scandal – how we got there and how to fix it

Between 2020 and 2024 the cost of residential care for looked after children in England rose by 96 per cent. Yet the number of children in such placements increased by only ten per cent.

That should tell you everything you need to know about a market which has been described as “dysfunctional” and “unsustainable”.

Last year, councils spent £3.1 billion on children’s residential care, most of it going to private providers, some charging more than £60,000 a week for a single placement. 

Local authorities warn the spiralling cost of children’s residential care is partly responsible for pushing them to bankruptcy. 

Last month the National Audit Office (NAO) published a report into children’s residential care and urged the government to get a grip on the situation.

But how did it come to this? And how can we fix it?

Rise of privatisation and children in care

Historically children’s homes were provided by local authorities or in partnership with third sector organisations.

However, the last several decades has seen a shift towards the private sector. It’s been part of a wider trend of outsourcing public services in the UK since the 1980s, pioneered under the Thatcher government and continued by successive administrations. 

There was no legislation directly promoting the outsourcing of social services. But when everything from waste management to prisons and care homes for the elderly was been franchised out, it was only a matter of time before it happened.

A neoliberal ideology that the free market is key to reducing public spending and increasing efficiency had a grip on government.

Also fuelling the shift was the rise of a litigious culture imported from the US shifting attitude to risk. At the same time a series of scandals involving council-run children’s homes, such as the Frank Beck child abuse case, were being exposed in the media.

Concern over children’s residential care culminated in 1997 with the Utting Report into the safeguarding of children living away from home. Then health secretary Frank Dobson described its findings as painting “a woeful tale of failure”.

Against such a backdrop of public and political outrage and lack of confidence, outsourcing children’s residential care to private providers must have seemed appealing to council bosses. For it also outsourced the risk of blame and damage to reputation when things went wrong.

Today, 84 per cent of the 4,009 children's homes registered with Ofsted in England are privately owned.

The same risk-averse culture also led to an increase in children coming into care, turbo-charged by the media and political frenzy surrounding the death of Peter Connelly – Baby P – in 2007.

In 2008 around 59,000 children were in care in England. By 2015 the figure had risen to 69,500. Last year it was 83,630.

This rise has also been linked to austerity cuts to early intervention services resulting in more families reaching crisis and children needing care.

Most children in the care system are in foster care (56,390). However, foster care placements are dropping due to a recruitment “crisis” of foster carers. Between 2021 and 2024 there was a ten per cent fall in numbers. 

Conversely the number of children in children’s homes in England has doubled since 2011 with 16,150 currently in residential care.

The shortage in foster care placements can mean children have no option but residential care. An Ofsted analysis of 113 children in homes in 2022 found more than a third had foster care in their original care plan.

Unless the rise in children coming into care is reversed and more foster carers are recruited, more and more money will be spent on privately-run children’s homes.

Why does private sector in children’s residential care matter?

There are certain consequences when the free market is involved in children’s social care. For a start a focus on the bottom line has meant that private providers are more likely to set up homes in low cost areas to maximise their profit.

The spiralling cost of property (average house prices in the UK have soared by 315 per cent since 2000) is also helping to fuel this trend.

A quarter of children’s homes are in the north west of England while only six per cent are in London, seven per cent in the south-west and eight per cent in the east.

As a result, 67 per cent of children in residential settings were placed outside their local authority and half more than 20 miles away from their family home last year. 

Research shows these children are more likely to have worse outcomes, including in health and education, and are at increased risk of sexual or criminal exploitation.

A “mismatch” in supply and demand has also led to a seller’s market where providers are able to ramp up fees as local authorities compete for a limited number of places.

An investigation by the Competition and Markets Authority in 2022 warned that the UK had “sleepwalked into a dysfunctional children’s social care market” as a result.

Profiteering has embedded itself into the system, with the 15 biggest private providers, some of them shareholder owned, making nearly 23 per cent average profits.

A 2023 report by the Local Government Association (LGA) found the 20 largest independent children’s care providers made more than £300 million profit from annual fees of £1.63 billion.

Last year, local authorities spent an average of £318,400 per child in a children’s home, or £6,100 a week. Some placements, for children with highly complex needs, are costing up to £63,000 a week, according to the LGA.

Children’s homes have also been accused of cherry-picking their intake based on the support needed versus income generated.

Last year Ofsted reported that nearly a third of children’s homes often or always rejected referrals for children with complex needs due to challenges recruiting trained staff.

The financial structuring of private providers is also a risk, with the CMA warning that some of the largest are carrying “very high levels of debt”. It warned of a “disorderly failure” of such firms leaving children without placements if they went under.

A PSW analysis last year found the three biggest providers, which between them owned more than a tenth of children’s homes in England, made combined losses of nearly £184 million in 2023.

One of the most compelling criticisms of private sector involvement in children’s social care comes from looked after children themselves who say they do not want to be profited from.

The billions spent on private sector fees is also money lost to the public purse.

In 2023 the Bishop of Blackburn criticised profits “lining the pockets of rich investors” rather than going towards children’s future.

Local authorities also cite the spiralling cost of placements as contributing to pushing them to the financial brink. Last year almost three-quarters of service-providing councils blamed the cost of children’s services and education for their financial difficulties.

What to do about it?

Wales has committed to ending profit in children’s social care by the end of the decade. This not only includes children’s homes but also private foster placements. 

Similar to England, the majority of children’s homes are in the private sector, 87 per cent in Wales.

But turning round a system so reliant on the private sector is not without risk. The Children’s Homes Association last year warned a lack of supply could result in the biggest disaster in Wales “since the Second World War”.

Scotland is following Wales by limiting the amount of profit that can be made from children’s social care. And today VOYPIC, a charity representing care experienced children and young people in Northern Ireland, called for an end to profit in care.

But in England, there are no such plans. 

Instead, Westminster is adopting a raft of measures recommended by the Independent Inquiry of Children’s Social Care to “rebalance the market”. This includes a threat of a cap on profit if providers do not act to reduce fees.

Non-profit providers will also be assisted to enter the sector and counter prohibitively high property prices.

Collective commissioning by local authorities through new Regional Care Cooperatives, recommended in the independent review, are being tested.

These promote local authorities working together to negotiate fees rather than competing with each other.

A £40 million focus on recruiting more foster carers, eight times cheaper than a children’s residential care placements, is also part of the strategy.

Likewise for kinship care, backed by an investment of £9 million in training and support (though a report this week by the charity Kinship warned a lack of financial and other support is leaving them "impoverished, exhausted and abandoned").

But perhaps most significant is the government’s overarching focus on reducing the need for children coming into care.

The rollout of family hubs, providing universal support to families from birth to 19 (or 25 for people with disabilities), is a key part of this strategy.

The government plans to open 1,000 more hubs by 2028, on top of 400 already up and running.

Behind this, is a tacit admission of the damage done by years of austerity cuts to early help and preventative services, partly blamed for a 25 per cent rise in children coming into care between 2010 and 2021.

Family hubs are a repackaging of New Labour’s Sure Start programme (though this only supported families with children up to the age of five).

One of its key proponents is former Conservative MP Dame Andrea Leadsom, founder of the 1001 Critical Days Foundation, a charity for the wellbeing of babies.

In her 2021 report The Best Start for Life published under Boris Johnson’s government, she wrote: “Prevention isn’t only kinder, but it’s also much cheaper than cure…”

She added: “We spend billions on challenges in society from lack of school readiness to bullying to poor mental health to addictions and criminality; and further billions on conditions such as obesity, diabetes and congenital heart disease.”

This turnaround in focus is also backed by new community-based multi-disciplinary teams currently being tested for wider rollout.

The realisation that to continue spending on broken families and an ever-increasingly costly market in children’s homes is unsustainable has sunk in.

It also does not make financial sense, costing far more in the long term than providing early support. 

But for this to mean more than words requires real and sustained investment and a commitment by successive governments, whatever their political persuasion.