£3.1bn annual children's residential care bill 'not value for money'

The £3.1bn a year which is being spent on supporting looked-after children in residential care facilities is not delivering value for money, according to a damning new report.

The National Audit Office paper warns that vulnerable children in care are being let down by a ‘dysfunctional’ system.

In particular, children in residential care in England are moved around frequently, placed far from their original homes, and increasingly confined against their wishes, due to ‘systemic failings’.

The report reveals that the annual cost of children’s residential care has almost doubled to £3.1bn since 2019, putting pressure on local authority finances.

And the focus of the report is to evaluate the Department for Education's (DfE) response to the challenges facing local authorities, which have a duty to place looked-after children.

Its conclusion is that the system is not providing value for money, with inadequate government oversight and lack of data contributing to the issue.

It states: “The demand for places, along with a largely private provider-led market has led to local authorities competing for places and providers charging higher fees.

To ensure these changes deliver a residential care system that works, the DfE needs to improve its understanding of the system, set out what it wants the market to look like, and support local authorities to make effective decisions

“The estimated annual spend per child in a children’s home has increased from an average of £239,800 in 2019-20 to £318,400 in 2023-24 in real terms – and more children are living in residential care settings that are not best suited to their needs.”

Although it recognises that the DfE has started to respond, investing in preventative care and fostering to reduce residential care demand and progressing legislation to improve financial oversight of private providers, these measures are taking time to implement.

“To ensure these changes deliver a residential care system that works, the DfE needs to improve its understanding of the system, set out what it wants the market to look like, and support local authorities to make effective decisions”, it adds.

Figures contained in the report show that one in seven children in residential care were moved home at least twice over the course of a year, as of the latest data for March 2024.

And nearly 8,000 children in residential care in England are now placed more than 20 miles from their original family home.

There are also regional differences in supply affecting the availability of places, with more homes in cheaper areas such as the North West, while three in five children in the South West are placed far from their communities.

This is putting increased pressure on local authorities, who cannot easily plan and respond to demand.

“Councils are competing for spaces in a mostly-private market (84%) with mismatched supply and demand across local areas,” says the report.

“This can allow providers to decide which children to home based on how much support the child needs or the profit levels available.

“In 2022-23 and 2023-24, DfE assessed failure of the children’s home market as one of its most-significant risks.

“The Competition and Markets Authority (CMA) has estimated that from 2016-2020, the 15 largest private providers had average profit rates of 22.6% for children’s homes with prices increasing above inflation.”

“Our main concern is that children are not being supported in the most-appropriate setting for them. That will impact outcomes for them,” adds Emma Willson, NAO director of value for money in education.

The report highlights that looked-after children already face numerous challenges , with two thirds having a history of abuse and neglect, and those leaving care are three times more likely not to be in education, training, or employment than their peers.

The NAO report confirms what we see daily... But missing from the Government’s response is the single-most-important ingredient – people

“For the department [DfE] to better fulfil its role overseeing the sector, it needs to build better information on both the supply and the availability of places, but also on the children’s needs for those places to be able match,” said Willson, who was lead author of the report.

And the distribution of homes that can support specific needs varies significantly, with fewer than 10% of homes in London able to support children with complex needs including autism and learning difficulties, as of the latest snapshot from 2020.

A previous Ofsted report, published in 2022 found that 80% of children living in children’s homes had special educational needs, much higher than the 52% of all looked-after children and 15% of all children.

Providers are responsible for staff recruitment and training so they can meet the needs of children in their care.

However, the lack of suitable settings for children with complex needs means they are moved further from home as a result.

Dr Mark Kerr, chief executive of the Children’s Homes Association, which represents providers across England and Wales, said: “The NAO report confirms what we see daily... But missing from the Government’s response is the single-most-important ingredient – people.

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

“Despite billions invested in the early years workforce, adult social care, and even fostering, there is still no comparable investment in children’s residential care staff.

“This neglect means high turnover, agency reliance, and homes unable to take children with the most-complex needs.

“That failure lands hardest on the most-vulnerable children.”

Moving forward, the report makes several recommendations to support the DfE to establish a productive and resilient residential care system. These include:  

• Provide clarity on its vision for the residential and foster care market, and define and develop its role overseeing the operation and resilience of private providers
• Give local authorities further guidance and support so they can more effectively maintain homes and reduce the need for expensive repairs or new buildings
• Agree with the Department for Health and Social Care and the Ministry of Justice a cross-government approach to ensure looked-after children with the most-complex needs are provided the most-appropriate setting and care
• Bring together a package of interventions to support providers in having enough staff with the right skills

Gareth Davies, head of the NAO, concludes: “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.”