Councils “forced to compete” for spaces in children’s residential homes, with many children in homes that don’t meet their needs: NAO report

The report, published today (12 September), notes that residential care costs for looked-after children have almost doubled in five years, reaching £3.1 billion in 2023-24 - driven by rising demand, limited placements, and a “profit-driven market”.

The NAO warned that as it stands, councils are competing for spaces in a mostly private market, with “mismatched” supply and demand across local areas.

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

In March 2024, 67% of children in children’s homes were placed outside their local authority, with 49% placed more than 20 miles from home.

The NAO observed that children may also move frequently, be confined without consent or be placed in illegal, unregistered homes.

The report said: “A shortage of places within foster care and for looked-after children with more complex needs are among factors driving up costs and creating a dysfunctional market.

“The Department for Education (DfE) and councils do not know how decisions made in health and justice settings affect children with the most complex needs, which makes it harder to plan and respond to demand.”

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

On this, the NAO said: “DfE does not have adequate data on providers’ and councils’ costs, which makes it hard to judge fair charges, or take effective action to tackle excessive profits. DfE plans to improve cost transparency and introduce oversight measures by 2028–29.”

The report made a number of recommendations to support the Department for Education to establish a “productive and resilient” residential care system. These included:  

• 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 said: “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 whilst they tackle this market failure.”

Responding to the report, Cllr Amanda Hopgood, Chair of the Local Government Association’s Children, Young People and Families Committee, said: “Our priority is ensuring that children get the very best care and support. However, with more children needing help with increasingly complex and challenging needs, a lack of appropriate homes and the challenges with commissioning those placements are leading to an escalation in costs.

“The astronomical cost of care placements also means there is less money available for councils to spend on the earlier help children so desperately need. We would also like to see greater financial oversight of the largest providers, with some making huge profits when money should be invested in supporting children.

“In the Autumn Budget, the Government should ensure all councils receive sufficient funding to invest long-term into family help, child protection, and child in care and care leaver services. 

“It should also develop a cross-government strategy for children, young people and families to ensure all partners are working towards a shared ambition.”

A DfE spokesperson said: “Vulnerable children across the country have long been let down by years of drift and neglect in children’s social care, which this report lays bare. But despite this inheritance, this government is gripping the issue and taking swift action to fix the broken care system.

“We are driving the largest ever reform of children’s social care, backed by £2 billion to break the cycle of crisis for children, recruiting thousands more dedicated family help workers to wrap support around families and tackle issues from drug and alcohol addiction to domestic abuse.

“Through the Children's Wellbeing and Schools Bill we are introducing tough new laws to stop profiteering in children’s care homes, and will not hesitate to take further action to cap provider profits if unacceptable profiteering continues.”

Lottie Winson