Local authorities across England face combined budget gaps exceeding £4 billion for 2025-26. Adult social care spending has increased 47% since 2015 in cash terms, yet buys 9% fewer care hours due to inflation and cost pressures. The Local Government Association estimates councils need an additional £2.4 billion just to maintain current service levels, before addressing any unmet need.

Meanwhile, the Real Living Wage rose to £12 in November 2024 (£13.15 in London), yet the median hourly rate local authorities pay for domiciliary care sits at £21-23 per hour – which after employer costs, travel time, training, management, and overheads leaves approximately £11-12 for actual care worker wages. The mathematics of sustainable service delivery don’t work, and 2025 will be the year this becomes undeniable.

If you’re a care provider right now, you’re probably caught between commissioners demanding you deliver more for the same or less money, and the operational reality that you simply cannot afford to do so without compromising either quality or your business viability. Understanding how to navigate funding constraints whilst maintaining service sustainability isn’t about negotiating slightly better rates – it’s about fundamentally reconsidering your business model for an environment where adequate funding isn’t coming.

What Council Budget Pressures Actually Mean

The £4 billion budget gap isn’t evenly distributed. Some councils face 15-20% cuts to non-statutory services whilst desperately trying to protect adult social care and children’s services, which are statutory duties they cannot legally abandon. But “protecting” social care often means holding budgets flat in cash terms whilst costs rise, which is effectively a cut in real terms.

Councils are conducting eligibility tightening exercises where people previously receiving support get reassessed under stricter criteria and lose services. They’re reducing care package hours based on “efficiencies” identified through reviews that primarily exist to cut costs rather than genuinely optimise care. They’re pressuring providers to accept lower rates by making clear that refusing means losing contracts to competitors who’ll accept inadequate funding because they’re desperate for volume.

A Kent domiciliary care provider described the local authority offering 2% rate increase for 2025 when their costs had risen 8% between Real Living Wage increases, pension auto-enrolment expansion, and energy costs. When they explained this meant providing care at a loss, the commissioner’s response was “well, we have other providers who’ll take it at this rate.” The implicit message: accept poverty rates or lose contracts to someone else who hasn’t done their maths properly yet.

Residential care faces similar pressure with fee rates that haven’t kept pace with cost inflation, particularly around energy, food, and staffing. One care home operator in Yorkshire calculated their true cost per resident weekly at £987, whilst their local authority paid £843. They’d been absorbing the £144 weekly shortfall per local authority resident by cross-subsidising from private payers, but private occupancy had dropped whilst local authority referrals increased. The business model collapsed mathematically.

The Provider Perspective Nobody Discusses

When councillors and commissioners talk about “market sustainability,” they’re often discussing something completely different from what providers mean by that term.

For councils, market sustainability means ensuring sufficient providers exist to meet their statutory duties at prices the council can afford within their budget constraints. For providers, sustainability means operating at rates that cover costs whilst maintaining quality and remaining solvent. These definitions are fundamentally incompatible when council budgets can’t support rates that actually cover provider costs.

The consequence is that “market sustainability” from a commissioner perspective often means finding providers who don’t yet understand they’re operating unsustainably, or who are willing to operate at losses temporarily hoping conditions improve, or who cut corners on quality to survive financially. None of these create genuinely sustainable markets, but they allow councils to meet statutory duties within their budgets for now.

Providers face impossible choices. Accept inadequate rates and hope you can achieve efficiencies that square the circle between costs and income. Decline contracts and watch your business shrink whilst competitors who accepted those rates struggle and eventually fail, creating market instability. Or exit the market entirely, which increasing numbers are choosing.

Skills for Care data shows net provider closures across the sector, with more services shutting down than new ones opening. This isn’t creative destruction creating better services – it’s unsustainable funding destroying provider capacity that commissioners desperately need. Understanding how to position your service strategically in this environment whilst maintaining financial viability requires honest assessment of what’s actually affordable at current funding levels rather than hoping conditions improve.

What the Next 12 Months Look Like

The 2025-26 local authority settlement didn’t provide the funding increase councils need to maintain services at current levels, let alone address unmet need or provide inflationary uplifts to provider rates matching actual cost increases. Several scenarios are playing out simultaneously across different councils.

Some authorities are conducting market position statement updates that acknowledge current rates are inadequate and commit to increased funding, but then the actual rate uplifts announced fall short of their own analysis of required increases. The gap between recognition and action is enormous.

Others are pursuing “innovative commissioning” approaches that essentially mean cutting costs through different mechanisms – outcome-based commissioning that shifts risk to providers, block contracts at below-market rates, or framework collapses reducing competition then squeezing remaining providers on price.

A growing number are conducting market exits from certain service types entirely. Several councils have announced they’re ceasing to commission domiciliary care directly, instead giving personal budgets to service users and expecting them to arrange their own care. This shifts the commissioning burden but doesn’t solve the funding inadequacy – service users receiving personal budgets discover they can’t buy adequate care at the rates councils provide.

For residential care, some councils are attempting to develop their own in-house capacity to reduce reliance on private providers they consider too expensive. The irony is that council-operated services generally cost more than private equivalents once true costs including pensions, management, and capital are properly calculated.

What Providers Are Actually Doing

Providers responding to funding pressures are employing various strategies with different viability levels.

Some are exiting local authority work entirely, focusing exclusively on private payers who pay closer to actual costs. This works in areas with sufficient private demand but leaves statutory provision underserved and puts remaining providers under greater pressure.

Others have moved geographically, closing services in low-funding areas and expanding in regions where councils pay better rates. This creates care deserts in already-underserved areas whilst oversupplying areas with better funding, which eventually erodes rates there too as competition intensifies.

Technology investment helps some providers reduce operational costs enough to remain viable at constrained rates. Better scheduling reduces travel time waste, electronic care planning cuts administrative burden, remote monitoring enables more efficient care delivery models. But technology requires upfront investment many providers can’t afford when already operating at margins that don’t support capital expenditure.

Partnership and merger activity is increasing as providers recognize economies of scale become essential at current funding levels. Shared back-office functions, combined purchasing power, and management efficiency help, but mergers are complex and don’t fundamentally solve the funding inadequacy problem.

At AssuredBID, we’re increasingly having conversations with providers questioning whether their traditional service models remain viable at current and projected funding levels. The difficult reality is that for many, the answer is no – not without fundamental changes to service model, market focus, or operational approach. If you’re questioning your service sustainability and need honest external perspective on realistic options, book a consultation to discuss your specific circumstances and what’s actually achievable given funding constraints you face.

The Uncomfortable Reality

Local authority funding pressures won’t resolve in 2025. Government policy continues prioritizing NHS funding over social care, despite rhetoric about parity of esteem. The funding reforms promised for years keep getting postponed. Meanwhile, demographic pressures intensify as the population ages and demand grows.

Providers waiting for adequate funding before it’s too late are likely waiting forever. The sector has entered an era where operating at rates that don’t cover costs is normalized, where councils commission services they know aren’t sustainably funded, and where quality failures resulting from underfunding get blamed on provider inadequacy rather than systemic funding collapse.

The providers surviving are those making difficult strategic decisions about their business model rather than hoping funding improves enough to make their current model viable. Some markets and service types remain sustainable at current funding. Many don’t. Knowing which category you’re in requires honest financial analysis many providers avoid because the answers are too uncomfortable.

For practical analysis of funding trends and strategic positioning for constrained commissioning environments, explore our sector guidance on provider sustainability and financial viability in social care.