12/07/2011 20:02 BST | Updated 12/09/2011 06:12 BST

Public Services Reform Bill Should Take on Board Lessons from Southern Cross

The latest news from Southern Cross comes as no surprise. The country's leading care home provider, home to 31,000 older people, are to stage an orderly transfer of its' 752 care homes to the landlords who own the properties.

It is a very worrying time for Southern Cross residents and their families. If Southern Cross can't run the homes at a profit why should another provider be successful? The answer to that question begs more questions.

First the answer; the flaw in the Southern Cross model is the inflated rents it is locked in to with its landlords. By transferring the homes back to the landlords that particular flaw is overcome which should allow care to be provided properly and profitably.

But there are more factors at play. The other reason for the demise of Southern Cross is that the forecasted market expansion and steadily rising fees from Local Authorities failed to materialise.

More people are being enabled to live independently at home which is a good thing; when that is their choice. But the issue of Local Authority fees is a real problem. Many Local Authorities have allowed no increase in the fees they will pay for the last three years. Meanwhile the costs of food, energy and other utilities have gone up significantly. Inflation is running at over 5% and energy inflation at considerably more.

Local Authorities fund the long term care of approximately one third of residents. For the most part the fees they pay do not meet the costs of providing a reasonable, no frills, level of care. Care Homes therefore have to demand 'top ups' from self funded residents to cover the difference. Quite apart from being unfair to the self funded residents it is hardly a secure business model for the long term.

To return to Southern Cross the other factor in its demise is of course the reckless decisions made by the directors of the company at the time of its stock market flotation in 2005. In order to profit personally from the sale of the properties, that previously underpinned the balance sheet of the company, the directors committed the company to future liabilities (escalating rents) that were unsustainable. Members of the Southern Cross board responsible for that decision should now be subject to an investigation as to whether they acted in accordance with their duty of care as company directors.

The Public Services Reform White Paper is something I very much welcome. But one lesson we need to learn from Southern Cross is that if private companies are to be encouraged to manage the care of vulnerable people, funded in part by the taxpayer, they should have to satisfy financial viability criteria as well as meeting the normal regulatory requirements around quality of care.