NAO warns of “dysfunctional” residential care market for looked-after children

Rising costs and limited provision

On average, a children’s home place cost £318,400 per year in 2023–24. Nearly half of children in residential care were placed more than 20 miles from home, and two-thirds were placed outside their local authority.

The shortage of foster care places, alongside the growing number of children with complex needs, is pushing up demand and costs. The NAO highlights concerns that profit-driven providers may choose children based on support needs or profit margins.

Market risks and lack of data

Private providers account for around 84% of children’s home places. Between 2016 and 2020, the 15 largest providers recorded average profit rates of 22.6%, with fees rising above inflation.

Despite these margins, the Department for Education (DfE) lacks access to detailed financial data from providers. The NAO warns this limits the department’s ability to judge fair costs, tackle excessive profits or set a cap on returns.

DfE has acknowledged the risk of market failure and plans to improve cost transparency by 2028–29, but the NAO cautions that current oversight is insufficient.

Concerns about outcomes

While most homes inspected by Ofsted are rated good or outstanding, the NAO stresses that many children are not placed in settings that meet their individual needs. This contributes to frequent moves, use of unregistered placements and poor long-term outcomes, including higher risks of being out of education or work after leaving care.

Recommendations for reform

The NAO calls for stronger cross-government oversight of the residential care market and sets out several recommendations, including:

• Defining DfE’s vision for residential and foster care and clarifying its role in regulating the private market

• Supporting councils to maintain and expand provision locally

• Developing a joint approach with the Department of Health and Social Care and the Ministry of Justice for children with the most complex needs

• Ensuring providers have sufficient skilled staff to meet demand

Wider context

As at March 2024, 16,150 looked-after children were living in residential care. Foster care capacity has also fallen, with a 4% drop in fostering households between 2020 and 2024 (9% excluding kinship arrangements). Residential care places cost around eight times more than foster placements.

Government has announced £270 million per year through the Children’s Social Care Prevention Grant until 2028–29, alongside £563 million in capital funding to rebuild, repair and expand secure homes. However, the NAO warns that structural change and improved oversight will be essential if reforms are to succeed.

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.”