National Audit Office: Government needs better oversight to tackle market failures in children’s residential care

• Residential care costs reached £3.1 billion in 2023-24 – costing an average of £318,400 for each children's home place in that year
• Councils are forced to compete for spaces, with many children in homes that don't meet their needs, and nearly half placed in homes more than 20 miles away from their local area
• The Department for Education (DfE) lacks access to provider financial data, limiting its ability to assess fair costs, identify excessive profits, or define a reasonable price for care – key if it was to set a profit cap
• The National Audit Office (NAO) recommends government has better oversight of providers with proportionate data on costs, profits, staffing, and capacity to guide the market and support councils effectively  

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 - especially for children with complex needs - and a profit-driven market.

The NAO's latest report, Managing children's residential care, assesses DfE's response to challenges faced by local authorities in placing looked-after children in residential care in England.

Although most children's homes are rated good or outstanding¹ many children are not in a setting that meets their needs contributing to worse outcomes. 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. Children may also move frequently, be confined without consent² or placed in illegal, unregistered homes³. In the longer term, care leavers face higher risks of being out of education or work.

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 market⁴. 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.

Councils are competing for spaces in a mostly private market (84%) with mismatched supply and demand across local areas. 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 to 2020, the 15 largest private providers had average profit rates of 22.6% for children's homes with prices increasing above inflation.

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.

In response to the challenges, DfE has focused efforts on prevention, to avoid children needing to be looked after⁵. It has also started to make changes to the residential care system, such as with the Children's Wellbeing and Schools Bill, which include implementing recommendations from the CMA and MacAlister reviews (2022). However, changes are taking time to implement.

As the Children's Wellbeing and Schools Bill passes through the House of Lords, the NAO report outlines what DfE must consider for measures impacting children's residential care to be effective. DfE has started piloting regional commissioning, with some areas starting to work effectively together, but it has not yet committed to when regional commissioning will be rolled out more widely.

The NAO has several recommendations to support 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 buildings⁶ 

• 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.” 

ENDS
Notes to editors

Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.   

As at March 2024, there were 16,150 looked-after children in residential care. Residential care includes children's homes, secure children's homes, and supported accommodation which allows older children to live more independently. 

1. In 2024-25, Ofsted rated 82% of the 3,633 children's homes it inspected as outstanding or good, up from 76% in 2019-20. (Figure 6) 

2. In December 2024, the Children's Commissioner found that 31% of children in unregistered placements were subject to a deprivation of liberty order, 66% had special educational needs (compared to 18% of the overall pupil population) and 41% received mental health services (compared to 8% of all children). 

3. All residential homes, along with supported accommodation and independent fostering agencies, must register with Ofsted. Unregistered children's settings are illegal to operate. Local authorities use unregistered care where it can be difficult to find registered places for certain children. 

4. Between 2020 and 2024, the number of foster care households also fell 4%, or 9% when excluding fostering with friends and family. This reduces options for accommodating looked-after children: a 2022 Ofsted analysis of approximately 113 children in homes found over a third had foster care in their original care plan. A children's home place costs eight times as much as a foster place. 

5. For 2025-26, government announced a £270 million Children's Social Care Prevention Grant, subsequently extended annually to 2028-29. It also announced a further £557 million for children's social care reform, including prevention, between 2025-26 and 2027-28. 

6. From 2021 to 2025, DfE secured £563 million capital funding up to 2029. It will work with local authorities to rebuild and repair three secure homes, build two new ones and carry out improvement works on all others.