‘Dysfunctional’ children’s residential care market driving poor outcomes, NAO warns

Spending on residential care for looked-after children almost doubled in just five years, hitting £3.1 billion in 2023–24 – the equivalent of £318,400 for each place. Despite this, two-thirds of children in residential care are placed outside their local authority area, with nearly half living more than 20 miles from home. The NAO says children are being pushed into placements that do not reflect their needs, increasing the risk of repeated moves, confinement without consent, or even placement in unregistered, illegal homes.

The watchdog says the Department for Education (DfE) and local councils lack insight in a “dysfunctional” market dominated by private providers, who run 84% of children’s homes. The 15 largest operators reported profit margins averaging 22.6% between 2016 and 2020, with fees rising faster than inflation. Local authorities, stripped of power and choice, are left scrambling against one another for scarce placements in what the DfE itself has admitted is one of its most significant market risks.

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. 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.

Although most children’s homes are rated good or outstanding, the NAO points out that quality ratings mask deeper failures. Too many children are left isolated, disconnected from schools and communities, and face poor long-term outcomes, with care leavers disproportionately out of education, training or work.

At the heart of the problem is the DfE’s lack of oversight. The Department does not hold basic financial data from providers, making it impossible to judge fair costs, tackle excessive profits, or even define what constitutes a reasonable price for care. Plans to improve transparency and introduce oversight measures are not scheduled until 2028–29 – a delay the NAO warns risks entrenching profiteering and poor outcomes for years to come.

While reforms from the Children’s Wellbeing and Schools Bill and MacAlister Review are showing signs of improvement for the sector, the NAO makes clear that change is slow, fragmented and far from matching the urgency of the crisis. There is still no clear national vision for the future of residential and foster care provision, no robust cross-government plan for children with the most complex needs, and no credible workforce strategy to address chronic shortages of skilled staff. Councils, meanwhile, are left with ageing, underfunded provision, rising repair bills and growing dependence on costly private placements.

Gareth Davies, Head of the NAO, said the current system is both unsustainable and failing children. “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.”