Local authorities in England spent an average of £318,400 in 2023-24 on residential care for each looked-after child placed in children’s homes and other supported accommodation, nearly double the figure recorded in 2019-20, a National Audit Office study has found.

The NAO said total spending on residential care rose from £1.6 billion to £3.1 billion over the period, while the number of children in residential settings increased by about 10% to 16,150. The study attributed the sharp rise in costs to a shortage of provision, high fees charged by private providers and complex financial arrangements that the Department for Education has struggled to understand.

The report said local authorities are legally required to secure placements for children in their care and are therefore competing in a tight market. Councils spent the equivalent of about £6,100 per week per child on average, while the Local Government Association highlighted individual placements that can cost as much as £63,000 a week.

The NAO said the market structure has allowed some providers to be selective about which children they accept, taking into account the level of support required and the potential for higher profits. Seven of the 10 independent providers with the most homes are owned by private equity firms, according to the study.

A Competition and Markets Authority review published last year concluded that the 15 largest private providers of children’s homes had average profit rates of 22.6%. Following that review, the government said in November it would pursue reforms to the sector to tackle what it called unacceptable profiteering.

The Children’s Wellbeing and Schools Bill, currently before Parliament, includes measures aimed at increasing provision, reducing the need for residential placements and constraining provider profits. The NAO, however, said the Department for Education did not have a clear vision for implementing a national strategy and lacked sufficient insight into the complex ownership and financial structures of many providers.

The report also highlighted the impact of the supply shortage on families. Nearly half of looked-after children placed in residential settings were housed far from home, with more than six in 10 children in the South West placed more than 20 miles from their families.

Tory Member of Parliament Joe Robertson said the figures were "shocking" and called for “a complete overhaul” of the system, describing it as "more than dysfunctional — it is broken." A Department for Education spokesman said ministers remained prepared to act, saying the department "will not hesitate to take further action to cap provider profits if unacceptable profiteering continues."

Local authorities, regulators and campaigners have previously warned that the sector faces workforce shortages, rising demand and a fragmented provider market, factors that policymakers say have contributed to escalating costs. The NAO recommended that the DfE clarify its strategy, improve financial oversight of providers and work with councils to expand local provision so fewer children are placed far from home.

The NAO report follows sustained scrutiny of the children’s residential care market by parliamentary and regulatory bodies. Government ministers have said legislative and regulatory changes are intended to curb excessive profits, increase transparency of ownership and financial arrangements, and promote the development of a broader range of local services to reduce reliance on high-cost placements.

The findings present immediate challenges for councils already facing budgetary pressure and for the Department for Education as it seeks to enact reforms while ensuring continuity of care for vulnerable children. The NAO advised close monitoring of progress against any new measures and urged timely action to address both the market failures identified and the impact on children and families.