Aged care in crisis: Facilities’ dire need for funding and efficiencies

by FM Media
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The results of the 2012 Bentleys Aged Care Survey reveal a sector in crisis and an urgent need to focus aged care reform on encouraging profitability in the sector and increase efficiencies through upgrading technology and group purchasing.

There is an urgent need to focus aged care reform on encouraging profitability in the sector as weakened financial performance places the future of some facilities in jeopardy, the results of the 2012 Bentleys Aged Care Survey indicate. Consumer funding and investment attraction will be critical to sustaining the sector and ensuring enough beds for future generations.

WEAKENED FINANCIAL PERFORMANCE
Preliminary results from the 2012 Bentleys Aged Care Survey indicate that while aged care providers have improved their financial capacity to protect consumers through improved liquidity management, profitability continues to lag. The survey’s phase one ‘Balance Sheet Health Check’ is based on the 2011-2012 general purpose financial reports of 246 facilities nationwide.
“With an ageing population continuing to place increased demands on aged care, it’s imperative providers safeguard their long term financial viability so they can continue to operate well into the future,” Bentleys director and aged care specialist, Heath Shonhan states.
“Bond repayment capacity is at historical highs, with the average provider able to pay back 98.35 percent of bonds compared to 85.65 percent in 2005/06, reflective of a focus on increasing consumer protection. Gearing and liquidity measures, which reflect providers’ abilities to repay debt, have also increased as providers stockpile cash reserves and defer new costs like capital works.
“Unfortunately, however, this year’s survey identifies an average net profit margin of 7.8 percent, well below 2005/06 levels of 9.95 percent. Return on assets has decreased over the same period as well – from 2.95 percent to 2.58 percent – while return on equity (RoE) is at a relatively low 6.57 percent.”
RoE has been targeted as a key measure for the Federal Government’s Aged Care Funding Authority (ACFA) in its determination of the likelihood of investment into the aged care sector to help meet future services demands and inform its advice to the Minister for Health & Ageing on how pricing and funding reforms are affecting the industry.
Shonhan also expressed concern over the financial disparity between urban and non-urban providers. “This year’s survey continues to highlight the disparity between urban and rural aged care service provision. Urban providers earn on average $12,520 per place per annum, compared to $11,277 for non-urban providers,” he notes.
“City-based facilities have 33 percent higher net tangible assets per place and better profits, return on assets and return on equity. In addition, accommodation bonds make up a third (34.64 percent) of total financing for urban providers, but less than a quarter (24.86 percent) for non-urban providers, indicating higher access to consumer funding via bonds for the city-based providers.
“As part of the Federal Government’s Living Longer Living Better reforms ACFA is charged with determining the methodology for governing the level (or levels) of the accommodation payments that an approved provider can levy on care recipients for entry to an aged care home from 1 July 2014.
“It’s integral any future legislation takes into account differing financial circumstances between urban and non-urban providers, and the effects of variances like local property prices on residents’ capabilities to pay accommodation bonds.”

CARE COST INCREASE:
CONSUMER FUNDING, INVESTMENT AND EFFICIENCIES CRITICAL

Phase two survey results build on this aged care provider Balance Sheet Health Check with profit and loss and other operational data to provide individual provider benchmarking reports.
According to Shonhan, results indicate lagging profitability in the sector, with expenses increasing at higher rates than income, and that consumer funding and investment attraction will be critical to sustaining the aged care sector and ensuring enough beds for future generations.
“With greater focus on the decoupling of care, services and accommodation, the survey broke down costs across those categories, finding care costs now represent 67 percent of the average provider’s expenses (up from 65.3 percent in 2011), accommodation at 15 percent and services at 18 percent,” Shonhan states.
“It also found that care costs (where subsidies are generally first directed and which include items like nursing and chemist supplies), jumped 11.58 percent between 2011 and 2012. This is opposed to average income – including subsidies, consumer and other funding combined – which grew at only 7.97 percent in the past year.
“Average services costs (like cleaning and catering) grew 9.07 percent since 2011 while accommodation costs (like energy and rates) decreased slightly, down 1.19 percent on last year.
“With the bulk of subsidies being directed into care, providers are looking elsewhere to cover those additional costs while funding the capital expansion needed to look after the next generation of aged care residents,” he notes.
“Australia is shifting from being a society that can cover the majority of costs for aged care, to one with a higher population of elderly residents and less taxpayers,” Shonhan continues. “At the same time, baby boomers accustomed to higher standards in services and accommodation are moving into aged care.
“Unfortunately, the average net profit stands at 7.8 percent, well below 2005-06 levels of 9.95 percent, and is not enough to fund capital expansion. This is where consumer funding and increased investment are critical to meet these demands.
“Consumer funding is likely to grow substantially in the coming years, particularly as individuals’ capacities to contribute increases, through superannuation and personal wealth.”
The potential for the sector to attract investment is a particular focus for ACFA, and can be gauged by the level of RoE. “RoE measures likely investment returns and so determines the likelihood of investment into the aged care sector to help meet current and future demands,” Shonhan states.
“This year’s survey found the average RoE to be at 6.57 percent, which for comparison’s sake, is not that much greater than other passive, low-risk investments like term deposits (RoE of about 4 to 5 percent) and managed funds. Investors are likely to be drawn to investments with a return on equity in excess of 10 to 12 percent.”
According to Shonhan, the survey results also point to the increasing imperative to focus on efficiency measures in aged care, such as upgrading technology to ‘by-the-bed’ tablet record keeping. Further efficiencies can also be gained through consolidation or group purchasing arrangements for clusters of smaller aged care providers.
“The survey found that facilities with more beds (60 or more) performed better, as administration costs were able to be spread out over more residents,” Shonhan notes. “Consolidation of services is inevitable in the future, as taxpayer funding subsides and the sector seeks further efficiency by cutting down on multiple administration and other costs.
“Even if not in the immediate plans, smaller aged care providers should give consideration to whether being a consolidator or becoming consolidated would be a viable option for the future.”
The Bentleys team will present the results of this year’s survey at seminars in Sydney on 5 April and Melbourne on 16 April to assist providers to prepare for their long-term future. Benchmarking reports will be available for download by participants at the aged care survey website, while industry participants, banks and other interested parties can purchase the data from the website.

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