Single facility operators tend to get a better overall financial result than providers that own multiple sites, while having two beds per room isn’t necessarily a hindrance to high financial performance.
Further, while location is important, operating in a regional area doesn’t equate to financial hardship for all providers outside the cities.
These are among some of the more surprising findings contained in the Factors Influencing the Financial Performance of Residential Aged Care Providers report by the Aged Care Financing Authority, which the government released last week.
Complied by RSM Bird Cameron and PricewaterhouseCoopers, and based on a comprehensive analysis of the financial statements of providers as well as a qualitative survey, the report contains several findings that will challenge prevailing wisdom in the sector, such as the need for scale through acquisitions or mergers.
The analysis grouped providers into four categories, ranging from group 1, consisting of the top 20 per cent of financial performers, to group 4, consisting of those with the lowest financial performance.
The report was based on 2013 financial data and does not reflect potentially significant policy changes that have occurred since then, such as the cessation of the aged care payroll tax, the introduction of lump sum payments (refundable accommodation deposits) across residential aged care, and the introduction of the Higher Accommodation Supplement.
Size: economies of scale ‘not strong’
While the notion that “bigger is better” has become a management mantra in quarters of the sector, particularly as the government opens aged care up to market forces, the analysis found that providers’ financial performance did not improve as the number of facilities owned increased. This finding suggested that “economies of scale from multiple facility ownership are not strong,” the report said.
Single facility providers made up 63 per cent of all providers but were 69 per cent of the top performing group. Further, of the 646 providers that operated single facilities, 70 per cent were in the better performing groups 1, 2 and 3, compared with 30 per cent in group 4, the report noted.
Facility size, on the other hand, was a determining factor in financial performance, as the report noted that “the better performing groups had, on average, higher number of beds per facility.”
The analysis found that group 1 providers operated 80 beds per facility on average, compared to group 4 providers which operated 55 beds per facility on average. (The industry average is 68 beds per facility).
Another surprising finding was that having two beds per room wasn’t necessarily a hindrance on financial performance.
Bruce Bailey, director of RSM Bird Cameron and a lead co-author of the research, told Australian Ageing Agenda on Tuesday that “a high percentage in the top group had double rooms.”
The analysis found that “group 1 providers were more likely to have double bed rooms (17 per cent) compared with groups 2, 3 and 4 (10 per cent, 9 per cent and 7 per cent respectively).”
However, the report added: “The prevalence of double and multi-bed rooms may change in the future as a result of the industry moving towards a more consumer driven market.”
Location: not a clear-cut picture
The report highlighted the challenges facing regional providers, noting a gap of $7,175 per resident per year (in operating revenues less operating expenses) between regional providers and their counterparts in city or mixed locations.
“Lower revenue from both ACFI care revenues and resident accommodation income, across all ownership groups, contribute to this lower outcome,” it said.
Not-for-profit and government providers together represented 86 per cent of regional providers.
Nonetheless, a regional location by itself was not necessarily a hindrance to financial performance. Mr Bailey pointed out that 37 per cent of the providers in the top performing groups 1 and 2 were regional providers.
“The results show good providers can make money in all of the locations, so it’s about the quality of what they did that determines the result, more so than where they were located,” Mr Bailey told AAA.
The report noted that the viability supplement, which was intended to support regional providers, was “generally well targeted” as only 16 per cent of providers in the top two groups reported receiving it. Further, a number of providers who would have been categorised as group 4 were categorised as group 3 as a result of receiving the supplement, it said.
ACFA said that it considered specific issues affecting the financial performance of rural and remote providers, as a subset of regional providers, warranted “further detailed analysis and consideration.” It said the data available for the study, particularly at the facility level, was “limited in enabling ACFA to analyse, in sufficient detail, issues affecting rural and remote areas.”
In response to the report, the government has given ACFA until December 2015 to conduct a further analysis of the financial performance of rural and remote providers.
Half of providers intend to expand, few plan to exit
Elsewhere, in terms of the outlook among providers, the qualitative survey found that almost half planned to expand, while almost half intended to maintain the status quo and just 7 per cent planned to downsize or exit the industry.
The report noted that, of those planning to expand, bank loans and lump sum accommodation deposits were identified as the main sources of funding. “Capital grants and donations are important sources of funds for regional providers, mainly in groups 3 and 4,” it noted.
“I think that shows a positive sentiment in the industry, at the time that we did the survey, about the future,” commented Mr Bailey.
On the other end of the spectrum, many of the group 4 providers, those which had the lowest financial performance, “may not be primarily driven by a profit or revenue maximising motive,” the report noted.
It based this conclusion on the high proportion of not-for-profit and state and local government providers in this group, “likely with a focus on providing services in locations where such services might not otherwise exist.”
This was supported by the findings of the survey in which providers in this group indicated “they were not intending to leave the industry and intended to continue to provide services despite their lower financial performance.”
Access the full report: Factors Influencing the Financial Performance of Residential Aged Care Providers