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Major financial analysis challenges common beliefs


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).

Bruce Bailey

Bruce Bailey, RSM Bird Cameron

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



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2 Responses to Major financial analysis challenges common beliefs

  1. Michael June 10, 2015 at 6:19 pm #

    What a fascinating report, not because it tells us anything useful but because it is such gibberish and such a waste of taxpayers money. Worse still it sends such an appalling message “The results show good providers can make money in all of the locations,” This equates good with making more money. This encourages providers to strive for better financial performance and not better care which will suffer.

    Baldwin’s recent research in Australia supported by multiple international studies (that I know of going back even further to 1994) show that the most profitable providers are profitable because they employ fewer nurses and provide poorer care.

    Without considering these two critically important variables the figures given are as unreliable as those from the accreditation agency. They simply show that some providers spend more on care than others.

    What is clear is that in the current competitive market focused on growth and profitability, any additional funding is likely to go towards preparing to float on the market or to acquire a competitor that is unable to compete because it provides better care.

    It is critically important that no more funding be given to the sector until we have urgently set in place a process for collecting accurate and useful information and then tracking what happens.

    Any additional funding provided now will be wasted – and one suspects that much of the last round of funding already has been. To the extent that it enables poorer providers to acquire better ones any additional funding will compromise care even further than it has already!

    Michael

  2. Michael June 21, 2015 at 5:24 pm #

    I have at last had a chance to look at the full report by ACFI and so correct my criticism made on the basis of the report above. The full report did look at staffing and came to the conclusion that there was no difference in the number of registered nurses and agency staff employed between groups and no difference in staff turnover. It did not evaluate care.

    The figures given were distorted in the report because the group sizes were unequal (Not-for profit 544, For-profit 372 and government 108) and only the raw figures without percentages were given. I calculated the percentage figures for the best and the worst groups. This showed that 44% of for-profits and only 6% of larger number of not-for-profits and smaller number of government groups each were in the best performing (top 20%) Group 1. In the worst performing Group 4 there were 17% of for-profits, 38 % of not-for-profits and 65% of the government facilities.

    The other figures show that the poorest performers in Group 4 make 18% less income than the best yet spend 16% more on their nursing homes. So those figures show that wealthy city dwellers paying more to the most profit focussed providers are having much less spent on the nursing homes where they are cared for. That is very much what you might expect from the information coming from international studies and from Baldwin’s paper in Australia.

    I am not claiming that that is an accurate assessment because the data does not allow you to draw any accurate conclusions. What I am saying is that until you collect all the data you need to have and assess it properly you have garbage in and garbage out. You get what you want and not what you need. Worse still the policies you adopt based on that incomplete data can be harmful. But the issue of profits at the expense of care needs to be resolved and the data that we collect in Australia does not do that. Consultants who are being paid for the reports you may want to hear will not tell you that.

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