The recent financial analysis of residential aged care operators has been welcomed by industry for its accuracy, and despite some surprising but favourable findings regarding regional providers, experts and industry have stressed the urgent attention needed for the rural and remote part of the sector.
As Australian Ageing Agenda reported on Wednesday, the Aged Care Financing Authority’s Factors Influencing the Financial Performance of Residential Aged Care Providers report highlighted the challenges facing regional providers, but also found that a regional location by itself was not necessarily a hindrance to financial performance.
Some 37 per cent of the providers in the top performing groups 1 and 2 were regional providers, Bruce Bailey, director of RSM Bird Cameron and a lead co-author of the research, told AAA.
However, ACFA said the specific financial performance of rural and remote providers were considered a subset of regional providers that required further analysis, which it would undertake and present to government by December 2015.
Heath Shonhan, director business advisory, Bentleys, said the characteristics identified in the report were are all things that Bentleys had been talking about for a number of years as a result of its own analysis, and that rural and remote needed to be the priority.
“Rural and remote has to be a key focus moving forward for the sector, primarily due to locational demographics, service input costs, a lack of scale, property market liquidity [and so on],” Mr Shonhan told AAA.
He also said that OEBITDA (Operational Earnings Before Interest, Taxes, Depreciation and Amortisation) was the wrong measure to use. “It overstates sector profitability and ignores a major input (the accommodation) of residential aged care. Depreciation on the capital assets used to provide the accommodation component of residential aged care is a critical component of the mix,” Mr Shonhan said.
Mr Shonhan said providers should be most mindful of the Statement of Principles set out by the Aged Care Sector Committee. “This foreshadows government’s funding intentions for the industry, including for example the shift to deregulation for home care supply from 2017; and is a significant framework for all providers to review their business strategies and models against.”
Similarly, on the need to focus on rural and remote, Ansell Strategic managing director Cam Ansell said the significance of the gap between earning potential for country homes should not be understated.
“The situation is not sustainable and puts at risk the quality of services and accommodation for people in non-urban environments,” Mr Ansell told AAA. He said:
“The demographics and service costs in many country areas result in very real scale and operational limitations. Many operate in a constantly uncertain environment and too many rely on local community support to keep afloat. Improved management might help, but we don’t believe this is the answer to such a huge disparity in financial returns between urban and non-urban providers.”
Mr Ansell said that while the report indicated that the viability supplement was well-directed towards the lowest performing homes, it should be emphasised that it was clearly not enough. “The information should be used to build policy for better resourcing of country services and government cannot tone down this issue under the ‘try harder’ tag.”
Leading Age Services Australia CEO Patrick Reid said the issues for this part of the sector had been identified by providers, peak bodies and communities and that this report showed government it was time for solutions.
“Right now there is an aged care crunch occurring in rural and remote Australia because there is insufficient funding and support at federal and state levels,” Mr Reid.
“Fluctuating demand for beds, staff recruitment and retention, reduced access to allied health services, higher costs to access training and support and anomalies in current funding schemes are the primary challenges for aged care providers in rural and remote areas.”
Economies of scale
Elsewhere, Mr Ansell said the report findings were useful and a big improvement in transparency on previous years and highlighted the limitations on the data from general purpose financial reports. However, he said the findings about provider scale were another area where the sector needed to be careful reaching conclusions.
The report suggested that “economies of scale from multiple facility ownership are not strong” as the analysis found that providers’ financial performance did not improve as the number of facilities owned increased.
Mr Ansell said: “We agree that you do not have to have a large portfolio to remain viable… As the report statistics correctly present, providers don’t always take advantage of their scale but there is certainly potential when group resources are well managed.”
He said roster management, through the rostering of care resources to meet the care needs of the residents, and resident funding, through the claiming of subsidies based on resident need, were the two most influential elements on financial performance that providers of all sizes could address.
“In residential aged care, most of your expenditure is for care staff costs. These are predominately site specific, so you don’t achieve economies through larger portfolio scale. Where larger groups create economies is through the sharing of clinical resources, care and administration systems and through the establishment of programs that minimise the compliance risks,” Mr Ansell said.
Also on the subject of scale, Louise Greene, director business improvement with The Ideal Consultancy, said there was evidence that both the aged care market and investors had a preference for portfolios.
Ms Greene noted the significant market consolidation that has occurred over the last two years, such as ECH Group’s exit from residential and its sale to the Allity group, consolidation of not-for-profit providers such as Catholic Homes and Villa Maria, the formation of ESTIA health care through consolidation of a number of smaller providers, and three aged care providers listing on the ASX in the past 18 months.
“Almost half of the respondents to [ACFA’s] qualitative survey indicated that they will expand with bank financing and lump sum accommodation payments as the preferred financing options. Top-tier banks have a clear preference to lend to providers who can spread risk across a portfolio, highlighting that both the aged care market and investors preference for portfolios.”
Overall, Ms Greene said the report needed to be considered in the context of the significant policy impacts and market changes occurring in the aged care sector.
“The report does not reflect the significant reforms and market changes that have occurred in residential care since 1 July 2014… all of which will have an impact on performance. Many large not-for-profit providers also operate home care packages and the significant changes to home-based care will impact overall financial performance.”
Ms Greene said the characteristics of strong financial performance may be more pronounced with the transition of aged care to a consumer-focused market-driven model, further market consolidation and the investment in infrastructure.
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