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Bigger defaults on aged care bonds could occur, ACFA told

Government should mandate the regular publication of financial details for each residential aged care provider, the financing authority hears.

Dr Richard Cumpston, a consulting actuary and director of Australian Projections, says that while 10 aged care providers have defaulted in the nine years to 2015 with an average cost of $4.3 million, his analysis shows that “much more costly defaults could occur.”

Richard Cumpston

Dr Cumpston detailed the new analysis in a submission to the Aged Care Financing Authority, which is undertaking a review of the current arrangements for the government guarantee of aged care bonds.

His analysis illustrating the large sizes of potential failures shows there were four providers in the second largest grouping, which each had an average of 4,920 residential places and average bonds of $466 million.

“If one of these four providers were to default then perhaps half of the bonds might have to be repaid from external sources, at an average cost of about $233 million,” Dr Cumpston wrote.

The largest grouping was made up of just two providers, which each had an average of 10,076 aged care places and average bonds of $954 million.

The analysis was based on data supplied by the health department in August 2016, showing residential place numbers for 971 providers, made up of 847 groups.

Dr Cumpston’s analysis showing the “large sizes of potential failures”

Dr Cumpston argued that one much-needed step is the regular publication of financial details for each residential care provider.

“This has been done for many years for general insurers,” he said.

“Regular publication of financial details for all providers would help create a better-informed industry, more able to deal with regulators and finance sources.”

On the question of whether government or aged care providers should pay to cover the costs of guaranteeing bonds after a default, Dr Cumpston said the automatic triggering of a retrospective levy on providers may be unfair as “a possible cause of a default is inadequate government supervision.”

Given residential providers receive about two-thirds of their income from government, any moves requiring providers to contribute towards the funding of a guarantee pool “would need slightly higher government payments to providers to maintain their financial viability,” he said.

On the role of bank guarantees or insurance to cover the payout of bonds, Dr Cumpston argued that “incompetence is not insurable” and banks and insurers would need very high charges to justify their involvement.

Growing bond pool

The value of accommodation bonds in the sector has been steadily increasing – to about $20 billion currently – following changes to how older people fund their residential aged care were introduced in 2014.

In November 2015 the Commonwealth, which is ultimately liable for the repayment of bonds should a provider become insolvent, tasked ACFA with reviewing the current scheme and examining any alternatives.

Australian Ageing Agenda recently reported that provider peak bodies have told the ACFA review there is no compelling case to change the guarantee scheme given most aged care operators have adequate prudential arrangements and the government can already levy industry to recoup costs (read that story here).

Department of Health officials last week confirmed that ACFA’s report, along with a review into the department’s prudential monitoring arrangements being conducted by Ernst & Young, will both inform the aged care reform review, which is examining the Accommodation Bond Guarantee Scheme.

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One Response to Bigger defaults on aged care bonds could occur, ACFA told

  1. Peter Stewart March 10, 2017 at 2:50 pm #

    Easily fixed – all residents pay daily

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