Aged care reform success: understand your costs

It is important for aged care providers to know which of their services are viable and where margins can be made, says Jennene Buckley.

Aged care organisations need to know which of their products are viable and where margins can be made, industry expert Jennene Buckley writes in the sixth article in this series.

Priority 6: Understand your costs and margins

Alongside workforce shortage, the financial viability of aged care operations is a key priority shared by service providers across the sector. With the pending move to a case-mix and activity- based funding approach to residential aged care and home care programs, including fixed pricing for all home care services, there is a need to consider implementing activity-based costing (ABC) to assist in both operational and strategic decisioning making. 

An ability to gain an accurate understanding of what products or services are making a margin and what services are making losses will assist in:

  • prioritising investment in service redesign and digital transformation to streamline services and find efficiencies where possible
  • making decisions on what services a provider will cease, continue or commence delivering. 

What is ABC?  

Under activity-based costing, a provider’s goal is to determine the actual cost of services, supplies and overheads on a per-case basis. For example, a case could be the total cost per day of caring for a resident within an AN-ACC class or the cost of delivering a service type within the new Support At Home program. 

It is necessary to consider travel time, travel distances, cost of supplies, remuneration, cost of recruitment and so on.

This includes identifying fixed, variable, direct and indirect costs, and allocating or apportioning these costs as accurately as possible across the different products and services to determine a true cost of a service instance or case.

It is important to note also that these costs will vary across geographic areas within an organisation. That is, the cost to deliver an hour of registered nursing in home care on Sydney’s northern beaches is not necessarily the same as the cost of delivering the service on Thursday Island in the Torres Strait or an hour from the Gold Coast.

It is necessary to consider travel time, travel distances, cost of supplies, remuneration, cost of recruitment and so on. Similarly, in residential care, there can be significant variances in the cost of operations between regional, rural, remote and metropolitan settings.

Be cautious about focusing on growing your services or winning new business in the belief that boosting income will solve cash flow and margin issues.

Accessing data from various business systems

This level of costing sophistication may require providers to consider how they can access customer, human resource and financial data through an integrated system. In the hospital sector, providers often use costing software that sits above these core platforms to facilitate this level of granular costing data. 

A final message for providers is to be cautious about focusing on growing your services or winning new business in the belief that boosting income will solve cash flow and margin issues. This could be fatal for some providers if there is not a good understanding of what products and services are viable and where margins are made within the existing business model.

Jennene Buckley is founding partner at Enkindle Consulting, which provides business advisory, strategic and operational planning, and transformation service to the aged care sector.

Read next: Understand your client experience

Read previous: Undertake a digital transformation

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