COVID-19 is a catalyst to put the aged care sector on a more sound financial footing, writes Andrew Fressl.
COVID-19 has brought a number of long-simmering issues for the aged care sector to the fore, and none more important than efficacy and funding.
As the pandemic crisis stretches deeper into 2020, both issues have put the financial viability of aged care operations under increasing pressure.
As with many other industries affected by the pandemic, COVID-19 could be the catalyst that puts the aged care industry on a new footing, one that allows the sector to thrive while providing an important service to the community well into the future.
The key is a renewed focus on prudent financial practices, and there is no time for operators to waste. Coming into 2020, the aged care sector was grappling with challenges on multiple fronts:
- a shifting regulatory landscape and pressures arising from the royal commission
- greater scrutiny around service levels and the associated impact on costs and funding
- a decline of trust in providers
- the difficulty of attracting and retaining staff particularly in remote areas
- urging demand putting further pressure on funding.
Even in normal times these issues were having a material impact on the operational and financial capacity of service providers in a critical and complex industry. COVID-19 has accelerated this impact and left many operators reeling.
To date aged care providers have been focused on delivering the highest standard of care that their levels of funding allows, with long-term financial management taking a back seat. That is understandable – aged care is an essential community service and people’s lives depend on it.
It is striking that boards and management of residential aged care providers are entrusted with substantial refundable accommodation deposit (RAD) funds but some appear to have limited understanding of how to invest or manage those funds. Instances of financial mismanagement have, unsurprisingly, become more common.
The issue of sound financial stewardship of residential aged care operations is too big for industry stakeholders to ignore. Consider the following financial pressures that operators must simultaneously manage.
Pressure on capital inflows: Many new residents in facilities cannot sell their home to liberate funds to pay the RAD. Yet, residents who leave care, or their estate, require the RAD to be repaid, usually within a very short time frame.
This imbalance has caused an unwinding of RAD balances for many providers, which is a significant problem if the RADs are not cash-backed or if assets they have been invested in are not relatively liquid.
Capital outflows continue and could increase: Many groups have made substantial capital expenditure commitments that can have onerous impacts when they attempt to defer or unwind the obligations.
Increased pressure on already tight operational cash flows: Notwithstanding COVID-19 having exacerbated the issue, the industry has been grappling for many years with the problem of increasing costs in the absence of substantial additional funding.
If you are a provider in a remote area, the pressures described above are even more intense.
Resetting the operational footing
Based on our experience advising the aged care industry, the key to resetting the industry’s operational footing is improving access to financial information and controls, and accountability for financial decisions.
As providers and their boards deal with the tsunami that is COVID-19, it is critical that they take time to reflect on their financial situation. If the numbers do not add up, they need to make an honest assessment as to whether the necessary financial expertise and acumen are available to position the operation for long-term viability.
Time and liquidity, which refers to access to cash, are the preconditions to solving most business challenges. Board members and trustees of aged care groups need to understand their duties with regards to insolvent trading. If there are concerns on this front, they need to know what courses of action are available to them.
In an industry that is asset-rich but all too often cash-poor, the importance of providers having sufficient runway to address financial issues cannot be overstated. Financial discipline and control should be embraced as an enabler, not as a threat or unwelcome constraint.
A stable financial footing will give providers the certainty they need to continue to deliver the high standard of care that elderly Australians deserve.
Andrew Fressl is partner at McGrathNicol Advisory.