The real bellwether on reform success

Dr Henry Cutler analyses the potential implications of the Aged Care Roadmap proposals and identifies some key gaps such as the impact of the NDIS and the need for a robust quality performance framework.

Dr Henry Cutler analyses the potential implications of the Aged Care Roadmap proposals and identifies some key gaps such as the impact of the NDIS and the need for a robust quality performance framework.

Recent aged care reforms have monumentally impacted residential care. They have changed the behaviours of care recipients, providers, and government, and shifted incentives for setting the price, quality and quantity of care and accommodation.

Dr Henry Cutler
Dr Henry Cutler

With the low-hanging fruit already picked, developing a pathway to further reform now becomes harder.  Remove regulation too fast and some providers may go under. Remove too little regulation and providers won’t meet future resident preferences, effectively capping resident wellbeing.

The Aged Care Sector Committee has recently released their Aged Care Roadmap, developed to advise the Federal Government on future reform directions in the sector over the next five to seven years.

Its overarching theme is to replace a large chunk of government regulation for market mechanisms. Providing more consumer information, making prices more transparent, and allowing providers greater discretion on what should be supplied, where and at what price, is assumed to increase system sustainability and value.

It is true, market mechanisms can achieve these goals, but they must be handled with care, with full recognition and commitment to social objectives and community service obligations.

More user pays

The roadmap suggests means testing all income and assets in the long term to improve fiscal sustainability of the aged care sector.

Greater means testing combined with uncertainty around whether someone will need residential care may result in two types of older clients in the future. These include those who saved to cover the cost of their care, and those who saved relatively little, instead spending their money prior to entering care and relying on the public purse.

One constraint on greater means testing is the large proportion of residents who are asset rich and income poor. In 2012, around 60 per cent of households with someone 75 years and older had an income less than $35,000 per year, while around 60 per cent had a net worth greater than $450,000. Most of this wealth was tied up in the family home, despite compulsory superannuation.

One way the government can build on a more user pays system is to help older Australians access that housing wealth. The roadmap recommends the government help establish a deep market for a debt free equity release product, echoing the Productivity Commission’s cornerstone recommendation for aged care reforms in 2011.

A debt free equity release product would allow the owner to sell a proportion of their home for an agreed price, thereby receiving a lump sum cash payment or cashflow. Claim on the value of that proportion is only made once ownership of the home is transferred, such as through bequest or selling the home. Reducing housing price risk may make this product more palatable compared to a reverse mortgage, although the consumer will still pay for the privilege.

Facilitating greater access to housing wealth would also allow the government to gradually increase co-contributions to care, particularly from residents when dependents or partners remain in the home once a person enters residential care, or when assessing the means to pay for home care services.

Care recipients would be the greatest beneficiaries from accessing housing wealth, particularly within a more market-oriented system. While it may mean less money for the children, care recipients could purchase better services to improve their quality of life. If providers were allowed to charge more for better care quality, residents could better express their preferences for improved care quality through their purchasing decisions.

Impact of greater competition on quality

The roadmap aims to promote competition through a number of reforms. One of the most contentious is to relax, and then remove, supply side restrictions on residential care beds. The objective is to reduce barriers to entry for new organisations into local areas.

The Aged Care Roadmap proposed further major reform
The Aged Care Roadmap proposed further major reform

While it makes eminent good sense to free market access, one major government risk is the substitution of less expensive home care for increased residential care. No one has measured unmet demand for residential care because of supply side restrictions.

Another major government risk is that some providers will buckle under competitive pressure, increasing exposure to lump sum payouts through the Accommodation Bond Guarantee Scheme. The roadmap suggests replacing the bond guarantee scheme, but asking providers to insure themselves will increase costs, regardless of whether lump sum payments are treated as senior or subordinated debt.

Competition can also lead to unintended consequences, and the government has got it wrong before. In May the Turnbull Government announced it would tighten regulation around pathology collection centres. Removing supply side restrictions in 2010 had pushed rents for GP co-located collection centres to unsustainable levels, as pathology providers raced to secure test volume.

Generally within healthcare markets, when organisations compete on price and quality, quality outcomes are unclear, and will depend on how consumers respond to quality and price. The less responsive consumers are to quality, or more responsive to price, the more competition drives down quality.

When prices are fixed, organisations generally compete on quality. Fortunately Aged Care Funding Instrument (ACFI) prices are fixed across providers, which bodes well for the impact of competition on quality in residential aged care. Providers are likely to concentrate on deciding how much care and support they should produce, as represented by volume and quality, rather than price.

However, if quality is not measured appropriately, or residents and their carers cannot interpret what quality metrics mean for quality of life, then residents won’t respond to improved quality. This could generate a competitive residential aged care sector with suboptimum quality levels.

Role of quality measurement

Consumers currently find it difficult to adequately determine which residential care provider best meets their needs. Care is an experience good, whereby care quality is only determined once the resident enters a facility.

Residents are also limited in exercising their displeasure with care quality given several barriers exist to moving into another facility, such as waiting lists and the personal cost of moving. This reduces incentives for providers to invest in better care quality, instead investing in observable quality, such as improved facilities and amenities.

The roadmap aims to improve quality through developing core aged care standards and quality indicators, which are to be publically reported. Australia is somewhat lagging in this regard, with the US publically reporting nursing home quality since 2002, and the UK publically reporting star ratings for nursing homes since 2008.

The government recognises the importance of publically reporting quality, and has recently introduced the voluntary National Aged Care Quality Indicator Program. It contains three clinical metrics to proxy quality; pressure injuries, use of physical restraint and unplanned weight loss, while the government trials potentially more useful quality of life measures.

While providers are currently improving care  around these three clinical indicators, there is limited opportunity to cover the marginal cost of improved care quality. Consequently, providers may shift resources from other areas, becoming myopic and tunnel visioned, as they strive to meet required rates of return. This can lead to underinvestment in unobservable quality factors, long-term strategic directions, and preventative programs.

The National Aged Care Quality Indicator Program will impact residential care in two more important ways.

First, residents will be able to better express their preferences for quality through a more informed choice. Evidence from the UK suggests publically reporting quality makes demand more sensitive to quality, providing a clearer signal to providers around the importance of quality, and how much to invest in quality.

Second, it will establish a benchmark for providers to compare and contrast their quality, to the extent that providers participate in the programme. This will highlight areas that require further attention, or areas of success that can be emulated by others.

While market incentives to improve quality are currently stifled through supply side restrictions, high occupancy rates, and caps on ACFI funding, the quality indicators program will become a powerful marketing tool for providers. But, the full potential of the program will only be realised if these constraints are relaxed.

Quality and financial performance

If reforms increase competition, providers with good financial performance are expected to deliver higher quality care

If further reforms increase competition, providers with good financial performance are expected to deliver higher quality care. Indeed this relationship was found in the US nursing home sector within the context of a more competitive market, suggesting profitable providers improve quality in the pursuit of further demand.

However, publically reporting quality can also supercharge the relationship between financial performance and quality. For example, the introduction of the Nursing Home Compare website in the US generated a positive relationship between profits and quality. This relationship was stronger in more competitive markets, and for companies operating on a for-profit basis.

A financially healthier residential care sector will improve the impact of the national quality indicators program on quality, particularly if supply side constraints are removed. This has implications for government in setting ACFI prices, and deciding whether to remove price caps. The difficult part is getting the balance right, because marginal quality improvements are likely to diminish as profits increase.

Quality and the NDIS

The National Disability Insurance Scheme is the largest social program introduced by an Australian government since Medicare. The rollout progressively starts on 1 July 2016, and when fully operational in 2019-20, is expected to cost $22.2 billion. About two-thirds will be spent on carer wages.

When Australia is close to full employment, this massive increase in disability services will no doubt suck workers from other sectors, with the aged care sector holding the most relevant skills. The increase in demand for workers will drive up residential carer wages, which means the marginal cost of quality will also increase, reducing the ability of providers to compete on quality without increased care prices.

Due to the tight government fiscal environment, the sector cannot rely on the ACFI. The roadmap recognises this reality, preferring to have consumers contribute to their care costs if they have the means. Another avenue is to cross subsidise quality through improved efficiencies, or higher accommodation prices.

If additional revenues and improved efficiencies fail to cover increased wage costs, some providers will fail. Other providers may attempt to maintain their labour costs by reducing the number of staff per resident or employing a greater proportion of less qualified staff.

An increase in less qualified staff is not without precedent, occurring between 2007 and 2012 when rates of return were considered too low in the residential care sector. At the same time resident acuity levels continued to increase.

This is not to say quality also decreased. While evidence suggests total number of nurse staff is positively associated with better quality across a range of indicators, the relationship between nursing staff mix and quality is complex. A greater proportion of qualified staff within a facility does not necessarily lead to better quality care even when measured using clinical indicators and accounting for other characteristics that impact quality, such as resident acuity and facility characteristics.

But, significant wage increases within residential care will impact financial performance, staffing levels and mix, management practices, work processes and eventually morale. This would have an impact on quality. ‘Non-essential’ programs that significantly improve resident wellbeing, but do not have their impact explicitly measured, will be cut first.

The road forward

The future is unpredictable, particularly given the government faces a tight fiscal environment. The NDIS also starts to roll out on 1 July 2016, and once fully operational, will be the largest exogenous shock to the residential aged care workforce providers have ever seen.

While the roadmap offers plenty of reforms to consider, there is no proposal around developing a systematic evaluation framework to monitor the impacts of reforms. The Aged Care Financing Authority will continue to monitor financial sustainability of aged care providers, but the real bellwether on reform success should be quality.

The importance of establishing a robust and mature quality performance framework before other big ticket reforms cannot be underestimated. Without it, the government risks creating a more competitive market that generates worse outcomes, as providers cut unmeasured quality to lower marginal costs in their attempt to survive with lower occupancy rates, and more expensive wages.

Dr Henry Cutler is the inaugural director of Macquarie University’s Centre for the Health Economy.

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