LLLB positive for bottom line: ACFA

Chart showing trend in revenue and expenses in residential aged care in ACFA report

By Linda Belardi.

The Aged Care Financing Authority’s inaugural report released on Monday estimates an extra $3 billion will flow to the sector in the first year of the Living Longer, Living Better reforms due to the removal of regulatory restrictions on charging for accommodation in high care places.

The Department of Health and Ageing predicts an additional 74 000 new aged care places will be needed over the next decade, requiring about $25 billion of investment, which could be potentially funded by this broader base of accommodation charges, the report says.

ACFA says that while the transition to the new system may raise some challenges for providers, many aspects of the reforms could be expected to have a positive impact on the sector.

“The impacts will need to be closely monitored as they will vary between providers dependent on their business models, operating and capital structures and other factors. For example, low care providers and those more dependent on lump sum bonds may find the transition to the new system more challenging than others,” the report says.

In the first year, ACFA estimated a $402 million decrease in Refundable Accommodation Deposits or RADs in low care and extra services high care and said it would closely monitor these impacts.

James Underwood, Director of James Underwood and Associates, a management consulting firm specialising in aged care said he agreed with ACFA’s assessment of a positive impact from the LLLB reforms. But he said the likely reduction in net lump sum holdings of low care services and many of the newer high care services that already hold bonds through extra services arrangements must be addressed before 1 July 2014, not left for monitoring afterwards. 

“The providers who have built the newest and best high care services are likely to be the most affected – a very unfair outcome for those who have done the heavy lifting over the last 10 years,” said Mr Underwood.

“Let’s accept the likelihood of there being a significant proportion of new residents who would not pay lump sums to replace bonds paid to departing residents under the new system and let’s work out a fair plan to address this major loss of capital now, not leave it until after 1 Jul 2014,” he said.

Sector viability

In its analysis ACFA also reported that 70 per cent of residential aged care providers recorded a net profit, an increase from 57 per cent in 2008-2009 and that total revenue has grown faster than total expenses in recent years. 

The Australian Nursing Federation used the report’s release detailing the financial performance of the sector to apply public pressure to providers to sign up to the Workforce Supplement. 

ANF National Secretary, Lee Thomas said the report refuted claims by some providers that the sector was chronically under-funded and said aged care providers should stop “crying poor”.

ACSA and Catholic Health Australia hit back saying the ACFA report was based on old data and did not reflect the cuts to ACFI subsidies introduced in July 2012. 

“It is not until we have an independent cost of care study that we will be able to determine how much it costs to deliver quality aged care services and then be funded appropriately,” said ACSA CEO, Adjunct Professor John Kelly.

Heath Shonhan, director of accounting group Bentleys and head of its national health and aged care unit, said that while the majority of providers were profitable, the 30 per cent figure of unviable providers was concerning and pointed to a case for greater consolidation across the sector.

Mr Shonhan forecast that by 2020 the current number of 1054 residential aged care providers would drop to around 600 providers through a process of consolidation.

Investment activity

According to the report, an estimated total of $922 million of new building, refurbishment and upgrading work was completed during 2011-12, involving about 15.3 per cent of all homes. An estimated further $979 million of work was in progress at 30 June 2012, involving about 6.6 per cent of all homes. 

While the value of completed work and work in progress has been declining since the GFC, the proportion of aged care facilities planning building work has remained relatively consistent, said the report.

At 30 June 2012, the proportion of aged care facilities planning upgrading work, which includes both refurbishments and extensions was the highest it had been since 2007-08.

According to ABS data, the total value of building approvals has also been trending upward since the LLLB announcements. February 2013 had the highest total approvals ($201 million) for a single month since September 2006.

In the 12 months to April 2013, the average monthly total building approvals for aged care facilities was $98 million, up from $69 million the previous year and $62 million the year before that. 

Equity financing

As identified in the report, Heath Shonhan said the option of separately owned property and operating companies was emerging as a diversified business model.

“Already we are seeing investors who are entering the sector but not necessarily taking on the operating risk, just taking on the accommodation piece. As accommodation pricing becomes more flexible under the LLLB reforms that model will become more sustainable,” he said.

ACFA said it would continue to monitor investment drivers, investment activity and financiers’ sentiment, as well as the impact of accommodation payment changes and means-testing on access to quality of care and funding. 

Minister for Ageing Jacinta Collins said ACFA’s role was important and its advice influential.

She said its inaugural report represented a significant step forward in increasing transparency around funding, financing and pricing issues within the sector.

Senator Collins said she looked forward to ACFA’s future analysis of the characteristics of good performers and the barriers to improving performance.

Key statistics

• 84 per cent of providers had positive earnings before interest, tax, depreciation and amortisation
• The average net profit before tax margin was 5.6 per cent, with results varying across the sector
• Accommodation bonds were a significant source of funds and represented 48 per cent of assets for the sector
• Residents were the second largest source of funding and were estimated to contribute about $3.5 billion in 2011-12 into the residential aged care sector through care fees, periodic accommodation payments and retention amounts withdrawn from bonds
• Average return on assets for the sector was 5.5 per cent and average return on equity was 15.9 per cent
• The major expense item for the residential aged care sector was staffing costs, which represent an average of 64 per cent of total expenses.

Read ACFA’s full report on the funding and financing of the aged care sector.