Profitability is lagging

Results of the 2012 Bentleys Aged Care Survey, released this week, have revealed important insights into how current aged care financing is affecting providers’ profitability and the sustainability of the industry.

Consumer funding and investment attraction will be critical to sustaining the aged care sector and ensuring enough beds for future generations, according to new details on the financial health of the sector.

Results from the 2012 Bentleys Aged Care Survey, released this week, indicate lagging profitability in the industry, with the majority of aged care facilities clocking increasing expenses that are rising higher than the rates of income received.

Bentleys’ director and aged care specialist, Heath Shonhan, said the survey broke down costs across care, services and accommodation.

It found that care costs now represent 67 per cent of the average provider’s expenses (up from 65.3 per cent in 2011); accommodation at 15 per cent and services at 18 per cent.

“It also found that care costs (where subsidies are generally first directed and which include items like nursing and chemist supplies), jumped 11.58 per cent between 2011 and 2012,” said Mr Shonan.

“This is opposed to average income – including subsidies, consumer and other funding combined – which grew at only 7.97 per cent in the past year.

“Average services costs (like cleaning and catering) grew 9.07 per cent since 2011 while accommodation costs (like energy and rates) decreased slightly, down 1.19 per cent on last year.

“With the bulk of subsidies being directed into care, providers are looking elsewhere to cover those additional costs while funding the capital expansion needed to look after the next generation of aged care residents.”

The annual survey, now in its 18th year, aims to reveal important insights into how current aged care financing affects providers’ profitability and the sustainability of the industry.

The phase two survey results, announced this week, represent the profit and loss and other operational data of approximately 195 aged care facilities around Australia, and build on the phase one data released by Bentleys in January.

Phase one of the survey, which analysed the 2011-12 general purpose financial reports of 246 facilities, found accommodation bonds make up almost a third (31.17 per cent) of total financing. This percentage has steadily increased from 16.83 per cent in 2005-06.

“Australia is shifting from being a society that can cover the majority of costs for aged care, to one with a higher population of elderly residents and less taxpayers,” said Mr Shonhan.

“At the same time, baby boomers accustomed to higher standards in services and accommodation, are moving into aged care.

“Unfortunately, the average net profit stands at 7.8 per cent, well below 2005-06 levels of 9.95 per cent, and is not enough to fund capital expansion.

“This is where consumer funding and increased investment are critical to meet these demands.

“Consumer funding is likely to grow substantially in the coming years, particularly as individuals’ capacities to contribute increases, through superannuation and personal wealth.”

The Aged Care Funding Authority (ACFA) will make recommendations on aged care service charges to the Minister for Health and Ageing this May.

The potential for the sector to attract investment is a particular focus for ACFA, and can be gauged by the level of return on equity (RoE).

“RoE measures likely investment returns and so determines the likelihood of investment into the aged care sector to help meet current and future demands.

“This year’s survey found the average RoE to be at 6.57 per cent, which for comparison’s sake, is not that much greater than other passive, low-risk investments like term deposits (RoE of about four to five per cent) and managed funds.

“Investors are likely to be drawn to investments with a return on equity in excess of 10 to 12 per cent.”

According to Shonhan, the survey results also point to the increasing imperative to focus on efficiency measures in aged care, such as upgrading technology to “by-the-bed” tablet record keeping. Further efficiencies can also be gained through consolidation or group purchasing arrangements for clusters of smaller aged care providers.

“The survey found that facilities with more beds (60 or more) performed better, as administration costs were able to be spread out over more residents.

“Consolidation of services is inevitable in the future, as taxpayer funding subsides and the sector seeks further efficiency by cutting down on multiple administration and other costs.

“Even if not in the immediate plans, smaller aged care providers should give consideration to whether being a consolidator or becoming consolidated would be a viable option for the future.” 

The Bentleys team will present the results of this year’s survey at seminars in Sydney on 5 April and Melbourne on 16 April.

Benchmarking reports will be available for download by participants at the aged care survey website

Bentleys is an association of independent accounting firms in Australia with specialist experience in the aged care and retirement village industries.

Tags: acfa, aged, aged-care-funding-authority, bentleys, care-survey, financial-health, health-shonan, loss, profit,

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