The future of finance – will bonds survive reform?
ACAA and ACSA have the answers to the big questions on the PC’s recommendations, but some in the industry are still worried about their future finances.
Above: ACAA CEO, Rod Young.
By Stephen Easton
The aged care system envisaged by the Productivity Commission (PC) fails to make accommodation bonds more attractive to consumers than periodic payments, which could undermine the financial viability of the industry, according to the CEO of Aged Care Association Australia (ACAA), Rod Young.
Mr Young said there was no doubt bonds were the preferred financing option among providers, and that the issue was of considerable concern within the industry as a shift to a cash-flow model, or the predominance of periodic payments over bonds, would erode providers’ capital base and force them to borrow more, at higher interest.
“There appears to be no incentive in the current scheme for a resident to pay the lump sum as opposed to a daily charge,” he said. “And if there continues to be no incentive, the number of bonds could decrease over time and that’s a direct financial threat to the industry.
“That’s something we’ll certainly be responding to the Commission about to ensure there is some balance between the two payment options. There appears to be no incentive at all, so the lump sum alternative becomes unattractive to future clients, and that creates concern in the industry about the future viability of providing aged care.
“The banks have already clearly indicated to us that there is cause for concern in that environment…and indications are that the cost of capital will likely be more expensive.”
But Klaus Zimmermann, the president of the non-profit sector peak body, Aged and Community Services Australia (ACSA), thinks it is too early to make dire predictions based on hypothetical situations, and sees no reason as yet why the current preference for accommodation bonds among consumers would change.
“My perspective is that you have to ask why consumers would make a different choice than they have in the past, unless there were incentives or disincentives for either option created by changes to Commonwealth law,” Mr Zimmermann said.
“If consumers are going to choose a periodic payment because of incentives created by legislation, then clearly that would have an impact on the industry, in terms of accommodation bonds providing a capital base.
“Providers will have to adjust their business models; the future is going to be different to the past, but I think we have to be careful that we don’t go down the path of too many hypotheticals.”
As the due date for responses to the PC’s draft proposals draws near, members of both organisations had their most pressing concerns addressed last Friday in a jointly-produced question-and-answer document.
The answers provided aimed to clarify exactly what the PC’s 500-page draft of Caring for Older Australians suggests, and were checked by Commissioners to ensure accuracy.
Both organisations broadly support the PC’s recommendations, including a new regulatory commission to determine payments for Commonwealth-supported residents that more accurately reflect the true cost of building facilities and providing care, while allowing reasonable returns to be made on investments.
Mr Young and Mr Zimmermann both expressed confidence that a detailed study into the cost of providing care by the proposed Australian Aged Care Regulatory Commission (AACRC) would deliver increased funding for supported places.
Other PC recommendations explained in the document include the ‘lifetime stop-loss limit’, the role of a proposed ‘Gateway Agency’ in community care and a system to allow supported resident places to be traded between different facilities in the same region.
I think Rod and Klaus are both partly right and partly wrong on this. A fair offer of a periodic payment option should include the cost of funds compared with the lump sum option. Or, looking at it the other way, a discount should be offered for an up-front payment (and a penalty for a post-hoc payment from an estate). In setting ‘equivalence’ between Bonds and Periodical payments this distinction needs to be madeto to set the correct incentive.
I don’t think that this is indulging in ‘hypotheticals’. I think this is anticipating the possible consequences of policy changes. If you change the incentives for consumers some of them will respond, and change their behaviour – that’s what incentives do. Anticipating this and recommending fine tuning to the change recommendations seems to be to be a good role for an industry body. But yes, providers will have to change some of their business models too.