Less than two-thirds of residential aged care providers are profitable and only half are viable, a new report commissioned for the aged care royal commission shows.
But while 10 per cent of residential providers are both unprofitable and unviable there’s uncertainty about the financial performance of the remaining providers.
The report found the sector had little financial transparency and that its financial performance is complex and unclear due to a lack of reporting, use of group entity structures, transactions between related entities and the delivery of non-aged care activities by some providers.
The Royal Commission into Aged Care Quality and Safety commissioned global professional services firm BDO to examine the finances of the aged care sector, including its profitability and financial viability to help inform its upcoming hearing about the funding, financing and prudential regulation of aged care.
The report released on Tuesday evening used accounting profits, cash flows and other measures of a provider’s ability to access capital to assess profitability and viability based on financial year 2017-18.
The report focuses on this period as it was the most recent year with data available for all providers at the time of the analysis.
The report found 558 residential aged care providers are profitable (64 per cent) and 106 are not profitable (12 per cent).
A further 122 residential providers made a loss but had a positive cash flow so may be profitable (14 per cent) and 91 may not be profitable because of a negative cash flow despite a profit (10 per cent).
Looking at all approved providers, 579 were profitable (74 per cent), 105 are not profitable (13 per cent), 31 may be profitable (4 per cent) and 72 might not be profitable (9 per cent).
Viability of aged care providers
Based on the “reasonable assumption” that 80 per cent of aged care bonds, which are known as Refundable Accommodation Deposits, are treated as non-current liabilities, the analysis found that 51 per cent of residential aged care providers are viable, 10 per cent are not viable and 39 per cent may be viable.
When looking at all approved aged care providers, 53 per cent are viable (53 per cent), 8 per cent are not viable and the remaining 39 per cent may be viable.
The report, and table above, also present the results for 60 per cent and 40 per cent assumptions to show how sensitive the viability assessment is and as a stress test to understand how resilient providers would be to a greater call on these liabilities.
Aged care complex and unclear
The report said the aged care industry’s overall financial performance is unclear due to several factors, including the use of group structures among aged care providers.
“This is a perfectly legitimate model, however it does reduce transparency over the financial transactions within the aged care sector,” the report said.
It also found that limited reporting obligations hindered the sector’s financial transparency, including among home care providers, who are not required to provide data at an approved provider level unless they also operate residential aged care.
“This leads to reduced transparency on the financial arrangements in this sector,” the report said.
The report calls for more financial transparency.
“An improvement in transparency would positively impact the extent of analysis possible and allow for more informed decision making in relation to policies and/or investment decisions,” the report said.
Improving reporting requirements, financial transparency
The report suggests that the aged care sector’s current model favours more sophisticated providers who have the necessary financial abilities to manage diverse portfolios and capital structures.
“Such providers are likely to generate better risk adjusted returns from the sector than those who are less sophisticated,” the report said.
The report said the Daily Accommodation Payment could provide protection against this to an extent.
“It effectively sets the floor value for the bottom end of the return on property component,” the report said.
It said allowing providers to have flexibility to utilise complex structures to maximise returns may imply the Commonwealth Government has to fund the sector less than it would if this flexibility did not exist.
“On the other hand, a possible issue with this relatively complex model is that it arguably weakens the link between the drivers of return and the quality of aged care service provided by the provider,” the report said.
It also suggests that the government should improve data governance arrangements.
“It may be very useful to have a clear process whereby required data fields are reviewed, monitored and updated regularly in line with the strategic and regulatory requirements of the government,” it said.
The report also suggests home care providers are required to report at an approved provider level.
Access the Research Paper 12 – Report on the profitability and viability of the Australian aged care industry report here.