Aged Care in Australia: someone's going to pay

June 13, 2016

The collapse in the share price of Australia's biggest aged care provider, Estia Health, over the past fortnight has raised serious questions about how profitable and realistic growth prospects are for a sector so reliant on the country's aging population and government funding. 

The demand for aged care led to the completion of $1.5 billion worth of new construction in 2014 – an increase of 69 per cent on the previous year, according to the Department of Health. Net assets in the sector were up 10 per cent on the previous year to $11.2 billion and revenues have also grown to $14.8 billion a year. Some analysts estimate that close to $22.5 billion worth of aged-care facilities will need to be built before 2031 to accommodate the growing demand.

The big listed providers Estia Health, Japara Healthcare and Regis Healthcare have all floated on the stock market in recent years, enjoying plenty of investment support and government funding.

Australian government spending on aged care has nearly quadrupled since 1975 and it is projected to nearly double again as a share of the economy by 2055 as a result of the increase in the number of people aged over 70. 

So, with all these incredible statistics pointing to so much growth, why have the big players been hit?

It's a combination of overly-optimistic growth and earnings forecasts which have taken a hit from the federal government's tightening and increased scrutiny of funding.

Estia Health's share price has plunged almost 20 per cent since May 30, when questions around its growth prospects were first raised by The Australian Financial Review.   

Stories are starting to emerge from the industry about how unrealistic some forecasts are in a sector facing substantial systemic reform.

One of the areas of change is government funding. Providing aged care is an expensive business requiring sophisticated medical equipment, trained health staff and a high level of patient care,  which determines the amount of government funding providers receive.

A substantial amount of funding per resident flows from government grants known as Aged Care Funding Instruments (ACFI). The operators in the sector are finding themselves beholden to the rigours of government crackdowns on the misallocation of those funds. This is related to how an individual patient's care needs are assessed and what level of care is required.  

Bank of America Merrill Lynch moved on the sector last week, issuing a series of new downgrades after recalibrating the government's new funding arrangements for aged care in the May budget.  

Minister for Aged Care Sussan Ley has made it abundantly clear that the government was sharpening up the way it funds the sector.

"There's no hiding away from the fact the residential aged-care budget will blow out by a further $3.8 billion over the next four years without action to address inconsistencies in the way claims are currently made, with as many as one-in-five ruled to be too high," she said.

"As responsible economic managers, this is why the Coalition is exploring a more independent, transparent and fairer method for determining funding for residential care so there is greater certainty for older Australians, aged-care providers and taxpayers."

While management of providers such as Estia Health refuse to speak about the impact on their growth and earnings from tightening government funding, some are raising the issue. Stephen Judd, chief executive of HammondCare, expects the changes to ACFI will hit the sector hard.​ He said some of the ACFI numbers that the listed players have reported are "toppy".

He is also circumspect on the near-term aged care requirements, suggesting there is not an "impending tsunami" of demand. However, the average age of an aged-care resident is about 85. The 85 and over age group will increase about 10 per cent in the next 15 years. Australia's intergenerational report notes that in 1975 this age group represented less than 1 per cent of the population. By 2055, however, it is expected to be 4.9 per cent of the population. 

The residential aged-care providers have seen year-on-year government funding growth of 5.1 per cent, but more than half that is for the creation of new aged-care places. The remaining 2.5 per cent is for existing places, but at that rate of funding growth the big providers will be squeezed by rising costs, especially wages.

The bigger hit to the residential aged-care providers is actually the home care providers who look after people who stay in their own homes. Home care is a growing consumer preference which has pushed occupancy levels in residential aged-care facilities down from 96 per cent in 2003 to 92.5 per cent in the most recent government figures at June 2015.

James Underwood & Associates director James Underwood has run the numbers and estimates there are almost 15,000 empty residential aged-care beds every night in Australia. And the reason is the increase in home care. 

"We are awash with home care. Some 5995 additional high-care home care places were awarded on March 18, 2016. This is almost the equivalent of opening 60 new 100-place nursing homes on the same day," he said.

Aged Care Guild chief executive Cameron O'Reilly said the emphasis on funding home care is hurting the residential aged-care providers.   

"When the residents come out of home care and go into residential aged-care they are usually significantly more frail," Mr O'Reilly said, "But now with the tougher ACFI rules it's harder for the residential aged-care provider to claim ACFI for that new frail resident."

He expects that residential aged-care providers will have to start charging the resident, not just asking for government handouts.

A resident can elect two main ways to get into an aged-care facility.

One way is to provide a refundable accommodation deposit (RAD) – a lump sum that is paid back after the resident dies or moves out. The other is to pay a daily accommodation payment (DAP),  which is derived from a 6.28 per cent interest on the RAD.

Some operators are charging people a fee to come in on a RAD.

Either way – RAD or DAP – the aged-care operator is able to claim government funding for that resident.

Operators also use the RADs as a form of cheap financing to go and acquire and or develop new aged-care facilities. However, some operators have almost spent all of that form of funding and a lot of it is being spent on bidding up the price of existing centres, not building affordable new facilities. 

According to the Aged Care Financing Authority Report, 66 per cent of residential care providers achieve a net profit with the average EBITDA per resident per annum at $9224. For home care 66 per cent of providers achieved a net profit with the average EBITDA per package per annum at $1973. 

But those figures could easily change in favour of the home-care operators.

The aged-care sector in Australia provides services to more than one million Australians and employs over 350,000 people. The providers will continue to be closely watched.

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