Turnbull government to re-examine $1.2b aged care cuts

September 5, 2016

The Turnbull government has agreed to review $1.2 billion in aged care cuts after the sector presented modelling showing the affect would be much greater than anticipated. 

As ASX-listed providers blamed the funding squeeze for a 30 per cent drop in the value of their shares, Aged & Community Services Australia president Paul Sadler said modelling revealed the cuts would reduce support per resident per year by 11 per cent, or between $6655 and $18,000. 

He told The Australian Financial Review that the government had indicated it was willing to talk about alternative ways for find the $1.2 billion in savings to what is known as the "aged care funding instrument" announced in the May federal budget. Labor had already given a similar commitment. "The government has started the process of talking to the sector about alternative approaches," Mr Sadler said.

Aged & Community Services Australia is among a number of groups and representatives that have told the government there are better ways to achieve the savings. 

The government concession comes as the trio of listed companies operating in the aged care space – Estia Health, Regis Healthcare and Japara Healthcare – experienced a sharemarket slump that they said was driven by restrictions on what they can charge residents.

The federal Department of Health clarified last Friday that providers could not charge building refurbishment or capital replacement fees on top of existing accommodation charges. 

"It's like you or I paying rent and then being charged extra to fund the cost of maintaining the building in the future," said Grant Corderoy of Stewart Brown, an accountancy firm that conducts a quarterly survey of aged care financial performance. 

Aged care has long been dominated by non-profit providers and the three companies are recent additions to the ASX. They went to IPO during a period of significant policy and funding transition. 

"Equity markets didn't appear to fully understand aged care or how it works from a financial perspective," Mr Corderoy said. 

"There's no other sector that has around 70 per cent recurrent funding from the government, and that's very attractive.

"But as investors are discovering, there are pitfalls too. Their balance sheets appear somewhat tenuous." 

Aged care funding is complex. 

Costs are split into two parts: healthcare and accommodation.

In the first category, funding is largely provided per resident by the federal government based the level of support required according to health needs.

Separately, accommodation is paid for via a refundable loan (paid by the resident), an equivalent daily payment (which is either covered by the government or the resident, depending on capacity to pay) or a combination of both.

There has been bipartisan support in Canberra to deregulate the accommodation part of the equation.

While the amount that can be charged for accommodation has a regulator to monitor pricing levels, residents can agree to pay extra for higher standards of food or services; a glass of wine in the evening or massage therapy, for example.

Some providers have added levies of up to $18 a day for building maintenance and building replacement.

But last Friday the department said these charges should be included into the base accommodation pricing – they could not be charged as "added extras".

The end result is a potential loss of revenue per resident of $4000 to $5000 a year depending on the extent of the additional charge.

Mr Corderoy said he had sympathy for the providers' position because they were trying to replace lost government revenue. 

Moreover, private investment was needed to meet anticipated increases in demand and the "last thing the sector needs is the collapse of one of these companies" or a downturn in the development pipeline, he said. 

Read more: http://www.afr.com/news/turnbull-government--to-reexamine-12b-aged-care-cuts-20160906-gr9uhs#ixzz4JWMONOwg 
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