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Bentleys 2009 Aged Care Survey
www.agedcaresurvey.com.au

AGED CARE EVOLUTION
Article published in the Australian Ageing Agenda May/June 2010

On the back of further discouraging results in the latest Bentleys Aged Care Survey, Heath Shonhan looks at ways that residential providers can improve their income streams to adapt to changing conditions.

Unlikely to come as a surprise to many in the industry, recent results from the Bentleys 2009 Aged Care Survey have revealed that financial performance across the aged care sector is in a state of spiralling decline. 

The survey, which canvassed the 2008/2009 financial year performance of more than 100 service providers operating approximately 350 residential aged care services, found that more than 40 per cent of providers are currently operating at a loss.  Further to this, average profits across the industry halved in the past three years to less than 5 per cent.

The gravity of this situation becomes clearer when you drill down to the service level and look at how the numbers equate for individual facilities.

Through analysis of benchmarking data Bentleys found that, on average, services are operating at a loss of $0.98 per resident per day.  This equates to approximately $360 per resident per year and represents a staggering operating loss of around $68 million for the sector’s 190,000 clients in residential aged care. 

Although these numbers represent only calculated averages, and not an audited assessment of the industry, they are however indicative of the broader financial challenges facing the sector currently.

With providers already buckling under the strains of escalating costs, wages increases embedded into EBAs, shrinking government funding pools and the increasing demands of an ageing population, we can only predict that if current trends continue, the future for the sector is looking bleak.

For investors and backers of the industry, a decrease in return on assets to just 1.99 per cent further dampens hopes for future growth of the industry. While this modest level of return is, in theory, in line with the low risk profile associated with the recurrent Government income stream in aged care it is contradictory to the level of returns expected of a capital-intensive sector. 

When considered against other asset classes, a less than 2 per cent return offers little investment enticement, particularly with commercial rental properties offering around 10 per cent returns and infrastructure projects offering investors around 15 per cent.  Low returns in aged care will thus mean that the sector will struggle to encourage capital injection and meet growing demand for services. 

Aged care also rates poorly against other operations within health-related industries. For example, vets achieve much better margins, so in effect those who look after our pets are more financially viable than those who care for our elderly!

WHAT CAN BE DONE?

As a society with an escalating elderly population – according  to the Australian Government’s recent intergenerational report, the proportion of people aged 65 years or over is set to grow from 13 per cent in 2010 to 23 per cent in 2050) – finding new ways of “doing business” in the aged care industry is imperative.

Aged care providers need to identify opportunities to build and grow their operations.  The industry must continue its transition from “cottage industry” status to become a more efficient and viable sector that is able to meet future care needs.

The issues facing the industry are complex and debate, often heated, about ways to improve the sector rages in forums around the nation. 

As a starting point, and armed with the financial data of approximately 12 per cent of the services across Australia, Bentleys has conducted some analysis of what is happening at the “coalface” of aged care services in aim of providing guidance to how operators in the aged care industry can improve their financial positions. 

Throughout our first layer of analysis, we have focused on examining one of the basics of business enterprise – income generation – for insight into improving financial performance.

GENERATING INCOME

The debate around Government funding and support to the sector will continue ad infinitum.  The structure of funding will continue to change and evolve however with a national deficit and less money in the Treasury kitty, providers shouldn’t pin their hopes on any increases in funding regimes -  certainly not in this budget year at least. 

With this in mind, we examined other areas in which providers in the survey indicated that they were generating income.  It is of little surprise that services that are increasing their level of consumer funding through accommodation bonds are generally experiencing some improvement in their financial performance.  Primarily this is being achieved through the productive deployment of cash reserves to generate interest revenue or reduce interest expense.

We acknowledge that prudential requirements in the industry mean that providers have restrictions regarding the use of accommodation bonds (for legitimate reasons).  We also appreciate that regulation in the industry prevents the collection of accommodation bonds from some residents.

However, even in this highly regulated environment, data from the 2009 Bentleys survey has shown that services are increasingly relying on accommodation bonds as a funding source.    Currently bonds represent approximately 27 per cent of total funding for providers, compared to just 17 per cent in 2006.

By no means do we propose a loosening of the safeguards put in place to protect resident funds, nor do we suggest that accommodation bonds are the panacea for the industry.  However accommodation bonds do represent an achievable funding source for many providers.  Future viability in the industry would improve with the collection of accommodation bonds for all residents able to contribute to the cost of their care, and the productive use of these funds.  

Survey data and findings have shown that those providers that have adopted more of a user pays approach are experiencing better financial returns.  We believe that this avenue is one which warrants further focus and thinking.

THE TRANSITION TO 'USER PAYS'

This evolution to more of a consumer-funded approach will change the landscape of aged care operations, particularly in terms of consumer expectation and service delivery.  It will also necessitate a higher focus on risk mitigation for many aged care providers.

Increases in resident funding bring increasing expectations of the level of service and value being offered.  Aged care providers will need to improve their services and facilities in order to attract residents in a more competitive environment. Subtle changes will be required, such as shifting the organisational focus away from “resident care” to a  more customer-centric culture that aims to meet not only the care needs, but also the lifestyle preferences and service expectations of the market.  This is just one way we have observed providers starting to change their approach and embrace opportunities for business growth.

In terms of risk mitigation, we need only reflect on the recent economic times in which we have seen the demise of regimes (in particular, think of Storm and Opus) to acknowledge that there is a heavy responsibility associated with funds under management.

It is imperative that organisations protect themselves and their clients in these arrangements and that fiduciary duties are upheld.  As capital funding sources increase, the associated risks are far greater.  Providers must implement more sophisticated financial management strategies to ensure that risks around consumer funds are minimised.

In addition to these elements, providers will also need to pay closer attention to their branding and public image in order to enhance their competitive position in the market.  To be successful in the future market, providers will need to shift from a reactive position of “meeting demand” to a more proactive space of “creating demand”.

OTHER OPTIONS

Income generation, and particularly the deployment of bond reserves, was just one aspect within the 2009 Bentleys survey that identified areas in which providers are taking positive steps to improve their financial performance.  Introduction of sustainability initiatives, fine-tuning of admissions procedures and gaining efficiencies in fixed costs were also identified in some of the top performing services. 

Ultimately, the common denominator for progress within the sector appears to be a provider’s ability to recognise the need for change and improvement within a service, and then act on this.  The industry will continue its journey of change and evolution. The providers that succeed in the future will be those who look for and embrace the opportunities ahead.

 Heath Shonhan is a partner with Bentleys Chartered Accountants and Chair of Bentleys’ National Health and Ageing Business Unit. Bentleys is an association of independent accounting firms in Australia with specialist experience in the aged care and retirement village industries. Bentleys conducts the National Aged Care Financial Survey.  Find out more about the survey and the findings at www.agedcaresurvey.com.au

 

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DISCLAIMER:

The underlying financial information for this analysis has been produced by you, the participant.  We have relied solely on the information and we have not completed verification or validation procedures on this information.  No audit or review has been performed and accordingly no assurance is expressed.

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