Aged Care

Thursday, 12 November 2020

KordaMentha’s Behind Business podcast discusses the most pressing commercial, financial and operational issues facing business today.

In this episode of Behind Business, Chris Martin, Partner in KordaMentha’s Corporate team, and Cam Ansell, Managing Director of specialist aged care advisory business, Ansell Strategic, join Sean Aylmer to discuss the history, present and the future of aged care in Australia.
 

Transcript

Sean Aylmer:
Welcome to Behind Business, the podcast where KordaMentha experts and their partners discuss the most pressing issues facing business today. I'm your host, Sean Aylmer, an economist and journalist for 25 years and the voice of the Fear And Greed daily podcast.

Sean Aylmer:
Today, we're talking about aged care. It's an industry that lies at the intersection of many parts of our lives. As we age, work and seek to retire into maturity, it's an industry that impacts us all. It's also an industry under intense scrutiny, thanks to the Royal Commission Into Aged Care and the COVID-19 crisis. Over the next few years, the sector will have to evolve on the back of the eventual findings and recommendations from the Commission. The best operators have already started to do so. Those that haven't could find themselves having some very difficult decisions over the next 12 months.

Sean Aylmer:
To talk to us about the history, the present and the future of aged care in Australia, we have KordaMentha partner Chris Martin joining me from Melbourne and joining me from Perth is Cam Ansell managing director of specialist aged care advisory business Ansell Strategic. Chris and Cam, welcome to behind business.

Let's begin by getting a sense of the aged care industry. Cam, how do you define aged care?

Cam Ansell:
So Sean, we normally define aged care by the programs that attract funding from government. There's two key elements to it. One is called residential aged care, which is commonly referred to as nursing homes. There's about 220,000 Australians in nursing homes today. And then there are community care services that are delivered to help people to stay in the community. And most of it is directed towards looking after people at home. It's about a million people that receive some form of subsidized home care services in Australia today. Australia is a little bit different than most developed countries. Sort of have a balance between the funding between home care services and residential aged care. Long-term care. Australian investment so far for the last sort of 20 years has been primarily around residential aged care. So we're probably more focused on nursing homes in Australia than other developed countries.

Sean Aylmer:
And the difference between retirement living and residential aged care?

Cam Ansell:
Yeah. So retirement living is not necessarily funded by government. So most people in retirement living are in what are frequently called independent living units. So generally speaking, the majority of people in retirement villages will not necessarily receive aged care services.

Sean Aylmer:
Okay, Chris, bringing you into it. So how big is the sector? How many businesses are involved? How many employees? Is there some way we can put a dollar value on it?

Chris Martin:
Sure. It's a very large sector, which I think given the aging population is expected to increase. So best estimates are, there are currently about 360,000 people who work at one of the almost 1900 registered aged care providers. And as Cam mentioned, it's estimated that between one to 1.3 million consumers are receiving some form or interacting in some way with the aged care sector on an annual basis. In terms of the spend or the value of the industry, public records show that the Commonwealth in financial year '19 spent about 20 billion, but already in the post COVID environment, that's expected to increase 24 to $25 billion in the next six to 12 months.

Sean Aylmer:
But I imagine there's also a large number of businesses that are indirectly involved in aged care. They provide support to the industry. Chris, can you give us a sense of the scale of businesses indirectly impacted by aged care?

Chris Martin:
The supply chains are deep and wide in terms of the aged care sector, but broadly they fall into one of two categories, the first category being capital and finance, including that the reliance on the construction industry. So a great many operators for many years have been involved in both renovating existing facilities and or building new facilities. And there are literally thousands and thousands of new beds in hundreds and hundreds of new buildings that are built on a regular investment capital cycle basis.

And certainly the aged care sector is a very important contributor to the construction industry, both in metropolitan Australia and regional Australia. The second element of the supply chain are really the day-to-day supplies of goods and services, which would fall into a couple of categories. One being the pharmaceutical and medical equipment retailers, the second being medical services and the third being hotel services and supplies. And clearly one of the real issues that sector participants are dealing with are the changing needs of their residents. And increasingly we're seeing a high proportion of residents have some form of dementia, which is putting a range of different and untested requirements on these operators. Many of whom are struggling with increasing health needs of their consumers.

Sean Aylmer:
And Cam, how has the sector broken up between government non-government, for-profit, not-for-profit? And then of course there are religious providers as well?

Cam Ansell:
You look at it between the two key elements I described before. So on the residential aged care side of things, the for profit sector is only around about 40%. In Australia the sectors continues to be primarily made up of religious and charitable and a small number of government organizations. So it's probably quite reflective of an industry that remains sort of heavily subsidized by governments and government subsidized around about 95% of direct care costs.

And it comes with it really, really heavy regulations, not just about the services that are provided, but where they're provided. And that normally comes with it a high incidence of benevolent support. And in Australia, unlike most OACD countries, we are heavily supported by the not-for-profit sector. And the private for-profits has remained around that sort of 35 to 40% for many years now. Home care even more so, so more than two thirds of home care providers are not-for-profit organizations. And the private sector is only a little bit over 20%. And so government institutions is roundabout 7%. So again, we are heavily dependent on religious and charitable organizations and that hasn't changed as quickly as we thought it would.

Sean Aylmer:
So I've been going through this process with my own mother in recent months, and it's just a very difficult process to fully understand. And there's no value judgment in that. I think it's really important there are checks and balances continuing in a system which is worth so much money. But particularly for older people as well, it is sometimes difficult to navigate their way through the whole process.

Chris Martin:
You're absolutely right. And I think that's one of the very fair criticisms that's been made of the sector for many years. Choosing where elderly Australians will spend a significant proportion of their latter years is a very important decision. It's fraught with emotion and financial impact and consideration. And I think that most people who have been observing the industry for many years would agree that a lot more should and needs to be done in terms of easing that transition from someone's home into an alternative care environment.

Sean Aylmer:
Cam to you now, there are also different parts of the aged care industry, including home support, home care, restbite, residential, short-term restorative care, those sorts of things. There are so many components which would probably make it difficult from a reform perspective, as well as from the view of someone considering the options.

Cam Ansell:
This little variety of different programs that we've made available here is exactly why looking through those options for your mother has been so difficult. We have had, because of its heavily subsidized nature, we've had a bit of a concept of designing a huge amount of programs and then expecting people to jump through the hoops and try and work out which of those programs are best for them. Most frustrating of which is probably the home care package program, which is the greatest level of support that you provide to someone in their home. Within Australia there's more than a hundred thousand people on the wait list trying to get a home care package. So not only do you have to try and jump through the hoops, but if you are at that higher end of need, then there's almost as many people on the waitlist as there are actually receiving those services.

What is happening at the moment is, is you need to go through as your mother has tried to work out, which of those services are available and how you can fit into them. And I think the reality that we have to move into is one in which we design services for people, rather than expecting people to jump into those programs that's easier for the government to administer. The services that you receive should reflect the needs that you have at the time and your ability to be able to pay for it. And I think that's hopefully where the rural commission will start pointing us.

Sean Aylmer:
So maybe over to you, Chris, if we just parked COVID-19, we parked the Royal commission, which is a bit difficult, the sector itself, how has it performed operationally and financially over the past 10 years or so?

Chris Martin:
The data from the industry, if you looked at it in totality would show that the industry has clearly been under sustained operational financial and public pressure for many years. I think specifically though what we have seen for many years and what we are still currently seeing is that the aged care operators are balancing, changing consumer preferences in terms of the type and quality of care that residents and their families are seeking and the manner in which they wish to pay for these services.

Sean Aylmer:
Okay. So just explain how it works now?

Chris Martin:
So an incoming resident has a very important election to make. They will either pay a refundable accommodation deposit, which is known in the industry as a RAD, or whether they will take an alternative path, which is the payment of a daily accommodation payment. And essentially that's a monthly amount equivalent to rent. What we've seen over many years is there's been a increasing tendency for incoming residents to move away from the payment of very large refundable accommodation deposit, to smaller, arguably more manageable daily accommodation payments. Now that does change the financial position of the facility who have been previously using money that has been paid to them in the form of RADs for various construction and other debt management type activities. Clearly, if the structure of the funding for the industry changes, there's going to be a range of downstream changes that the operators are going to also need to accommodate. So it effectively changes the working capital mix that the operator is managing.

Sean Aylmer:
Cam, let's go on to the Royal Commission. Now, two years ago, the Royal Commission Into Aged Care Quality And Safety was established. There's been some dreadful stories out of it. The final report is not out until the beginning of next year, but we have some information already. So the interim report was out 12 months ago and it found, and I quote here, the aged care system fails to meet the needs of its older vulnerable citizens. It does not deliver uniformly safe and quality care. Is unkind and uncaring towards older people. And in too many instances, it neglects them. Fairly scathing.

Cam Ansell:
The interim report was scathing. I think the commissioners set off by analyzing the industry by asking sector participants to provide examples of poor care outcomes over a period of time. And so it wasn't surprising that the first part of the commission was heavily weighted on those examples of where poor care had been delivered. And so the interim report was labeled neglect and it was very focused on the negative aspects of the industry. Which was concerning as to where the final report might go. And then two weeks ago, the council assisting the Royal Commissioners have come up with their recommendations, which between now and February, 2021, will become the final report depending on which of the recommendations come forward. But I found that the recommendations from the council assist have been really good.

They're bold, audacious, and you'd have to argue exactly what the industry needs and what they're largely pointing to is rather than trying to do continual incremental changes to the aged care system as it is at the moment, they want to rewrite it, start again, rather than being program driven to take the consumer as the starting point, and then start to redesign the entire aged care system around what they and eventually we will need as we get older.

So I'm very heartened by the direction that they've taken, but it is bold. And the Morrison government having made the decision to ask for Royal Commission, arguably when they didn't think that they would be in government to deal with it, now have to face these recommendations, which will be disruptive and very expensive.

Sean Aylmer:
There were 128 recommendations made. Are there any that stand out that show how different the thinking is?

Cam Ansell:
Yeah, a lot of work goes at the beginning to the redesign of the system. But the one single recommendation that I think is most critical is around the complete change in the way that service is delivered. So they are talking about a integration of residential aged care and home care services and a single point of entry. So if we took your mother as that example, you would be presenting all of the things that you required around your physical, behavioral and your social needs. And then that assessment would then come to a design of the sorts of services that you need. Then there would be a contribution by government, usually, depending on your means. And then the system would follow you almost like a portable voucher type system, as opposed to where we are at the moment, which is program driven. So it gets its origins from NDIS and the productivity commission review caring for older Australians.

Sean Aylmer:
Chris, I'll bring you in on this one here and maybe more specifically on COVID-19 because the Royal commission also delivered a special report on the coronavirus at the beginning of last month and it talked about areas for immediate action. Do you agree with recommendations?

Chris Martin:
I think most people in the industry would agree that they are in four key priority areas very fair and reasonable. The only issue in respect of the interim report and indeed many of the other previous government reports and potentially the coming Royal Commission is that to the extent changes are required in the form of increasing regulation or increasing services or staffing levels, or COVID response plans or infection control plans. Ultimately someone does need to pay for these, all be they very reasonable expectations. And I think the industry still remains somewhat concerned that they are currently unable to make ends meet within the current regulatory framework and are very concerned that additional financial burden will be placed on them. But certainly in terms of what as a society we should expect from our aged care sector, I think everyone would be fully supportive of the recommendations.

Sean Aylmer:
I suspect that when the final recommendations come down, the government will be under pressure to spend a lot more money in aged care. What do you think?

Chris Martin:
I think aged care is very similar to public health care. I think it comes down to choice. I think as a society, we really need to decide what form of public health care we think is appropriate for the Australian population. And equally, I think in terms of caring for clearly a particularly vulnerable section of our community, it's what is the minimum standard and expectation? And I just think as a society, we really need to set those standards and then we need to work out how to fund them appropriately.

Sean Aylmer:
Cam, do you agree with that?

Cam Ansell:
Yeah, look Sean, I think Chris has just nailed it there. The Royal Commission has found that as Australians, we expect a four, four and a half star level of care, and we're currently funded to provide a sort of two and a half, three star. And the gap between that is what we currently face.

For me dealing with that gap is probably in reality, something that we need to look at from a means testing perspective. In Australia at the moment, there's about five taxpayers for every older Australian. And that drops down to nearly half about 2.7 when the baby boomers hit their peak. So with a shrinking taxpayer base, it's inevitable that we need to face the reality of means testing. And if we're going to provide the sort of quality of services that Chris is talking about, we need to bite the bullet. And I think when the Royal Commission hands down its report in February with all of the difficult and horrible things that have happened through COVID, probably now is the best time for us to face the reality of the intergenerational transfers that will take place if we do not act.

Sean Aylmer:
Chris, how are your clients responding to the changing nature of aged care, vis-a-vis COVID and the Royal Commission?

Chris Martin:
Our clients and those in the sector more broadly are continuing to struggle with the day-to-day requirements. Particularly in Victoria, COVID response has certainly improved, but the system is still on notice that another outbreak would not be particularly helpful to the short, medium or long-term outlook of the sector. People are now starting to turn their mind to cash, to working capital, to how are they going to bridge the gap? And indeed many of the public companies that are operating the system that most recently reported their results, and there is clearly significant financial pressure building in the system and likely to continue towards the end of next year, in our view.

Sean Aylmer:
How will they overcome that Chris? If I'm an aged care provider, what should I be doing right now?

Chris Martin:
I think it's very important that aged care providers are honest with themselves and their advisors and their bankers and their equity funders. A great many people seem to run from the truth in our experience. And it's very difficult to work out what to do unless there is an honest assessment. Clearly in this sort of environment and in the COVID economic response more broadly, cash has always been and remains king. It is very important that operators are running very detailed, honest cashflow forecasts we would say on a rolling 13 week basis.

Clearly the time has come to perhaps implement and make some very difficult decisions. There may have been some opportunities to reduce costs, to increase revenue, to tighten the sail. I think the time for those difficult decisions has probably come. To the extent that many of the operators are receiving third party debt from the trading banks now is a very good time to approach the banks and seek some sort of forbearance in terms of debt repayment in order to get operators through the current term. And I guess we're all spending an increasing proportion of our time talking with operators in terms of optimizing their real estate portfolios. So some operators are looking to split the operations of their facilities from the real estate ownership, and that can often provide a source of significant capital to operators who are more interested in operating the business than they are in necessarily owning the real estate in which it operates.

Sean Aylmer:
Okay. And then Cam from a less financial perspective. What should the operators be thinking about right now?

Cam Ansell:
I guess during the last few years, particularly since the funding cuts in 2016, a lot of aged care providers have been hanging on just for survival. Two thirds of them making a loss at the moment. And in that survival mode, sometimes the ability to be able to sit back and remember what it was that they are in aged care for can take place. And so resetting a reminder of what it is that we're here for. A bit of a vision about how the world is likely to change with the Royal Commission and the other reforms, and potentially some of the potential collapses that Chris is alluding to. Where do you want to be in that future? Does your goal, your objective remain valid? If it does, how you're going to manage that? How will you adjust and thrive in that environment? Or is this time to be rethinking whether or not you want to remain in the sector?

Sean Aylmer:
And a final word from you, Chris, maybe an unfair question. What will the sector look like in 10 years time?

Chris Martin:
I think the sector will contain many of the fundamental elements that currently exist. I do think that there will be a significant change in terms of the percentage of aged care that is delivered in the home, and I think there will be an increasing reliance on the use of technology and artificial intelligence to both diagnose and care for individuals in their own homes. I think there will be significant consolidation in the sector. And I would expect that in 10 years there will probably be six to 10 dominant national providers that will provide 80% of the care to elderly Australians.

Sean Aylmer:
Chris Martin and Cam Ansell. Thanks for talking to Behind Business.

That brings us to the end of Behind Business, the podcast where KordaMentha experts discuss the most pressing issues facing business today. Today's topic, the aged care sector, is clearly one that's had its challenges and will need to evolve and find new ways of providing care for the elderly. It's a diverse industry with thousands of operators, employing hundreds of thousands of people caring for more than a million seniors. It touches everything from construction and financial services through to healthcare and catering.

Earnings were falling even before COVID-19 and the coronavirus has impacted aged care more than any other sector. But it's not all doom and gloom. This is a sector that provides an invaluable service and keeps people out of medical facilities, including hospitals. It looks after some of the most vulnerable and most needy people in our community. It seems that larger players will increasingly dominate the sector. The role of for-profit, not-for-profit and government providers will all evolve in coming years. It's an industry that society needs to function well. I'm Sean Aylmer and that was Behind Business.