17 October 2013
Searching for the efficiency dividend
As the aged care industry adapts to sweeping reforms, providers are coming to terms with how implementation of new measures will affect their bottom line.
For both private and not-for-profit providers, financial understanding, analysis, and planning is essential to ensure they survive the reforms, adapt to generational changes and meet Australia’s future care demands.
With reduced taxpayer funding and user pays funding an increasing reality, the key for both providers and the industry is finding the efficiency dividend, or essentially, determining how to do more with less.
190,000 Australians are currently in aged care homes. The majority of this group were born between the 1910s and 1940s, paid substantial taxes over their working lives but did not have compulsory superannuation, which was introduced in 1992. For more of these residents, their primary piece of wealth is the family home and having paid their contribution to society, they expect to be cared for.
As the baby boomer generation moves into aged care however, more affluent residents accustomed to higher standards of accommodation will be moving into the space while simultaneously, the current taxpayer-funded service model begins to buckle under the demands of a higher population of elderly residents and increased longevity from medical and scientific advances.
Growing increasingly clear is the shift from Australia being a society that can cover the majority of costs for aged care, to one in which care is paid for by the state but accommodation is a personal responsibility.
Some market-priced consumer funding of aged care is already evident, however this is likely to grow substantially, particularly as individuals’ capacities to contribute increases, through superannuation and personal wealth.
Although there will always be provisions for those elderly Australians who can't afford to pay their accommodation costs, it will be reasonable for consumers to expect to pay (to the extent they are able), a significant percentage of the value of accommodation. This includes understanding equity in an existing home may need to be used to contribute to aged care accommodation, through an accommodation bond or similar.
the funding framework
The Australian Government is committed to caring for our elderly population, with one of the world’s best health care systems and taxpayers the primary funding source for aged care. While this system ensures care for all, funding it has become increasingly complex due to societal and intergenerational changes.
In consideration of these changes, the Government - both past and present - have introduced reforms that will fund the aged care safety net from diminishing tax funds and transition towards increased consumer contribution to care, accommodation and services while in an aged care home.
Critical to this framework is an understanding of how the cost of care, efficiency and returns on operations and equity drive the profitability, and sustainability, of the residential aged care sector.
This financial understanding also informs the methodology for governing the level (or levels) of the accommodation payments that an approved provider can levy on care recipients for entry to an aged care home from 1 July 2014.
Understanding the bottom line
For providers understanding the financial implications of their operations will be critical in the future, particularly when mandatory sanctions to offer residents the choice of paying their bond as a lump sum, periodic payment or combination come into effect on 1 July 2014.
Periodic payments are akin to rental payments, in that they would cover repayments on current debt but unlike lump sums, can’t be used to reduce debt in a substantial way to reduce interest or be put towards capital works like building new facilities. This may mean that without government assistance, such as zero real interest loans, a lot of providers won’t be able to build for the future.
In addition, as banks and other financiers will be no longer be lending based on upfront payments, they will be looking at future cash flow projections when they assess loan applications.
Encouraging increased consumer funding is a fundamental key to finding the efficiency dividend. ACFA has been charged explicitly with recommending “…how ‘efficiency’ is to be defined and determined, taking into account the unavoidably higher cost structures faced by some aged care providers (for example, being located in remote or regional communities).” (Aged Care Financing Authority Revised Operating Framework - November 2012)
With taxpayers wanting savings generally, efficiency is being sought in many Australian industries including education and health, however aged care is one of the sectors bearing the brunt.
Efficiency measures can include constraining budgets, re-allocation of staff hours, using new technologies to save time and resources – such as reallocating resources to offer more in-home care - as well as cutting down on administration and staffing costs.
For example, in the Bentleys National Aged Care Survey, significant changes have been recorded for measures like these. In terms of workforce fluctuations, data has shown that in the four years from 2006/07 to 2012/13, aged care providers are now employing care staff for seven per cent more hours each fortnight, up from 34.51 hours to 36.76. In that same period, there has been a reduction in hours for Assistant Nurses, therapists and Registered Nurses, and an increase in hours for Directors of Nursing, Care Managers , Personal Care Attendants/Health Care Assistants and Enrolled Nurses.
Return on Equity (RoE) is another important measure for ACFA as it will determine the likelihood of investment into the aged care sector to help meet future services demands and inform its advice on accommodation payments and equivalence of lump sum and periodic payments.
RoE, which measures net profit before tax divided by net equity (assets minus liabilities) is an important measure for investors, indicating expected returns against other passive, low-risk investments like term deposits and managed funds. The better the RoE, the better the chance of encouraging equity capital into the sector.
Bentleys has identified an acceptable return on equity as 12.4% for for-profit providers, and 13.4% for not-for-profit providers (which have access to additional funding sources). However, the 2011 Bentleys Aged Care Survey indicated the average return on equity for participants was 8.08% and therefore not strong enough to encourage new capital.
Preparing for change
- Maintain updated records. Keep track of important operational and financial data including monthly profit and loss (income less expenses), balance sheet and cashflow data. Understand what elements of the businesses are driving income, such as funding and accommodation bonds, and which are adding expense, such as level of debt or construction costs.
- Look to the future. Prepare a three-way forecast (project profit and loss, balance sheet and cash flow) to allow banks to get a good indication of the viability of your business. Build into this forecast a number of scenarios, such as wages going up or income staying flat. Note that cashflow is not profit, it is when the expected inflows and outflows of the business actually hit the bank account. Cashflow also includes capital expenditure and principal loan repayments which are not in the profit and loss, and quantifies the short term survival of your business – an important measure if periodic payments become a popular choice by residents.
- Find your break-even point. In consideration of your current and future financial situations, what can you do now and in the future to ensure your business doesn’t make a loss? This is important even for NFP providers and requires looking at what might need to be changed in terms of occupancy levels, wages and incomes.
- Consider consolidation. Consolidation of services is inevitable in the future, as taxpayer funding subsides and the sector seeks further efficiency by cutting down on multiple administration and other costs. Despite a provider’s feelings about consolidation and even if not in the immediate plans, consideration needs to be given to whether being a consolidator or becoming consolidated would be the more viable option.
- Partnering up. As part of planning for consolidation, providers (particularly community facilities) should be considering which others would be suitable to partner or joint venture with in the future and in each case, whether this would entail a change to government or market funding. Research other providers, self-assess your board and compliance, and determine preferred partners.
Want to know how your service measures up?
Participate in the Bentleys National Aged Care Survey to find out!
BETTER NUMBERS MEAN BETTER DECISIONS.