• The Productivity Commission’s blueprint for reform of the aged care sector strikes a balance between the competing needs in the sector.
  • They should lead to greater investment and consolidation in the sector.
  • The sector should welcome the Commission’s report.
  • But attention is now turning to whether the federal government is prepared and able to implement the reforms.  

Domestic and foreign capital providers, who are attracted to Australia’s aged care demographics will seek to develop and own facilities as property investments, if the government implements the Productivity Commission’s balanced blueprint for reform of the aged care sector.

But attention is now turning to whether the federal government is prepared and able to implement the reforms. It should.

If it does, not only will investors be looking to build new facilities and partner with established operators, we will also likely see consolidation in the sector sooner than the five year implementation plan, as smaller operators see the writing on the wall.

Those with the most to lose from the recommendations are providers with old building stock with out-moded configuration across a small number of facilities or with large bonds operating as a cross subsidy for other, non-profitable beds.

The Commission is right to recommend that operators be allowed to set accommodation bonds and charges across all residential settings by reference to market forces, not in accordance with a formula which tries to estimate average costs of operators to develop facilities. However, in allowing bonds to be charged for high care beds, the Commission insists that the need for cross subsidies between settings will be alleviated. Therefore consumers should be given a choice between paying a bond or an equivalent amount as a periodic charge.

This choice has the potential to cause liquidity problems for some operators who will be obliged to repay a bond to an outgoing resident, while only receiving a periodic charge from the incoming resident moving into the available bed. Not all operators have the capital structure to readily replace net bond outflows. If implemented, this policy will also affect developers who traditionally rely on interest free bond inflows to pay down commercial loan facilities drawn to fund the development.

For many years, government set periodic charges have been insufficient to generate acceptable returns for operators - this has skewed business plans toward bonds and care will be needed in implementing change.

The Commission has struck a balance between addressing the requirements of baby boomers for greater choice, quality and convenience of aged care services and accommodation, and creating a fiscal environment where the federal government can contain future spending on aged care. Proposals affecting the family home have been treated as carefully as possible, recognising their potential to consign the report and reform process to the still too hard basket.

Providers set to benefit from the recommendations include larger operators, whether run for profit or within charitable organisations, who will be best placed to respond to removal of supply side restrictions on bed licences and care packages, which have traditionally been used to contain funding costs. While providers will continue to be accredited against threshold quality standards, opening up supply would suit providers with the skills to offer services valued by the market, from the quality of staff and ratios to residents, configuration of rooms and amenities and the facility location.

Residential care needs of baby boomers are expected to surge from 2030 onwards when those born in 1945 reach 85. In the meantime, some retirement village operators and community and home based care providers will benefit from recommendations promoting ageing in place under a co-contribution framework. The Commission is right to recommend no change to the current state-based regulation of retirement villages. Calls to co-regulate villages and aged care appeared as a solution looking for a problem. Retirement village developers are already seeing the benefits of designs which are sympathetic to ageing in place and include technology like alarm buttons. Informal care networks are in decline, increasing demand for home based care and nursing from third party providers.

The report also calls on the government to separate responsibility for policy setting and governance of the sector and to streamline regulation of aged care operators. It is hard enough for operators to compete with hospitals to attract staff, where wages are typically higher, without additional compliance burdens.

Private aged care services in Australia emerged from gaps in public housing and healthcare services, and the sector remains the most fragmented within the health- care system, where the top 20 residential providers account for less than 30 per cent of total residential places. The sector should welcome the Commission’s report. But will the government?

This article first appeared in The Australian Financial Review.