The most substantial changes impacting upon operators in the residential aged care industry would result from the establishment of entitlement models and the relaxation of regulatory restrictions over supply (approved places) and price (resident capital and recurrent contributions).
The Productivity Commissionís report correctly concludes that the creation of a responsive and competitive market will require providers to change their business models and will test the management skills of some. The extent to which these changes represent a threat to existing operators will depend largely on their capacity to adapt and capitalise on their existing strengths.
From the providerís perspective, the challenge and opportunity is to address the three critical factors that will be paramount in this new environment:
1. Co-contribution and pricing
The Productivity Commission has recommended that the users of aged care services should make a greater contribution to the cost of their care, which is similar to the approach proposed in the UK Dilnot Report Commission on Funding of Care and Support - July 2011. The Productivity Commission proposed that prices would be established through a combination of market forces and the provision of subsidies reflecting the real cost of delivering care and related services.
These initiatives open the door to a more viable industry in which consumers are able to exercise choice in relation to accommodation and services. The burden for doing so will drive higher expectations for value and quality.
The current over-regulated system limits choice and the capacity for consumers to influence service standards. Prices for accommodation charges and hotel services (catering, laundry, entertainment, etc) are capped in the majority of cases and this inhibits service innovation.
Under the proposed reforms, consumers will be expected to contribute to the full cost of these services, where they can afford to pay, as well as a limited proportion of personal and health care costs. Prices would be subject to negotiation with those receiving services.
Grant Thornton research confirms the Productivity Commissionís conclusion that the provision of aged care services in modern facilities is not financially viable. This is largely because of the over regulation of pricing under the Aged Care Act 1997. In the absence of such restrictions, providers would be able to charge a commercial price for their services and can expect Government subsidies that are adequate to cover care costs.
Establishing appropriate pricing will require more than just an assessment of current operating costs. In a competitive environment, price will be determined more directly by the value perceived by residents and their families than provider resource inputs.
Providers will have to capitalise on their knowledge of resident priorities and preferences to design innovative services that are both valued and affordable. Their capacity to let go of redundant aspects of their current service models and adapt to increased competition will be paramount in a less regulated pricing environment.
2. Increased competition
Grant Thornton anticipates that the proposed reforms would result in increased levels of investment and greater levels of service innovation. However, the level of competition for business in a more commercial and
dynamic market will be a new paradigm for most operators.
We are already observing new investment in the Australian aged care sector from foreign interests, drawn to our relatively affluent and rapidly ageing population. Some of these investors are currently operating in countries
more accustomed to competing in less regulated conditions.
The proposed relaxation of supply constraints will remove the protection afforded to current facilities under our existing managed bed policy. Our experience in New Zealand indicates that heightened consumer expectations, particularly in affluent areas, can result in aggressive competitive behaviour.
Operators with strong, flexible service models and access to capital are able to establish themselves in the catchment areas of existing operators who do not meet market demand. The resulting impact on occupancy levels and the workforce can result in service closure.
While many operators have voiced their concerns at this threat, the Productivity Commissionís priority has been for the sustainable improvement of service levels for consumers and not the protection of established operators.
To prevail in this new world, providers must leverage their superior knowledge of the communities in which they operate, their established care service models, workforce and reputation.
Based on their understanding of their community, providers can determine whether current service models are likely to remain competitive in a more dynamic environment and develop strategies for their adaptation and the
upgrade or redevelopment of their building stock.
3. Capital funding
The Productivity Commission has recommended the removal of restrictions on the payment of accommodation bonds in standard high care which would dramatically increase the proportion of consumers who could pay refundable entry contributions in residential aged care.
At the same time, providers would be required to offer periodic accommodation charges as an alternative (and set at a commensurate value) to accommodation bonds.
The move has raised concerns about the potential decrease in bond receipts across all forms of residential care if residents prefer to pay periodic accommodation charges. Although future preferences are difficult to predict, we do not share the same level of concern. There are several reasons why the number of accommodation bonds might actually increase over the short to medium term.
3.1 Investment stimulus requirement
Although we anticipate the entrance of new market participants in the future, it will be established Australian operators that will drive the initial development and the redevelopment of the countryís aged care building stock. Grant Thornton estimates that an investment of approximately $21 billion will be required in the short and medium term. Few existing providers have the cash reserves to undertake new developments or redevelopments
at a cost of over $180,000 per bed (excluding the cost of land) without resident capital contributions. Lending horizons for Australian financial institutions are relatively short and the use of accommodation bonds is
a well established mechanism for the repayment of bridging finance.
The success of the Productivity Commissionís vision for a rejuvenated industry is dependent upon new investment by providers. Future reform implementation strategies will need to facilitate access to resident
capital contributions. In the longer term, operators and their financiers will develop alternative capital financing models on the back of the more profitable operating models. This will help reduce dependence on accommodation bonds for new developments.
3.2 Resident preferences
Residents currently paying accommodation bonds have been assessed as requiring low care services (or extra service high care). The average length of stay for low care residents is approximately 36 months compared
to high care entrants of 15 months (Department of Health & Ageing 2011).
The introduction of accommodation bonds for standard high care may not appear attractive given the likely duration of stay. However, many high care extra service facility operators have been successfully operating under this model for many years.
Feedback from the Productivity Commission indicates that the proposed Australian Aged Care Home Credit Scheme can be used to draw down accommodation bonds against the value of the residentís home. This means that the resident can retain their home, and often their pension, while incurring a servicing cost to the Government limited to the Consumer Price Index.
Alternatively, the Aged Pensioners Savings Account scheme can be used to deposit the surplus from the sale of the home after paying an accommodation bond and the pension would be preserved.
Conversely, a resident paying periodic accommodation charge instead of a bond must meet the providersí cost of capital. This would be substantially greater than CPI charges from the Home Credit Scheme (or no charges from funds from the sale of the home) and represents a disincentive for consumers to pay accommodation charges in lieu of a bond.
3.3 Alternative capital contribution models
With the establishment of entitlement models, the residentís capacity to influence the setting in which they receive care will drive the creation of a broader spectrum of service environments and innovative building designs. International experience demonstrates that seniorsí housing models adapt to consumer expectations where entitlement models are effective. This is reflected in their options for accommodation payments.
In the future environment proposed by the Productivity Commission, recipients of residential aged care services will be able to receive care services in apartments or units and should be able to make contributions based on their personal circumstances and preferences, including strata purchases, loan licenses and rental alternatives currently provided at retirement villages. In a less regulated pricing environment, providers will develop alternative capital funding models that meet consumer demand and support the development of accommodation that their clients value.
In the longer term, we believe that the emergence of entrepreneurial financing alternatives and consumer preferences are likely to reduce the industryís dependence on accommodation bonds in their current form. However, if the reforms are successful in creating a more viable industry, providers will have greater capacity to service borrowings and banks will be able to develop products to help support this transition.