Aged care needs financial transparency says independent Commission report

The report found that it was difficult to measure the overall performance of the aged care industry because of the limited reporting obligations on aged care providers by the Australian Department of Health (DOH), the use of group entity structures by providers, transactions between related entities, and the deliver of non-aged care activities by some providers.

In 2018-19, there was approximately $25 billion funnelled into the aged care sector from the Government. 

The Commission engaged BDO Australia, an audit, tax and advisory group, to analyse the data provided by aged care organisations to the DOH. The DOH data is not publicly available.

The organisation released its findings in the Commission’s Research Paper 12 – Report on the profitability and viability of the Australian aged care industry. 

BDO found that there is a large difference between the way in which aged care providers structure their operations and the costs they incur from things like interest, management fees and rent.

These expense items range from 0 to 100 percent of total expenses for different individual aged care providers.

Aged care providers’ profitability and viability were assessed by BDO, regarding their accounting profits, cash flows and other measures of a provider’s ability to access capital.

From 2017-18:

• 74 percent of aged care providers were profitable, 13 percent were unprofitable, 4 percent were unprofitable but had positive cash flows, and 9 percent were profitable but had negative cash flows

• 53 percent of aged care providers were viable, 8 percent were not viable, and 39 percent of providers viability could not be determined because it was dependent on them being able to secure additional capital

The BDO report says, “We have outlined the challenges of measuring the total return on investment in the aged care sector. These challenges primarily stem from the limited transparency in relation to how group structures and related parties are used by providers to generate returns. 

“This makes it difficult to distinguish returns generated by the group from those generated as a result of funding received from the aged care sector.

“The current [aged care] model favours more sophisticated providers who have the necessary financial acumen to manage diverse portfolios and capital structures.

“An improvement in transparency would positively impact the extent of analysis possible and allow for more informed decision making in relation to policies and/or investment decisions.”

BDO also reported that they believe part of the complexity and uncertainty around the sector’s financial performance arises from Refundable Accommodation Deposits (RADS).

RADs are interest-free loans to providers by people wishing to enter a nursing home, so a provider can use the loan to make investments but must be repaid if required to.

This report was released ahead of the Royal Commission’s hearings that started Monday, 14 September, focussing on the funding, financing and prudential regulation of aged care in Australia.

The hearings run from 14 – 22 September. To find out more about these hearings or read the recent report, head to the Royal Commissions website.