Investment ‘critical’ for aged care growth

Consumer funding and investment attraction will be critical to sustaining the aged care sector and ensuring enough beds for future generations.

Ahead of the Aged Care Funding Authority’s (ACFA) recommendations to Mark Butler, Minister for Mental Health and Ageing this May, the 2012 Bentleys Aged Care Survey has revealed important insights into how aged care financing is affecting providers’ profitability and the sustainability of the industry.

Now in its 18th year, phase two survey results represent the profit and loss and other operational data of approximately 195 aged care facilities around Australia, and build on the phase one data released in January.

According to Bentleys director and aged care specialist Heath Shonhan, results indicate lagging profitability in the sector, with expenses increasing at higher rates than income.

“With greater focus on the decoupling of care, services and accommodation, the survey broke down costs across those categories, finding care costs now represent 67% of the average provider’s expenses (up from 65.3% in 2011), accommodation at 15% and services at 18%,” Mr Shonhan said.

“It also found that care costs (where subsidies are generally first directed and which include items like nursing and chemist supplies), jumped 11.58% between 2011 and 2012.

“This is opposed to average income – including subsidies, consumer and other funding combined – which grew at only 7.97% in the past year.

“Average services costs (like cleaning and catering) grew 9.07% since 2011 while accommodation costs (like energy and rates) decreased slightly, down 1.19% on last year.

“With the bulk of subsidies being directed into care, providers are looking elsewhere to cover those additional costs while funding the capital expansion needed to look after the next generation of aged care residents.”

Phase one of the survey, which analysed the 2011-12 general purpose financial reports of 246 facilities, found accommodation bonds make up almost a third (31.1%) of total financing. This percentage has steadily increased from 16.83% in 2005-06.

“Australia is shifting from being a society that can cover the majority of costs for aged care, to one with a higher population of elderly residents and less taxpayers,” Mr Shonhan said.

“At the same time, baby boomers accustomed to higher standards in services and accommodation, are moving into aged care.

“Unfortunately, the average net profit stands at 7.8%, well below 2005-06 levels of 9.95%, and is not enough to fund capital expansion. This is where consumer funding and increased investment are critical to meet these demands.

“Consumer funding is likely to grow substantially in the coming years, particularly as individuals’ capacities to contribute increases, through superannuation and personal wealth.”

The potential for the sector to attract investment is a particular focus for ACFA, and can be gauged by the level of return on equity (RoE).

“RoE measures likely investment returns and so determines the likelihood of investment into the aged care sector to help meet current and future demands,” Mr Shonhan said.

“This year’s survey found the average RoE to be at 6.57%, which for comparison’s sake, is not that much greater than other passive, lowrisk investments like term deposits (RoE of about 4% to 5%) and managed funds.

“Investors are likely to be drawn to investments with a return on equity in excess of 10 to 12%.”

According to Mr Shonhan, the survey results also pointed to the increasing imperative to focus on efficiency measures in aged care, such as upgrading technology to “by the bed” tablet record keeping. Further efficiencies can also be gained through consolidation or group purchasing arrangements for clusters of smaller aged care providers.

The survey found that facilities with more beds (60 or more) performed better, as administration costs were able to be spread out over more residents.

 “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,” Mr Shonhan said.

“Even if not in the immediate plans, smaller aged care providers should give consideration to whether being a consolidator or becoming consolidated would be a viable option for the future.”

The Bentleys team will present the results of this year’s survey at seminars in Sydney on 5 April and Melbourne on 16 April.

Benchmarking reports will be available for download by participants at the aged care survey website www.agedcaresurvey.com.au

Industry participants, banks and other interested parties can purchase the data from the aged care survey website also.