Productivity Commission Recommendations for Residential Care Providers – impact of recent amendments on financiers
Insight:
While the recent amendments to the Productivity Commission’s recommendations may cause some short-term uncertainty, they signal positive changes for both the industry and for consumers. The changes will make quality care more affordable and provide greater clarity for aged care providers.
Overall, we see the changes as beneficial for financiers as there should be upward impetus on industry operating profits. This may be tempered by short-term cash flow issues as bond flow becomes more uncertain, despite the introduction of bonds on high-care beds.
Introduction
Following the release of the draft Productivity Commission Report in January 2011, the final report was released in August 2011, following an extensive consultation process with various stakeholders. This Insight focuses on the key recommendations and what they will mean for financiers.
1. Introduction of an entitlement-based assessment and funding system
Users of aged care services (‘consumers’) who can afford to do so will be required to contribute to the cost of their care through a co-contribution payment of between 0% to 25% of the costs, capped at $60,000 over their lifetime.
The current accommodation charge for high-care accommodation of approximately $30 per day will be abolished as it does not reflect the cost of accommodation.
Consumers who can afford to do so will also pay for their accommodation and living charges. The prices will be determined by market forces.
Overall, PPB Advisory believes these reforms are positive, as ultimately, they will reward the more professional and efficient operators that take advantage of them and win market share over their poorly funded and less profitable competitors.
If the recommendations are implemented, they will deliver:
- increased funding for providers
- greater cost transparency and choice of accommodation options for consumers
- the removal of the accommodation cap for high-care, which will promote service innovation via competition
These positive aspects to the funding system will be counter-balanced by a few uncertainties, such as:
- Providers who have collected accommodation bonds in excess of reasonable market levels may face a cash shortfall when these so-called ‘super bonds’ are repaid.
- The expected government contribution for supported residents (based on 1.5 residents per room) will likely be insufficient compensation to providers, as most residents are in single bed rooms.
2. The removal of the distinction between high and low care and the abolition of extra service status
PPB Advisory believes that the removal of the distinction between high-care and low-care is a positive change, as it will allow operators to charge accommodation bonds for all beds (as opposed to the current limitation of low-care and high-care extra service beds). This initiative will likely result in increased levels of funding that can be used to renovate older facilities or build new ones.
The abolition of ‘extra services’ may have an adverse impact on those facilities where the quality of the services is not significantly better than the immediate surrounding competition. Such providers may initially experience cashflow deficiencies as extra service accommodation bonds are refunded. This may result in reduced valuations for these facilities.
Another concern relates to the current building certification regulations that require certain minimum standards in order to qualify for high-care status. The removal of the distinction between high-care and low-care will result in revised building certification regulations.
Although the removal of the distinction between high-care and low-care poses a few challenges, it is only recommended to be implemented over the next three to five years. Hopefully, this will allow the government time to address some of these concerns.
3. Removal of the cap on residential bed licences
There is currently a restriction on the number of bed licences issued by the Department of Health and Ageing. This creates an artificial protection mechanism for less efficient operators, which are often the custodians of outdated facilities.
The restriction has also resulted in values being ascribed to bed licences, which in turn has inflated the value of balance sheets.
The removal of the cap will act to increase competition, accelerate the redundancy of older residential aged care facilities and stimulate investment in high quality care services.
Operators with older stock will no longer be afforded protection and will find themselves competing in an open market. These facilities will either need to be refurbished or sold for alternate use.
Given that this recommendation is only likely to be phased in over a five-year period, it will create short-term uncertainty. This may result in valuers of residential care facilities increasing their discount rates (at least in the short-term), leading to reduced valuations.
With the likely impact that bed licences will no longer have value, operators will need to write-off this asset from their balance sheets, resulting in a possibly significant diminution in the value of net assets.
Where banks are forced to rely on their security to recover debts, and a facility is not able to be sold as a going concern, the likely returns will be reduced as the administrators/receivers will no longer be able to sell the bed licences. Value will only reside in the alternate use of land and buildings, which is typically much lower than the in-use valuation.
4. Periodic accommodation charge
Consumers who will be charged an accommodation cost will have the choice of paying for their accommodation via a periodic accommodation charge or providing a cash accommodation bond.
Depending on how the periodic charge is to be set, this may result in a significant drain on an operator’s cash flow, as residents may opt to pay for their accommodation costs through a periodic charge, rather than an accommodation bond.
However, assuming that periodic payments for accommodation will be set at levels that match an operators’ cost of capital, consumers are likely to opt to pay an accommodation bond. This assumes that consumers can take advantage of borrowing against the equity in their homes using the Australian Aged Care Home Credit Scheme at interest rates equivalent to CPI. Allowing consumers to borrow against their homes should be a strong positive for the industry as it encourages consumers to enter aged care while broadening the funding base.
Contacts
Joe Dicks
Partner
t: +61 3 9269 4209
e: jdicks@ppbadvisory.com
Les Cullen
Director
t: +61 3 9269 4115
e: lcullen@ppbadvisory.com
Christian Sprowles
Director
t: +61 2 8116 3140
e: csprowles@ppbadvisory.com
Important: This information is not advice. Readers should not act solely on the basis of information contained in this document. We recommend that formal or independent advice be sought before acting in the areas covered herein.