The much anticipated 2015 ACAR results announcement in late March saw an overall release of 10,940 residential places with 9,907 places allocated and the remainder to be distributed via deferred allocations.

The biggest winners were Bupa and Regis who were allocated approximately 900 places each. Between the two of them they took almost 20% of the initial release of places.

In our October 2015 edition, in the article titled ‘Farewell to Mitch’s Dream’, we touched on the issue of whether the departure of Mitch Fifield as Assistant Minister of Aged Care, would mean his goal of getting rid of the whole ACAR process altogether (not just in the Home Care space) will die a natural death.

In an attempt to answer this question, one needs to go back to the origins of Mitch Fifield’s Dream which is the 2011 Productivity Commission’s Inquiry Report – ‘Caring for Older Australians’ 28th June 2011. In the preamble of this report, it is stated that “The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed most simply, is to help governments make better policies, in the long term interest of the Australian community.

The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole”

In essence, when the report was tabled in Federal Parliament in June 2011, the key recommendation, to solve the problem of a lack of supply of residential aged care services was to ‘‘Remove restrictions on the number of community care packages and residential bed licences’’ (Recommendation 7.1). The Commission concluded that ‘Providers would be able to better respond to the level of demand and the preferences of a wider range of care recipients and hence, this was the genesis of the call for removal of the allocation of new places (bed licences).

Since June 2011, have there been any definitive statements from any of the Ministers for Aged Care on whether this is the best course of action to increase supply of residential aged care facilities and increase competition, so ultimately consumers and the Government get value for money?

The complexities with deregulating the allocation of bed licences include:

• Meeting the Government planning ratios so needs are met and we don’t see new developments in high socioeconomic areas to the detriment of low socioeconomic areas.
• Operators meeting their current banking key performance benchmarks, not least their ‘Loan to Value’ ratio when a zero value is placed on the existing bed licences they hold.
• Dealing with the difficulties in raising capital (bank loans) for development of aged care facilities due to
• The lack of surety of Government funding of residents.
• Limiting the Government’s fiscal exposure by an unplanned increase in resident numbers.

It is due to these complexities that it was the Commissions view that ‘‘a five year transition period, with appropriate monitoring and feedback processes, provides the best balance, with a significant risk of a loss of reform momentum if the period is significantly longer. That said, given the interdependencies with other reform proposals (in particular disability, health and hospital) the Government may find it prudent to extend the transition period’’.

The release of the Aged Care Roadmap in early April by the Aged Care Sector Committee ties in with the Productivity Commission’s submissions and addresses some of the above points and many others. The Road Map produced a number of recommendations regarding Approved Places ‘APs’ and Provisionally Approved Places ‘AIP’s. These included reducing ‘red tape’ around AIP management and within reason, simplifying the transfer of APs and AIPs between providers across regions as a short term goal. The removal of the ACAR is seen as a medium term (up to 5 years) goal. Suffice to say, as always, these recommendations are underpinned by the relevant ‘financial modelling’ as always.

Whilst none of us believe that Treasury will open up the funding floodgates any time soon, it is clear that the Road Map aims to ‘knock down’ a number of the barriers new operators face when seeking to enter the sector, a move destined to increase the number of aged care players.

On the other hand, these barriers are regarded as one of the most attractive aspects of the industry, which drives continued investment by established operators. Some existing operators may not fare     so well in the years to come in a broader market.

Readers will also note the recommendation to facilitate Home Care and Residential Care operators to ‘cross streams’ and provide another type of care, further adding to the pool of providers.

Without wanting to appear impertinent about the work and findings put forward by the Productivity Commission on this component, given the huge dissatisfaction expressed by many of the aged care operators who missed out on getting bed licences in the most recent round, is there more that can be done?

To answer this, it seems to us and to many of the aged care operators we have spoken to, one has to ask is there a difference between experiencing vacancies in an aged care facility due to a lack of demand today and vacancies due to potential residents ‘choosing’ to take their funding and reside in a facility they feel is better suited to their needs.

The answer from aged care operators is ‘probably not’. That is, most operators would be prepared to take on the risk of attracting residents but they are not prepared to proceed if bank finance is not available. Thus, the key is being able to finance the stream of new facilities. This is not as significant a problem for larger operators but is certainly a real issue for the small and mid-tier operators.

Given there is not a major difference, should more places be allocated immediately, twice yearly instead of annually so as to speed up the delivery of facilities on the ground? In many instances operators either purchase land or take options to purchase a site. If they have to wait a year to have another crack at getting an allocation, they may forfeit their options to purchase, or sell their land to residential developers to recoup costs.

The Minister to clarify if the current system of bed licence allocations will or will not continue for the mid-term (say 5 years) and if the Approved Places system as a whole is to be continued. As stated in our last edition, the current state of the Government holding their cards close to their chest in order to keep all political options open and not commit to anything, creates nothing but uncertainty for the industry and its stakeholders.

We continue to observe what seems to be an increasing number of typically small community based aged groups join forces with other like-minded organisations. There are obvious attractions to such a proposal. The larger group who ‘swallows’ up a smaller operation immediately broadens it footprint whilst the smaller entity continues on in some form.  It is interesting to ponder though, if both sides ultimately retain their identities, one overshadows the other, or a new trade mark is forged. Recent examples of these include:

Bega District and the Imlay Nursing Homes in NSW, together with allied services, announced late in 2015, they will join forces to become the Sapphire Coast Community Aged Group. The group will incorporate residential care, home care and retirement living.

 http://www.merimbulanewsonline.com.au/story/3059821/pambula-and-bega-aged-care-homes-to-merge/

Recently, two aged care operators, Karingal and St Laurence, based in the Geelong region of Victoria, have announced they are also in talks for the next few months over whether to team up.

http://www.karingal.org.au/news/articles/karingal-and-st-laurence-possible-merger/

Early this year, faith based provider Eldercare absorbed the 18 bed Minlaton Hostel on South Australia’s Yoke Peninsula. These are but some of a number of unions of late.

http://www.eldercare.net.au/about-eldercare/publications/eldercare-news/2016/minlaton-aged-care-facility-transfer-reaches-completion

The release of the 2016-17 budget revealed a $1.2 Billion cut to the payments of Aged Care Providers over the next four years, in an effort to curb a projected blowout of $3.8bn dollars in the Complex Healthcare Category (CHC) of the Aged Care Funding Instrument (ACFI).

With ACFI reviews being one of the most effective strategies to increase profitability, the news will, while not unexpected (see the recent MYEFO forecasts) will not inspire operators, particularly those running marginal services. This will shift more of the costs from the Government to the Consumer.

Roughly 10% of the cut will be ‘reinvested’ in the sector by enhancing the My Aged Care Website, improving funding for Aged Care Providers in Rural Areas and a continued blitz on unannounced compliance visits by the Australian Aged Care Quality Agency.

In more acquisition news, the corporates have continued their quest for size with Japara buying the Profke Group in October ’15, Estia having purchased the Kennedy Group shortly after in December, and Regis just having announced their acquisition of Masonic Care Queensland in March of this year.

While the news of initial acquisitions used to cause strong share price gains in the past, consensus has calmed down significantly with shareholders and industry specialists now cautiously examining the cost vs. benefits of each acquisition. Rising debt levels, the quality of the asset as well as the need to integrate any new facilities into the existing structures are concerns that are increasingly being voiced and reflected in the share price movements after the announcment of a new acquisition.

Please feel free to contact John Newman on 03 9831 9898 or john@amicum.com.au for more information.