Understanding Industrial and Political Influences on Community and Residential Care Providers

Key Statistical Findings (Australian Bureau of Statistics, 2011)

Funding Structure Statistics

71% of all funding into the residential aged care sector comes from the Federal Government

o 25% of all funding comes from residential care feeso 4% of all funding comes from accommodation payments

Sustainability of the residential aged care sector depends on providers’ ability to attract another $25 billion of investment throughout the next 10 years

o Residential aged care organisations require an IRR greater than their WACC in order to attract investment, with an IRR of 12% or higher preferably

Demand Statistics

1 in 10 people over 70 live in permanent aged care currently o By 2021-2022 the government target is to maintain the same ratio, aiming for

113 places per 1, 000 people: 42 residential high care 44 residential low-care 27 community-care 6 high-level community care

The growth rate for the Australian population aged over 60 is 2.9%, which is far higher than the global average of 1.9% for this age group

745, 000 people, or 47% of all aged care residents are aged between 80-89, followed second by 30% for all people older than 90 years

o All people aged 80+ thus represent the market segment with the highest demand for residential services

This 80+ segment will rise by 211% between 2013-2050, resulting in 2.7 million in this segment by 2050

In 2013-2014, more than 500, 000 elderly Australians were recipients of a Commonwealth Home and Community Package

o 243, 000 were recipients of residential aged care serviceso 78, 000 were recipients of home-care packages

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Market Structure Statistics

The aged care industry has low levels of market share concentration with the biggest four providers combined yielding less than 20% of total industry revenue and no single provider holding a market share higher than 5%

o Total of 2, 700 aged care providers, with 3 out of every 4 providing high-level care

o Not-for-profit organisations currently account for 57% of all operational aged care facilities, followed by for-profit providers with 37% (up from 33% in 2009) and government providers with 6%

o Just over 60% of all providers operate only 1 facility while less than 30% operate between 2 and 6 facilities and only 2% more than 20 facilities

In 2004 only 28% of all facilities had more than 60 residential places, while in 2013 this increased to just less than 50% of all facilities

For every $1 spent on capital, $11.30 is spent on wages, or in other words - only 9% of all money spent by aged care providers on employees, is spent on land, capital and equipment

o Wage costs have been forecast to grow by 2.6% per year to 2020, accounting for 53 percent of total industry revenue

Total residential aged care industry revenue for 2014-2015 was $17 billion, of which $10 billion was wages and $1 billion was profit

o Annual growth rate of industry between 2010-2015 has been 4.2%o Projected annual growth rate for 2015-2020 is 5.3%

Total number of providers in the residential aged care industry in 2014-2015 is 1, 732

Government Funding Statistics

Total budget amount for residential care subsidies is $9 billion currentlyo Total budget amount for residential care subsidies is to be increased to $10.9

billion by 2017-2018o Living Longer Living Better Reforms will cut $650 million of payroll

supplements for aged care providers by 2018, with further plans to move $1.5 billion from the payroll tax supplement to a general pool of funds for the aged care industry

In the aged care approvals round for 2014, there were a total of 19, 000 applications for 9, 300 residential places advertised in Australia, and an additional 6, 650 home-care places

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Average government subsidy per residential place is $48, 870o Average government subsidy per provider with more than 80% high-care

residents is $55, 300 per year, while the average subsidy per provider with more than 80% low-care residents is $20, 800 per year

38 percent of all new aged care residents are government-subsidised, with subsidy amounts increased since 2014, to a current amount of $52.50

o Providers that do not give more than 40% of their eligible care days to government-subsidised residents receive a 25% discount to the amount of accommodation supplement provided to new residents

Relevant Policies and Legislative Bodies

Aged Care Act 1997 Australian Aged Care Quality Agency Act 2013

o Aged Care Quality Agency Residential Care Subsidy Principles Act 1997

o The Conditional Adjustment Payment (CAP) Living Longer Living Better Policies

o Aged care Pricing Commissionero My Aged Care

Ageing in Place Policies Federal-State Agreements

o Home and Community Care Programo The Commonwealth-State Housing Agreemento The Supported Accommodation Assistance Programo The Commonwealth, State and Territory Disability Agreemento National Disability Insurance Scheme

Conclusions

Together the statistics in this report suggest four main things about the community services and aged care industries combined:

(1) the market is fragmented with low levels of market share concentration; (2) for-profit providers are quickly beginning to join the market;(3) the aged care industry is in the growth phase of its life-cycle until 2050;(4) facility expansion is the preferred mode of growth, compared to new facility development or product diversification.

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This report stresses five main conclusions for the community services and aged care industries:

(1) small rises in costs can be crippling; (2) efficient management can help keep administrative costs down; (3) alternative sources of funding can make providers more self-reliant; (4) meeting government requirements such as training and capacity quotas can ensure sustained funding and; (5) differentiation in offerings is becoming increasingly important - either through price-competition (varying prices to those of competitors) or the provision of higher quality services or non-care activities that tap into clients recreational, entertainment, lifestyle and personal interest preferences.

Recommendations

(1) Due to Ageing in Place policies and government targets to keep more elderly living at home, it would first be worthwhile investigating means by which to develop a more profitable home-care packages segment. This may involve looking into ways by which providers can start providing more home-care packages or more competitive/better packages compared to other providers. Further in the future, it could also involve a long-term push toward becoming a market leader in home-care packages: as this direction would yield greater support from and access to more government funding.

(2) The alternative or additional direction that could be pursued is an emphasis on ageing in place within the residential community, whereby services are provided across the entire aged care continuum. This would involve an increased focus on facilitating the elderly to continue to live in the same place and continue to receive extra care, as requested or needed, meaning that they would be provided with the right to indefinite residence. This may also involve a shift in service provision to a direction whereby providers look to co-locate retirement villages together with residential aged care centres, thus better enabling the elderly continue ageing in place.

(3) With the Longer Living Better Living reforms and the government push to diversify service-quality across aged care services, one related recommendation would be to investigate the possibility of diversifying service offerings. This could be done by providing additional non-care activities or services including recreation, entertainment, lifestyle and personal-interest activities such as massage, gym, pool, dancing or personal training. The cost of adding these would however need to be first weighed up against their potential demand by residents, and an investigation of potential demand may be first warranted before any financial outlays.

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(4) More specific recommendations concern the emphasis to be placed on particular financial goals. Based on the key indicators of investment attractiveness and financial performance in the not-for-profit aged care sector (see Aged Care Financing Authority, 2013), the findings in the report highlight that providers should place greater emphasis on increasing: Net worth per resident per annum Equity as % of total financing Net profit before tax margin Return on assets Return on equity Interest coverage Accommodation bond asset cover

Providers should also place greater emphasis on reducing their accommodation bonds as % of total financing, while also recognising that there are financial goals which are not particularly important for improving financial performance, such as: occupancy rates, average bond per resident per annum, number of bonds and non-current liabilities as % of total financing. Contrary to common intuition, organisational size (number of residential homes) was also revealed to be unimportant to improving financial performance and investment attractiveness. The focus should thus be increasingly directed at reaching financial goals that contribute to increasing the internal rate of return or to reducing the weight average cost of capital – as have been selected above.

(5) Lastly, some key findings on the sustainability of the aged care sector and its organisations have stressed the importance of improving responsiveness to demand. One measure of this is the delay in entry to care: “while there appears to be a lengthening of times from assessment to entry, the data is weak and does not indicate local, regional or jurisdictional variation” (Baldwin et al., 2013, p. 6). Another measure of responsiveness to demand is extended hospital stays for people waiting to enter aged care: “the proportion of aged care-type patients occupying acute care hospital beds has declined since 2005, which suggests that access has improved” (Baldwin et al., 2013, p. 6). Providers should place greater focus on both of these measures of demand responsiveness, if they aim to improve their levels of investment attractiveness, organisational legitimacy and government support.

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Preliminary Report on Understanding Industrial and Political Influences on Community and Residential Care

Introduction

For multifaceted non-for-profit organisations there are often multiple sources of funding and various revenue streams involved in providing services. The complexities involved extend even further when the provision of services is community-based, or focused on key government priorities. With regard to the provision of aged care services in Australia, the government priorities are specifically aligned with supporting community-based care (Richardson, 2015b). For such community-based not-for-profit organisations, there is a greater dependence on government funding, compared to not-for-profit organisations, whose services do not align with key government priorities, and compared to for-profit organisations: which commonly do not rely on government funding.

This increased relevance of government funding to community-based not-for-profits has direct implications for their organisational planning. While other types of organisations can plan for the future based on solely understanding their industry landscape, community-based not-for-profits must in addition have a developed understanding of the government policy landscape. A greater dependence on government funding, as such, means a greater reliance on and awareness of current and future changes in government priorities: changes that could cut or increase particular funding streams.

It is well-documented in management literature (see Teece, 2007) that competitive advantages can arise from improved organisational planning, such as the anticipation of emerging trends in either consumer-preferences or funding landscape. For organisational planning purposes, as such, the present report provides an in-depth look at important aspects of both the industry and government policy landscapes.

Source of Funding

The Aged Care Financing Authority’s (2013) inaugural report on the funding and financing of the aged care sector documented that the Federal Government accounts for roughly 71% of total funding to residential aged care providers: mainly through the Aged Care Funding Instrument (80%) with other funding through different supplements. The remaining sources of funding include the residential care fees which account for 25% of total funding and accommodation payments revenue accounting for 4%.

The Aged Care Financing Authority also estimated that in order for Australia’s aged care sector to meet the demands of the ageing population, another $25 billion of investment will be required over the next 10 years (Aged Care Financing Authority, 2013). Whether the providers are for-profit or community-based, the viability of meeting the growing demand for aged care will depend on their ability to sustain sufficient profit margins so as to attract this level of investment into the sector.

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To predict the possibility of aged care organisations attracting $25 billion of investment over the next 10 years we turn to popular economic theory: organisations with an Internal Rate of Return (IRR) greater than their Weight Average Cost of Capital (WACC) will attract investment. Deloitte Access Economics (2011) reported that for predominantly high-care providers, on average the IRR is 2.4 percent and the WACC is 9.8 percent, while for low-care providers these figures are 8.4 percent and 8.6 percent, respectively (25-year investment). With investors expecting at least a 12 percent rate of return, it would appear that there is currently no incentive to invest in either low care or high care places (Deloitte Access Economics, 2011).

Other evaluations by Deloitte Access Economics (2013) show that the daily accommodation payment required to break even – in the base case of 50% of people using the refundable accommodation deposit option – is $61.40 and $64.40 where all accommodation revenue is derived from daily accommodation payments.

Source of Demand

According to the IBIS-World industry report by 2020 the community services industry is estimated to provide employment to around 580, 000 people across 30, 000 providers: with growth rates between 1.5 and 1.9 percent over the next five years and; number of community service locations growing by 2.4 percent (Richardson, 2015b). In 2014, there were just more than 240, 000 retirement-aged (65+) individuals in residential aged care facilities. Based on these figures, this industry may be classified as being in the growth phase of its life-cycle. Presently, one in 10 people over 70 years of age live in permanent aged care.

Through to 2021-22 the government target for residential care is surprisingly the same, aiming to have one in 10 people over 70 in permanent aged care, or 113 places per 1, 000 individuals (see Aged Care Act, 1997, National Provision Ratio): “Within this overall target provision ratio of 113 places, 42 places should be residential high care, 44 places should be residential low care, and 27 places should be community care, with six of these places being for high level community care” (Aged Care Financing Authority, 2013, p. 49).

Community services here are defined as comprising four types of providers, including both not-for-profit and private: (1) childcare providers; (2) personal welfare providers; (3) crisis and care accommodation providers and; (4) aged care accommodation/nursing home providers. Looking more closely at aged care accommodation and nursing home providers, there were over 6.1 million Australians in June of 2014 who were over the age of 55. Although this number accounts for 26 percent of Australia’s total population, only 6 percent of this age-group lives in residential facilities or retirement villages.

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In this broad group of individuals older than 55 years, 12.1 percent are aged between 80 and 89. In June of 2014, this cohort accounted for roughly 47 percent (745, 000 persons) of all aged care residents. As such, people aged between 80-89 represent the market segment with the highest demand for residential care services (47 percent of all residents). This segment is followed by the over 90’s, who account for approximately 30 percent of all permanent residents. Going into the future, the portion of those over the age of 80 will rise by a whopping 211 percent between 2013 and 2050, “resulting in 2.7 million Australians…in this age group by the year 2050” (Kowal et al., 2014, p. 378).

Comparatively, as of 2013 around 20 percent of Australia’s total population was over 60 years of age, with this proportion expected to increase to 28 percent by 2050 and 36 percent by 2100 (Kowal et al., 2014). Adding to the recognition that Australia’s population is ageing, the speed of ageing becomes just as important, due to the consequent demands placed on policy-makers, organisations and citizens to adapt to the resulting effects. In particular, the growth rate for the population over the age of 60 is 2.9 percent, which is far higher than the global average of 1.9 percent for this age group (Kowal et al., 2014).

Market Structure

The market structure of the aged care residential services industry is especially divided, with low levels of market share concentration. Currently, the top four providers together comprise less than 20 percent of total industry revenue with no single provider holding a market share higher than 5 percent. This market fragmentation can be largely explained by the significant presence of not-for-profit organisations (charitable, religious and community-based) which are responsible for 57 percent of all operational aged care facilities, followed by for-profit providers which account for 37 percent and government (local, state/territory) providers with the remaining 6 percent. Of particular interest is that in 2014-2015 for-profit organisations provided 37 percent of all operational aged care facilities, which increased from 33 percent in 2009-2010. This suggests that for-profit providers are increasingly beginning to join the market.

The market fragmentation can also be explained by the small size of the operating providers. In excess of 60 percent of all providers operate only one facility with fewer than 30 percent providing between two and six facilities. Just two percent provide more than 20. Another interesting observation however is that in 2004 only 28 percent of all facilities offered more than 60 places while in 2013 this increased to just shy of 50 percent of all facilities. This fast trend in growing facility sizes suggests that facility expansion is the preferred mode of growth, as opposed to new facility development.

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Moreover, in contrast to the increasing share of for-profit providers, the facilities and places operated by religious, government and community-based providers have decreased gradually during the same period. This suggests that the market is in the growth phase of the industry life-cycle and that for-profit providers will increasingly continue to join the market as demand continues to rise. The entrance of international for-profit providers is likely to help raise funding and industry revenue.

Looking more closely at operational considerations, the next section delves more deeply into specific aspects of policy and market structure that are likely to have an impact on future investment and returns of residential aged care and community services organisations.

Policy Considerations

In community services there is a large dependence on government funding. Fluctuations in funding policies or requirements can have substantial impact on operators’ returns. As a result of the political implications of funding specific community services, the funding activities can radically change based on changes in government. More importantly perhaps, the funding lags behind changes in demand, and this lag is most pronounced when the government’s efforts are directed at decreasing budget deficits.

Fortunately for community services, the most recent government in power favours community-based care over institutional care. The reason is that the cost of providing at-home care and related services is lesser than having these services run at fully staffed hospitals or residential aged care homes. Therefore at the expense of hospitals and psychiatric institutions, community services organisations will continue to receive extra funding and support, enabling hospitals to treat clients as outpatients and outsource aspects of treatment. This is reflected in current funding arrangements designed to facilitate the elderly, disabled and economically disadvantaged to stay in the community, in privately owned or rented accommodation.

Aged Care Act 1997

To help better understand the implications of changing government policy, we first turn to the primary piece of legislation that enacts the aged care framework: Aged Care Act 1997. Its broad goal is to oversee that aged care services are responsive, diverse, equitable, flexible and affordable. Specifically concerning government-subsidised providers and facilities, they are all required to have accreditation through the ‘Aged Care Quality Agency’, or previously known as the Aged Care Standards and Accreditation Agency. On the first of January, 2014, this new legislative agency began operating, as under the Australian Aged Care Quality Agency Act 2013.

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The accreditation procedure evaluates the performance of a residential facility in line with accreditation standards which involve assessment contacts and review audits. As of last year, the Aged Care Quality Agency will engage in accreditation assessments of over 1, 400 residential facilities. Although the Federal Government sets the maximum level of fees that providers can utilise, it offers decision-making freedom with regard to the level of basic daily care fees for individuals on any kind of pension and anyone else who may qualify for an additional income-tested fee. The Federal Government further controls accommodation payments which include bonds and charges payable by individuals going into a residential facility. Bonds are refundable entry requirements and providers are free to keep interest earnings on the bond, as well as taking a set administration fee amount as determined by the client’s duration of residency.

The total 2014-2015 budget amount that has been set by the Federal Government for special appropriations for Residential Care Subsidies is $9 billion. This will further be increased to $10.9 billion through to 2017-2018. Part of this amount will be provided to subsidies for aged care providers, with the average subsidy per residential place at $48, 870 in mid-2013. The 2012-2013 average subsidy for providers with more than 80 percent low-care residents was $20, 800 per year, as compared to $55, 300 for providers with more than 80 percent high-care residents. During the same time, there were around 2, 700 aged care providers, with roughly 3 of every 4 being home to high-care individuals.

Another portion of the total budget amount is in the accommodation supplements that cover elderly individuals who are socioeconomically disadvantaged and unable to pay for their residential accommodation. Providers that do not give more than 40 percent of their eligible care days to the government-subsidised residents have a 25 percent discount to the amount of the accommodation supplement provided to new residents.

In 2013, 38 percent of all new aged care residents were government-subsidised, with the subsidy amounts now increased since mid-2014: to a figure of $52.50. However this increased amount only applies to providers that have renovated, renewed or developed their facilities any time after the 20th of April, 2012. To receive these subsidies the applicants must be approved under Part 2.3 of the Aged Care Act 1997. In particular, subsidy approval is based on the ACFI assessment tool, where applicants are evaluated across three sets of criteria: (1) activities of daily living [ADL]; (2) behaviour supplement, and; (3) complex health care supplement [CHC]. Based on responses applicants are then ranked on a level ranging from nil, to low, medium and high – each of which receives a different amount of funding within the various criteria.

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Conditional Adjustment Payment

Separately to care provision, the Conditional Adjustment Payment (CAP) is a form of financial assistance that is also provided to aged care providers with the aim of promoting and improving corporate governance and financial management practices. Claiming this however requires that a provider voluntarily adheres to specific requirements detailed in the Residential Care Subsidy Principles Act 1997. Some of these requirements include financial auditions, and specified employee provisions, such as training for example. The specific amount of financial assistance provided is 8.75 percent of the basis subsidy amount payable in respect of a resident.

Living Longer Living Better

However, there will be changes to these numbers as new reforms are implemented. The first of these are the largest reforms to aged care in over 25 years, known as the Living Longer Living Better reforms. They commenced in 2012 and are aimed to be rolled out over a ten year period. An important component of these reforms commenced on the 1st of July in 2014, removing the division between low-care and high-care services in an attempt to encourage more equitable funding. The reforms bundle also appointed an aged care pricing commissioner in October of 2013, enabling providers to apply for approval to price their accommodation at higher prices than the ceiling ($550, 000) enforced by the Minister for Social Services in the 1997 Aged Care Act.

Furthermore, providers can also apply for additional service fees on: (a) accommodation; (b) range and quality of food and; (c) the inclusion of non-care activities such as those of a recreational, entertainment, lifestyle or personal interest nature. This allows providers to offer extras additional to the basic standard of services. This is aimed to foster a direction toward a user-pays model of service delivery, while further enabling a higher degree of pricing transparency. By encouraging operators to progressively develop their aged care facilities as extravagant hotel-style packages, it is hoped that the resulting changes in customer expectations and continuing reforms will encourage other industry competitors to differentiate their service offerings.

These changes which aim to provide residents with increased choices are likely to boost the level of competition in the aged care market with an accompanied rise in the level of transparency in accommodation pricing charges. As of last year, all providers need to report their accommodation prices on the government’s website - My Aged Care.

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From the beginning of 2015, the Living Longer Living Better reforms are also cutting payroll supplements for commercial aged care providers, saving the government over $650 million by 2018. There are however further plans to move $1.5 billion from the payroll tax supplement into a general pool of funds for aged care provision. Some providers in particular may experience declines in profit due to the unanticipated termination of the Dementia and Severe Behaviours Supplement in late 2014. With the anticipated growth in numbers of people with dementia, the removal of this funding has raised criticism, similarly to the government’s intention to terminate the pre-entry leave subsidy for residential care.

Nonetheless, positive financial outcomes have been predicted: “KPMG modelling and analysis commissioned by ACFA indicates a positive impact on the sector at the aggregate level. Positive impacts are likely to arise from the removal of regulatory restrictions on charging for accommodation in high care places (lump sum accommodation payments will be allowed and caps on periodic payments removed) and the increase in the accommodation supplement for new or significantly refurbished homes” (Aged Care Financing Authority, 2013, p. 12).

Ageing in Place

In addition to these reforms however, it is also hoped that providers will look to operate in alignment with the government’s Ageing in Place policies. Mainly, this would involve a move toward offering services across the whole scale of aged care: from retirement-living to aged care and home-care. The ageing in place policies are further pushing emphasis on home-care and home-assistance that allows the elderly to live in the community within rented or privately owned homes, as opposed to residential aged care facilities and public housing. This may increasingly fuel demand for home-based services and delay or interrupt entry into residential aged care facilities.

In the Aged care Approvals Round for 2014, there were a total of 19, 000 applications for the 9, 300 residential places advertised in Australia, and an additional 6, 650 home-care places available. These numbers reflect funding increases stemming from Ageing in Place policies, aimed at community and respite services that care for elderly with both low-level and high-level needs. Although more recently, the largest portion of new residential places have been allocated to high-care patients, providers are increasingly beginning to offer low-care services and extra-service high-care places that enable them to charge expensive bonds for accommodation. Such high-care providers have not conventionally charged accommodation bonds, but with the new regulatory regime implemented mid-2014, providers are now permitted to do so for all their aged care places.

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Providers must now also provide ageing-in-place services to the degree that elderly individuals can continue to live in the same place and continue to receive extra care, as requested or needed. This means that they now have a right to indefinite residence. This will likely shift service provision in a direction whereby providers co-locate retirement villages together with residential aged care centres, thus better enabling the elderly to age in place. In line with the Ageing in Place policies, other providers can also be expected to shift toward an increased emphasis on providing home-care packages.

Concerning home-care specifically, more than 500, 000 elderly Australians were recipients of a Commonwealth Home and Community Care package between 2013 and 2014, with an additional 78, 000 as recipients of a home-care package. During the same time, just less than half, or 243, 000, were beneficiaries of residential aged care services. Observing the relative prevalence of home and community-care packages, some aged care providers are increasingly broadening their offerings, with a growing focus on providing home-care packages (Richardson, 2015a).

Federal-State Agreements

Supplementary to the Living Longer Living Better reforms, there are numerous federal-state agreements through which the government is also able to employ regulatory control over the community services industry. These include the Home and Community Care Program, the Commonwealth-State Housing Agreement, the Supported Accommodation Assistance Program and the Commonwealth, State and Territory Disability Agreement. In attempts to lower structural barriers and enable a more unified and synchronised approach in the health and community care industries, more recently there has been a push toward increased flexibility in the governing and operation of such programs/agreements.

For example, with the Australian Charities and Not-for-Profits Commission (ACNC) as the present regulator of the charities sector, the current government is looking to expand the role of community-based organisations and volunteers by removing the ACNC. This was detailed in the ACNC (Repeal) [no. 1] Bill 2014, put forth on the 19th of March, 2014. As of June 2015, the Bill has not yet been voted on however. In addition, the current government is working to return specific governing functions to the Australian Securities and Investments Commission and the Australian Taxation Office.

Of upmost importance to the community services industry however, are two of the four pillars of reform that are aimed at promoting the development of a philanthropic culture. These include the development and empowerment of: (1) individual and family capability, as well as; (2) community capacity. Specifically, this translates into many of the reforms discussed in this section, also including the re-establishment of the Community Business Partnership and regulatory overhauls on bodies that regulate charities, not-for-profit organisations and welfare programs. Following this trajectory, community-based services can expect to benefit more than most.

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Complementing the aged care and planned welfare system reforms detailed in the interim report – A New System for Better Employment and Social Outcomes – is the National Disability Insurance Scheme. With the national rollout planned by 2018, trials of the disability insurance scheme are currently taking place in WA, ACT and NT, already reaching 20, 000 recipients since beginning in July of 2013. Support and funding spill-overs may trickle down to aged care community services as a result, with access to housing, respite, supported accommodation and new equipment under the broad umbrella of this scheme. Early intervention and advisory services are also planned for individuals with disabilities and those who care for them, aiming to enable these individuals to remain living within the community.

As the community services industry is heavily dependent on public-sector funding, crisis accommodation services and welfare organisations are especially well-funded, while the Child Care Rebate significantly contributes to the Child Care Services industry by directly providing clients with money to spend on childcare. Aged care, on the other hand, is provided the least assistance. As the ageing population necessitates greater care, the importance to Australia’s economic prosperity will be increasingly contingent on heavier funding-assistance from the public-sector. Parallel to this, the inflow of private money is quickly rising with corporate philanthropy establishing major philanthropic funds and creating additional welfare services, as well as contributing through private investments that recognise the significant growth potential of aged care providers.

Cost Structure and Key Success Factors

Lastly, with regard to the key success factors of the community services industry, the majority of the emphasis noted in the 2015 IBIS-World industry report was on keeping costs down through operational efficiency. To better understand why, we look at the costs of labour in particular. Due to shortage of skilled staff, the reliance on labour or labour intensity (high carer-to-patient ratio and wage costs) is overwhelmingly high.

To this end, it must first be noted that capital is defined very broadly as not only land and property, but also machines and utilities used to support clients such as medical equipment to assist with movement and or deal with emergency health situations. In the IBIS-World industry report, it was estimated that in 2015, “…for every dollar spent on capital, $14.57 is spent on staff” (Richardson, 2015b, p. 25). These figures are similar for the aged care industry where it is “estimated to spend $11.29 on wages for every dollar spent on capital” (Richardson, 2015a, p. 29). Labour costs in the aged care industry in fact comprise between 50 percent and 80 percent of revenue, with roughly 60 percent of this labour-force working in direct service provision: taking care of residents.

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Based on this, it is calculated that for the large majority of community services and aged care organisations, just less than 7-9 percent of all the money that is spent on employees is spent on land, property and equipment. It is unclear whether keeping capital costs this low is beneficial to profit margins or whether providers have arrived at this cost-structure through trial-and-error. Furthermore, the costs of wages have been forecast to grow by an annualised 2.6 percent through to 2020, representing 53 percent of total industry revenue in 2020.

Accordingly, it is perhaps not surprising that industry analysts place great emphasis on keeping costs low. However providers must be wary and balance their investments as low-cost approaches run in opposition to the aforementioned initiatives by government to encourage providers to invest in extending their product range and differentiating their aged care services and offerings.

Overall, the IBIS-World report notes that in an industry so reliant on government funding and labour intensity: (1) small rises in costs can be crippling; (2) efficient management can help keep administrative costs down; (3) alternative sources of funding can make providers more self-reliant and; (4) meeting government requirements such as training and capacity quotas can ensure sustained funding. With these four key success factors in mind, the fifth and perhaps most important factor that must not be forgotten is (5) differentiation: either through price-competition (varying prices to those of competitors) or the provision of higher quality services or non-care activities that tap into clients recreational, entertainment, lifestyle and personal interest preferences.

Moving forward, Aged and Community Services Australia (ACSA) and the Aged Care Financing Authority released separate reports investigating the financial viability and sustainability of the aged care sector (Baldwin et al., 2013; Aged Care Financing Authority, 2013). Some key findings on the sustainability of the care sector and its organisations stress the importance of improving responsiveness to demand.

One measure of this is the delay in entry to care: “while there appears to be a lengthening of times from assessment to entry, the data is weak and does not indicate local, regional or jurisdictional variation” (Baldwin et al., 2013, p. 6). Another measure of responsiveness to demand is extended hospital stays for people waiting to enter aged care: “the proportion of aged care-type patients occupying acute care hospital beds has declined since 2005, which suggests that access has improved” (Baldwin et al., 2013, p. 6).

More importantly perhaps, the capital structure and financial viability of top-performing aged care organisations have been compared against those with worse performance, highlighting important structural and financial goals that should be pursued. Specifically, in their analysis of not-for-profit aged care organisations, the Aged Care Financing Authority (2013) reported the totals and averages for 2011-2012 across the four categories of performance: (1) best; (2) well; (3) poor; (4) worst.

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Providers were grouped in these categories based on their amount of Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA), defined as: “Net profit after tax with interest, taxes, depreciation, and amortisation added back to it, and can be used to analyse and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions” (Aged Care Financing Authority, 2013, p. 7).

Earnings, Capital Structure and Financial Viability of Not-for-Profit Aged Care Organisations, grouped by Financial Performance (2011-2012)

Earnings, Capital Structure and Viability

Best-Performing

Well-Performing

Poorly-Performin

g

Worst-Performing

Total

Provider Count 92 155 169 136 552

EBITDA per resident per annum

$19,695 $10,291 $5,726 -$2,193 $8,176

Capital StructureTotal assets per resident

per annum$189,055 $160,008 $143,430 $180,418 $161,686

No. of bonds 4,881 17,140 11,258 5,910 39,189Average bond per

resident per annum$172,449 $189,756 $173,310 $207,692 $185,581

Net worth per resident per annum

$101,249 $61,907 $68,628 $69,989 $70,371

Net working capital per resident per annum

$9,829 -$63,139 -$24,984 -$26,356 -$37,020

Non-current liabilities as % of total financing

21.70% 16.40% 18.70% 29.10% 20.10%

Accommodation bonds as % of total financing

36.20% 49.40% 45.00% 45.40% 45.60%

Equity as % of total financing

53.60% 38.50% 47.10% 38.80% 43.20%

ViabilityInterest coverage 39.9 13.9 17.5 -2.6 14

Net profit before tax margin

18.70% 6.70% 2.00% -9.50% 4.50%

Occupancy 94.90% 94.80% 95.30% 93.00% 94.70%Return on assets 10.40% 6.40% 4.00% -1.20% 5.10%Return on equity 19.50% 16.80% 8.50% -3.10% 11.70%

Accommodation bond asset cover

2.8 2 2.2 2.2 2.2

Figures Sourced from Aged Care Financing Authority (2013, p. 89)

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The figures reveal that there are significant differences between the best performing and the worst performing organisations in the not-for-profit aged care sector. The main differences are that the best-performing organisations have larger net worth per resident per annum, net working capital per resident per annum, equity as % of total financing, net profit before tax margin, return on assets, return on equity, interest coverage and accommodation bond asset cover.

The best-performing organisations also have lower accommodation bonds as % of total financing suggesting that they do not rely on accommodation bonds for financing as much as poorer performing organisations. With regard to organisational size (number of residential homes), occupancy rates, the average bond per resident per annum, the number of bonds and the non-current liabilities as % of total financing, there are no consistent differences between the best performers and others. Based on this analysis, as such, we have been able to isolate the most important financial factors Providers should concentrate on, if it aims to be viewed upon favourably by potential investors and future stakeholders, including government.

It is lastly worth mentioning that for-profit aged care organisations perform better than the best not-for-profit organisations, while government-operated organisations were found to perform most poorly. However, since the funding arrangements are significantly different in the for-profit model compared to the not-for-profit and government-operated models, they are not comparable, and have instead been included below for inclusiveness purposes.

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Earnings, Capital Structure and Financial Viability of all Aged Care Organisations, grouped by Financial Performance (2011-2012)

Earnings, Capital Structure and Viability

Not-for-Profits

For-Profits Government Total

Provider Count 552 392 110 1054

EBITDA per resident per annum $8,176 $13,121 -$1,508 $9,274Capital Structure

Total assets per resident per annum

$161,686 $176,590 $193,277 $168,611

No. of bonds 39,189 23,077 2,183 64,449Average bond per resident per

annum$185,581 $233,032 $144,575 $201,18

Net worth per resident per annum $70,371 $24,660 $149,461 $59,198Net working capital per resident

per annum-$37,020 -$63,912 $4,010 -$45,168

Non-current liabilities as % of total financing

20.10% 31.70% 15.20% 23.90%

Accommodation bonds as % of total financing

45.60% 58.20% 19.90% 48.40%

Equity as % of total financing 43.20% 14.00% 75.50% 34.90%Viability

Interest coverage 14 6.2 -9.7 8Net profit before tax margin 4.50% 10.50% -14.10% 5.60%

Occupancy 94.70% 90.40% 91.80% 93.00%Return on assets 5.10% 7.40% -0.80% 5.50%Return on equity 11.70% 53.20% -0.70% 15.90%

Accommodation bond asset cover 2.2 1.7 5 2.1Figures Sourced from Aged Care Financing Authority (2013, p. 88)

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References

Richardson, A 2015a, Aged Care Residential Services in Australia, IBISWorld Industry Report Q8601, Australia.

Richardson, A 2015b, Community Services in Australia, IBISWorld Industry Report Q8700, Australia.

Deloitte Access Economics 2011, The viability of residential aged care providers and the potential impact from Productivity Commission recommendations on changes to the aged care system ACAA and ACSA, Deloitte Access Economics, Sydney.

Aged Care Financing Authority 2013, Inaugural Report on the funding and financing of the Aged Care Sector, DoHA, Canberra.

Baldwin, R, Stephens, M, Sharp, D and Kelly, J 2013, the Financial Viability and Sustainability of the Aged Care Sector, Aged & Community Services Australia.

Teece, D. J. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic management journal, 28(13), 1319-1350.

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