Many residential care providers are significantly undercharging on Refundable Accommodation Deposits (RADs) by failing to bring pricing strategies in line with the real estate market, according to industry financial analysts.
The latest data from StewartBrown’s quarterly Aged Care Financial Performance Survey found that while average RADs increased during the 2015/16 financial year by 5.8 per cent from $282,235 to $298,627, the national median house prices jumped from $608,000 in 2015 to $660,000.
Patrick Reid, Director of Aged Care, Community and Disability for StewartBrown, said the difference of $360,000 between the average RAD taken of $298,000 and a median house price of $660,000 further highlighted that RAD pricing is an area of income for providers that remains to yet be fully explored.
“For some time StewartBrown has been highlighting the growing differential between the average RAD price in Australia against the rapid growth in dwelling values in all states,” Mr Reid said.
“During 2016, half a million dwellings were sold but only 33 per cent of houses and 40 per cent of apartments went for less than $400,000.”
“This tells us that 60 per cent of the real estate market is valued well above the average RAD,” he said.
“Of course there are exceptions at both ends of the market, with the lowest RAD in Australia being $34,000 and the highest $2.7 million, but generally there is scope for providers to be more strategic and a little more courageous in setting RAD and combination pricing strategies.”
The StewartBrown survey also revealed that only 16 per cent of providers increased their minimum and maximum prices during the 15/16 financial year, four per cent decreased their prices and 62 per cent did not change their pricing at all.
However, according to the Aged Care Pricing Commission report for 2015/16 only 4,142 beds had RAD prices approved that were above the maximum amount of $550,000, reflecting just 1.8 per cent of the sector.
“While it is interesting to note the four per cent who decreased their pricing, most likely to shore up occupancy in ageing stock, it is lower than the discounting seen in the real estate market which sits at about six per cent” said Mr Reid.
“In real terms it could be said that aged care accommodation is too cheap, leading to pressure on other parts of the business where costs outstrip income.”
“Boards and executives should be reviewing accommodation pricing to match market conditions, particularly in light of Government funding cuts for both providers and clients.”
“As with our hypothesis of floating the basic daily care fee, accommodation pricing should not be seen as static but one where the price is allowed to fluctuate in response to the client’s ability to pay and any market mechanisms that create price headroom.”
“Critical to a holistic review of pricing strategies is having a clear picture of what competitors are charging, a strong understanding of local real estate prices in your area and other fees and charges such as Asset Replacement Charges,” Mr Reid said.
“Providers should take heart that with a compound growth rate of 5.98 per cent in RAD pricing since the reforms in 2014, occupancy remains stable at 94.9 per cent across the nation,” Mr Reid said.
“This stability in occupancy should give providers confidence to at least test the market around adjusting accommodation prices. Notably, our survey found those with a higher RAD price often had higher occupancies that their competitors.”
Mr Reid said that given changes to aged care through reform and client demographics, CEOs, CFOs and company directors need to fully understand the financial data to accurately manage, evaluate and plan their services.
“We often find that clients are doing well, but haven’t identified areas in which they can be doing much better. Participating in benchmarking surveys is the one best ways to determine this, and to help the industry as a whole identify trends such as undercharging on RADs that will be detrimental to everyone in the long run,” Mr Reid said.
The StewartBrown September quarterly Aged Care Financial Performance Survey (ACFPS) collected data from over 800 facilities with the final data set representing a total of 778 facilities across Australia.
For more information including a discussion about your pricing strategies based on local comparators including competitor analysis and real estate reports go to www.stewartbrown.com.au