Aged care must rebuild trust from the valley of funding uncertainty

Mark Harrison
Mark Harrison, partner/executive director at national accounting and business advisory firm Pitcher Partners

In this guest post, Mark Harrison partner/executive director at national accounting and business advisory firm Pitcher Partners, shares his views on funding aged care and the importance of providing investors with certainty around future funding mechanisms.

Public confidence in the aged care sector has been damaged by the Royal Commission into Aged Care Quality and Safety, as horrific stories emerged about the neglect that residents suffered in residential aged care.

Tarred with the same brush, aged care providers must consider how the sector is perceived by the community in its actions and be visible in addressing areas that it can control.

Open communication with stakeholders is vital in rebuilding that broken trust.

In addition, structural reform driven by the Federal Government is necessary to repair a funding and governance model that the Commissioners have determined to be flawed.

Different funding solutions were recommended in the report. Commissioner Tony Pagone QC recommended a special Medicare-style levy, raising funds specifically for aged care, while Commissioner Lynelle Briggs proposed a general levy of 1 per cent to boost overall tax revenue and thereby increasing the amount available for aged care.

The Royal Commission report identifies recommendations to address other deficiencies in the sector, with key issues including:

• Delayed access for those in need
• Quality of care
• The number of appropriately qualified people working in the sector
• A need for improved governance

These shortcomings loom large in the race against Australia’s rapidly growing aged population.

Given the expectation of improved service levels, a need to attract more qualified people to work in the sector, greater compliance and oversight, and further capital investment, it is clear that the cost of aged care will increase.

The current funding arrangements are not sustainable. According to the Aged Care Financing Authority data cited in the Royal Commission report, 31 per cent of home care providers and 42 per cent of residential aged care providers reported an operating loss in 2018 – 19.

As the Federal Government steps back to think about the shape those reforms will take, aged care providers are stuck in a valley of uncertainty between the old and new worlds.

The Government is not going to be able to provide aged care operators the clarity they seek in the small window between now and the May budget.

Revising the sector is akin to turning a giant supertanker – it is big, and movement will be gradual.

In 2018–19, there were over 3000 providers of aged care services, including residential and home care. More than 273,000 people accessed residential aged care in 2019-20, while Federal Government expenditure was more than $21 billion in 2019-20.

Pressure is only going to increase on aged care providers, with significant changes to operating processes, reporting regimes, funding mechanisms, transitional funding arrangements and unknown future pricing points, all compounded by additional public scrutiny and a lack of trust.

Uncertainty about a future funding model is not attractive for the private sector, unless there is blind faith that the Government will step up funding to sustain investment and profits.

Consolidation is unlikely to play out in coming months, at least not until investors know the longer-term structure of the business or the funding mechanism.

For investment to occur, there must be significant confidence in the ability to raise debt or equity for consolidation plans. Without a concrete plan from the Government about funding models, there is no confidence at all.

It is highly possible that an aspect of a revised aged care model includes an expectation that people fund more of their own aged care costs, rather than rely on the Government.

With constrained budgets and a reluctance to introduce new taxes, the Government may state that people need to be accountable for their own care, while providing a safety net for those who cannot fund themselves.

As the Government considers change, the best use of government funding and potential unwinding of the deposit system, attention will be given to developing the funding means to get people into care. This may include greater acceptance of reverse mortgages or other instruments that will let people draw down on their existing equity.

Ultimately something unpopular must give in a system where the cost per occupant is growing and there are a growing number of occupants, while the tax base is shrinking as people age. The money needs to come from somewhere.

Visibility is critical from aged care operators to lift the quality of service and be more effective in communicating with residents, their families, and other stakeholders to return the belief that the sector can be trusted.

There also needs to be an emphasis on a two-pronged approach between government and the private sector, with greater reliance on individuals to fund themselves if they can afford to.


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