This February, the Aged Care Quality and Safety Commission proposed Financial and Prudential Standards to support the Royal Commission’s reforms, introducing new liquidity and financial management requirements for Aged Care providers.
For the first time, Residential Care Providers who don’t hold refundable accommodation deposits as well as home care providers, will be required to comply with the Standards, requiring them to hold a Minimum Liquidity Amount (MLA) – or 35% of a provider’s total cash expenses in the previous quarter. It is not just the inclusion of non-RAD providers, but a significant hike in the MLA for all aged care providers.
The impact of the Standards on aged care providers – who are by no means a “vanilla” group of businesses – is immense. With entities ranging from public, private, for-profit, not-for-profit, and franchises relying on various types of non-aged care income including government grants, the impact of the proposed liquidity requirements on cash flow will be significant.
Not only will the increased compliance and reporting obligations limit working capital and create cash flow pressures, but the application of the proposed standards will also create significant inequities between providers depending on their business model, the split between aged care and non-aged care services, other prudential requirements arising from government grants, and their relative size. The prudential requirements may even compete with the proposed Standards, like in the case of prepaid grant income to be held for the delivery of future services.
These inequities will likely flow through to care recipients in the form of reduced services and quality – the very thing the Commission is aiming to address. Not only that, the proposed Standards have the potential to result in reduced growth or even the closure of aged care providers, ultimately reducing consumer choice.
Restrictions on liquidity sources could make it harder for providers to secure capital for investments and operations, while at the same time affecting business valuations and ultimately the bankability of the sector, leading to an elevated risk of business failure.
While the financial and prudential standards aim to strengthen financial oversight, they could create unintended financial and operational pressures on aged care providers. If these standards are implemented without amendments, the new financial and compliance challenges could impact providers’ sustainability in the future.
In response, Grant Thornton’s Heath & Aged Care industry group led by Darrell Price – Principal and Owen Carew – Partner, has collated a report to submit feedback to the Commission, highlighting financial and compliance challenges that could impact providers’ sustainability if these standards proceed without amendment.
We suggest broader recognition of liquidity sources, including lines of credit, to maintain financial stability and support sector sustainability. The aged care sector needs practical, well-defined financial standards that support stability in the sector while ensuring appropriate regulatory oversight.
Our alternate approach is to compel aged care providers to prepare and publish their cash flow forecasts over three years and their capital plans over five years, at least in summary, for consumers to access when considering their choice of providers. These forecasts cannot be audited in the traditional sense, however, qualified advisors can review and comment on key assumptions and outcomes to provide an external review and insight.
As the formal consultation period has now closed, and we now await further updates from the Commission.
