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Making cents of the industry’s coppers

Dr Anna Howe examines the current captial funding framework, the challenges it poses, and offers some possible solutions.

Capital flows into aged care from interest on bonds and accommodation charges paid by residents or by the commonwealth for those who are unable to pay themselves. Aged and Community Services Australia reports that interest on a median bond is $40 a day, or $14,600 a year, compared to the Accommodation Charge of $26 a day or $9490 year. At these rates, the 58,000 bonds held by providers and accommodation charges for the balance of 95,500 permanent residents (as at June 2007) generate an annual capital flow of $1.753m.

The commonwealth contribution to capital funding is estimated to be more than $560m a year. This estimate is based on figures from the AIHW ‘Residential Aged Care Statistical Overview for 2006-07’ set out across that show that 35 per cent of residents were concessional and another 4 per cent were assisted.

Sources of capital funding (see table)

Industry sources report the cost of a new bed as $200,000, so $1.753m would be sufficient to build 8765 beds a year. This amount also corresponds fairly closely to the $1.854m of new building, rebuilding and upgrades reported as underway in 2006-07 in the ‘Report of the Aged Care Act’ for that year. It also fits with total expenditure of $2988 on building work completed in 2006-07, assuming construction over two years.

Several indicators show a sustained capital flow over the last decade. The number of beds has grown by 22 per cent from 1997-2007, and building activity has been greater than the net increase of 31,000 beds which does not take account of extensive rebuilds and upgrades undertaken to reach the certification standards required by 2008.

The 2006-07 ‘Report of the Aged Care Act’, records that 15 per cent of homes completed building work in the year, 12 per cent had work in progress, and 15 per cent were planning new building, rebuilding or upgrading but without specifying a timetable. While the proportion undertaking rebuilding was steady over the last three years, the proportion of homes planning upgrades and/or new buildings fell markedly, suggesting that activity was tapering off with the approach of the 2008 certification deadline.

What’s the problem?

Notwithstanding this apparently healthy picture, there are persisting concerns about capital funding, especially for high care. So if the problem is not with the amount of capital funding flowing into the sector, where is it?

The current arrangements spread capital across the sector, even if somewhat unevenly. This would be a reasonable approach if the aim was to have the sector replicate itself with very little change, and if all providers had the same capacity for renewing themselves over time, and all intended to do so.

But this is not what happens, nor what is required. Capital investment is lumpy and is required evenly across the sector at any one time. Potential inefficiencies in the use of available capital funding arise because while all providers have a stream of capital income, all the time, their capital commitments vary over time and do not necessarily even up over the longer term. Only a proportion are engaged in constructing new homes or redevelopment, and some may not intend or have the capacity to reinvest at any time.

Instead of simply reporting on the number of homes that are engaged in capital development, a closer look needs to be taken to see which kinds of providers are involved. Hogan’s view of aged care a cottage industry needs to be corrected as the sector is highly differentiated. The top 20 providers, about 10 in the for-profit sector and another 10 in the not-for-profit sector, account for close to half of all beds, and it is the investment decisions of these providers that drive the scale and shape of capital development.

At the other end of the scale, there is a long string of providers operating a single home and whose intentions and capacity to remain in the sector are likely to be highly variable. These are not just the “typical” older style, small, privately owned high care homes but include many not for profit providers who are based in local communities and who operate a stand alone low care or high care home. Many of these small providers are not likely to be intending to expand, and the increase in the size of homes over time suggests that at least some are exiting the sector and realising their capital. This trend has been especially evident in inner and middle distance suburbs in Sydney and Melbourne where high land values and high prices for bed licences have made selling

In between the small and large providers is a group of medium scale operators who appear to be very dynamic. A number of these providers are strong participants in the ACARs and have also bought bed licences as they have expanded their operations. Grant Thornton findings suggest that these providers have to get bigger if they are to survive and thrive.

When the dynamics of providers’ interest in and capacity for capital development are taken into account, numerous scenarios can be sketched. There are no requirements for capital funding to be spent only capital development, and these scenarios show the risks of capital seeping away from its intended purpose. Those who are investing have to make up the balance through borrowing, adding to the cost of capital.

Some scenarios

1. Expanding and diversifying

The big providers are here for the long haul, and to the extent that there are changes at this level, it mostly involves churning among them, as in the trading of the Salvation Army beds a few years ago. That sell-off was however a one-off, and the share of all places in the not for profit sector has remained steady at just on 60 per cent over the last decade, indicating that these providers have access to sufficient capital to hold their own. It is the public sector that seen a relative decline, and the increase in the private sector share from 26 per cent to 32 per cent indicates its strong capacity for growth.

Large scale not-for-profit providers have long reported that they cross-subsidise high care development with capital raised from bonds for low care. The extent to which different organizations pool capital across all their homes varies, but ageing-in-place and retention of bonds has increased capacity to do so. Most of these large providers are expanding steadily and have long term plans in place.

Large scale for profit providers are even more likely to combine capital funds across their homes. Grant Thornton reports that private sector operators with 11 or more homes had the highest returns and these providers can marshal considerable capital resources. This expansion includes a substantial entry into low care homes, a field that the private sector had previously eschewed.

Large scale private providers who also operate other forms of retirement accommodation have an additional or alternative flow of capital income. High care homes that appear not to have access to bonds but operate in conjunction with retirement accommodation are in reality in a very different situation to those which are truly stand alone. The synergies between assisted living or serviced apartments and high care are not only financial. The option of ageing-in-place, or at least ageing under the umbrella of the same operator, is proving an attractive option for those buying into retirement accommodation as it offers an alternative to low care.

Some of these providers also diversified into community care packages, or if not, they can call on packages and HACC to deliver a range of services to residents in their retirement accommodation.

2. Have capital reserves but on hold

A second group of providers have accumulated considerable capital reserves and are committed to expansion, but are “on hold” because they are unsuccessful in ACARs and do not want to use a substantial part of their reserves to buy bed licences at market price, especially from sellers who have also received capital funding.

3. Want to invest but cannot raise enough capital

A third group of providers are those who want to expand but who have not been able to accumulate capital reserves because they have not been able to raise bonds and rely heavily on commonwealth supplements for low income residents. These providers are likely to be located in areas of lower socio-economic status but with rapidly ageing populations make them areas of high need. The injection of the commonwealth interest free loans is not enough to address this growing need for redistribution of beds.

4. Capital rich and staying so

In contrast, another group of providers in more affluent areas may be rebuilding but doing so in ways that less responsive to changing need. Rebuilding in over-bedded areas is a case in point, locking up capital that could be better used elsewhere. Beds have proved very slow to shift out of these areas and some have instead upgraded to Extra Services.

5. Sitting pretty

Some providers have little if any intention of undertaking major capital investment in the near future if ever. They are sitting pretty, waiting for the time when they might sell their bed licences and real estate, either as a going concern or separately. Most of the capital funding they accumulate in the meantime is never going to be reinvested in aged care homes. Small sites often limit opportunities for rebuilding and there is no real scope for capital investment beyond maintenance.

6. Getting out

One major provider, Uniting Care NSW, has declared that it is not going to build any further residential care and will not participate in ACARs. This decision raises questions as to what will happen to the capital that is accumulating, and why capital funding should continue beyond a level required to cover maintenance.

7. Too little capital to be useful

The capital funding arrangements are not well suited to the special roles of some homes catering for special needs groups, or located in small rural and remote communities. These homes are very unlikely to collect bonds and managing small capital flows over long time periods can impose an additional burden on management. While only a small amount of capital may be involved overall, it is still lost to other providers.

8. Too bad about that

Last, and hopefully least, some providers have not been adept at managing their capital reserves. The global financial crisis is likely to have taken its toll on some aged care providers, with a consequent loss of capital the sector.

What’s the answer?

Bonds in high care are not the answer. Not only has the current government shown itself unlikely to adopt this option, but bonds for existing high care homes would not necessarily get capital to where it is needed.

A new capital funding system has to include some means of driving change and reshaping the sector to meet future needs. There is no single solution and several options are likely to be needed. Some new thinking is needed and among the ideas that have been put forward are:

1. The commonwealth could move away from spreading the Accommodation Supplement thinly to lumping at least a part of these funds into a pool from which providers could borrow at low or no interest. The effect would be to expand access to low interest loans.

2. Capital payments can be seen as entitling residents not only to a bed in a particular home but access to commonwealth funded care benefits and accredited standards of care. It can be argued then that all providers should contribute to the system as a whole on behalf of their residents by paying into a capital pool through a pro-rata levy on bond income and accommodation charges paid by users.

3. Given that the commonwealth is likely to be reluctant to run a large capital investment fund itself, there is a potential role for the industry to set up one or more funds. Such funds could also provide a vehicle for providers to invest their capital funds in, and parallel to the experience of the superannuation industry, large industry funds may well perform better than small self managed funds.

4. A starting point for any changes to capital funding is to get a much better view of the capital structure of the industry. Aged and Community Care Australia and others have made several calls for a industry study and plan over the last decade. Without a view of even the broad intentions and capacities of provider organizations, capital funding is likely to remain a less than best fit with the needs of the sector and the next generation of older people who need residential care.

Anna Howe is a Melbourne based consultant gerontologist with over 30 years experience in research and policy development in aged care.

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