Aged care faces cash crunch

Western Australia’s aged care sector is preparing for major upheaval, including the entrance of investment-hungry private equity firms, as the most significant reforms in a generation take effect.

From July 1 the way aged care providers gain revenue will change in a way which could leave many strapped for cash and unable to funnel capital into infrastructure.

The sector has operated for decades on model where users pay upfront, but that’s set to change from next week when people entering into aged care facilities have the ability to choose how they pay.

Instead of paying for accommodation in a lump sum payment when they enter a facility, occupants will be given the opportunity to pay what is effectively ‘rent’ on a daily basis.

Occupants will have 28 days to choose whether to pay upfront, on a daily basis, or a combination of the two.

Chief executive of Amana Living, Ray Glickman, told Business News the change would mark significant upheaval in the sector and had providers scratching their heads over how to deal with it.

“We know that this is happening but no one knows what the impact on our cash flow or our bottom line is going to be,” Mr Glickman said.

“The uncertainty is really unacceptable.

“The extraordinary thing, which I don’t think we will find in any other sales relationship, is (occupants) have 28 days to decide.”

Mr Glickman said the system has been set up to equalise payments, regardless of the method, so the overall cost for residents should not change.

However, for the operator, there is a big difference - a daily payment will improve the operating bottom line, while the payment of ‘bonds’ contributes strongly to cash flow.

“The issue here is that a significant change in the payments method away from ‘bonds’ to daily payments will leave the sector cash-strapped and impact on new development,” Mr Glickman said.

“We providers, over the years, have had a predictable (cash) flow … now we have no idea. So one of the real risks to the sector is this flight of cash."

Beth Cameron, chief executive of Leading Age Services Australia, which represents aged care providers and recipients of care, said providers had stopped all investment decisions until they had an idea about the impacts of the change.

“A lot of residential aged care providers were built on a business model of bonds (upfront payments) where they would use that money to build the facility, which is the way the sector has operated for a long time,” Ms Cameron said.

“But what I’m seeing in the sector is a halt on building in Western Australia – the brakes are on for building completely.”

Ms Cameron said the payment change was just one factor set to affect the sector, and one that was being implemented with very little support.

“There’s been no support for businesses,” she said.

“This is going to hit the sector quite hard in terms of them needing to adapt and learn and resource that change, (but) there’s not been any kind of support and communication’s been quite bad.”

Christopher How, chief executive of Bethanie, WA’s third-largest aged care provider, said many smaller operators were at risk of going under if they failed to adapt to the changes.

“There’s a risk for some that don’t really how much of a change is coming … if you haven’t done the work to get your back office right or moved towards getting your service model right for the future, then there could be a risk,” Mr How said.

“This is a big unknown for providers and it’s a whole new world – it’s not something that we’ve dealt with previously.

“It’s very difficult to make a budget when you don’t’ know how consumers are going to respond to these changes in legislation.”

The sector has already seen some consolidation, which Ms Cameron said was evidence of operators wanting to get out of a complicated and increasingly over-regulated sector.

One such example has been the City of South Perth stepping away from its Collier Park aged care facility.

“This is an overly regulated sector that’s underfunded and supported, I’m not sure how bad things have to get,” Ms Cameron said.

“If there’s a complete halt on building is that not a big enough sign that it’s not encouraging the investment and growth that we need?”

Other changes to legislation mean occupants will also be asked to pay more for their accommodation, which will be assessed by their income and assets.

In turn, the government will contribute a smaller rebate.

Mr Glickman said that was a logical change as the number of older Australians needing care increased - a factor which was prompting increased interest in the aged care sector from private investors.

Private equity firms such as Pacific Equity Partners and Quadrant have already begun to move on Victorian and South Australian aged care providers.

Mr Glickman said it was a trend which would inevitably move west and could significantly disrupt the sector.

“These sorts of organisations see the opportunity to cherry pick - what they will try to do is cherry pick the best, highest social demographic areas to develop high end product and use the (new) opportunity to charge for additional services,” Mr Glickman said.

“I’m sure they’ll come and try to take the cream of our market as well - but they won’t be going out of Perth into regional areas where it’s harder.

“They also have this massive balance sheet and they can use aged care as a loss leader to undercut the pricing of other organisations just to get market share and then they can flog that at some later stage…we shouldn’t be naive about what tactics they will use in the marketplace.”

However the next suite of changes set to hit the sector in July 2015 could make the private aged care market much less lucrative - in its budget the federal budget proposed removing a tax rebate for private aged care providers.

Not for profit aged care providers such as Bethanie and Amana Living already get a tax rebate due to their charitable status.

However, private providers such as WA’s largest, Aegis Aged Care, could see a significant dent in their revenue if the tax rebate is removed.