Aged Care On 16 September the Prime Minister announced the establishment of a Royal Commission into the aged care sector. Consultation is underway until 25 September to develop the Terms of Reference, which the Government anticipates will include: The quality of care provided to older Australians, and the extent of substandard care; The challenge of providing care to Australians with disabilities living in residential aged care, particularly younger people with disabilities; The challenge of supporting the increasing number of Australians suffering dementia and addressing their care needs as they age; The future challenges and opportunities for delivering aged care services in the context of changing demographics, including in remote, rural and regional Australia; and Other matters that the Royal Commission considers necessary. The announcement preceded the release of a two-part investigative piece on aged care by the ABCs Four Corners programme, with the first episode airing on 17 September. This has generated a significant amount of press relating to the aged care sector from all areas of the media. StewartBrown is referenced in several of these articles, so it is worthwhile confirming the professional services we provide to the aged care sector and how we engage with it. For the benefit of interested stakeholders in the aged care sector, including the media who are not aware of StewartBrown, a brief profile is below: StewartBrown StewartBrown provides these professional services nationally to a diverse range of clients, however, we have a speciality expertise in aged care and community services, social services, independent schools, children’s services and disability services. With respect to aged care and community services, StewartBrown has more than 35 professional staff actively providing significant professional services to the sector nationally including: Audit and assurance Financial modelling and forecast assignments Governance reviews (including Board and Executive) Finance systems and process reviews Strategic reviews and workshops Preparation of general purpose financial statements Annual Prudential Compliance audits Community Acquittals Community Acquittals Conference presentations and sector workshops Briefings to Department of Health and the Aged Care Financing Authority Aged Care Financial Performance Survey (2018: 197 providers comprising 996 residential facilities; 468 community programmes incorporating 24,032 HCP packages) These services are provided across the spectrum of aged care providers (for-profit, not-for-profit and government) as well as consultations with government departments and industry peak bodies. StewartBrown undertakes the largest financial performance benchmarking survey covering the aged and community care sector in Australia. This survey includes detailed operational, equity and staffing data on a quarterly basis for residential aged care facilities and home care packages. The Aged Care Financial Performance Survey (ACFPS) commenced in 1995 and has grown exponentially due to the requirement for Boards and executive management for forecasting, trend analysis, revenue and expense management and capital strategies. Over the years, the format of the results of our survey has become more granular in content and an integral part of the budgeting, forecasting and review processes within many participant organisations. With respect to participation in the survey, it is generally representative of the sector as a whole with respect to location and has participants in the survey from across the provider spectrum. The profile of the participants based on the residential aged care geographic spread is: Residential Particpants Subscribers to our ACFPS include some of the largest providers nationally, including independent stand-alone providers, faith-based and community providers, culturally specific providers, as well as government bodies, including the Department of Health (DOH), Aged Care Financing Authority (ACFA), aged services sector peak bodies, consumer bodies and other service providers. Our ACFPS surveys quarterly financial and non-financial data for residential (by facility) and home care (by program) at a granular level. In addition, the survey obtains specific segment information and key balance sheet information at organisation (approved provider) level every six months. Our involvement in the aged care sector over many years has provided us with a unique and comprehensive knowledge of the financial performance of providers and of the financial performance and viability of the aged care sector. In recent times StewartBrown has made public submissions to the Senate Economics References Committee Inquiry into the “Financial and Tax Practices of For-profit Aged Care Providers” and also appeared before the enquiry. StewartBrown also made a submission to the Aged Care Workforce Strategy Taskforce. StewartBrown welcomes the Royal Commission, and has a hope that at the end of the process the sector, including Government, is provided with a blueprint for a viable and sustainable aged care sector equipped to care for some of the most vulnerable in society.

Overall, the financial results reflect the sector trends of pressure on revenue due to the FY18 freeze on ACFI indexation and ACFI scoring changes; occupancy pressures; and increases in staff costs. As in prior periods, Estia and Regis both have a net tangible liability which is due to the fact the intangible assets are greater than the net tangible assets. The ratio of liquid cash assets as a percentage of debt has decreased for all three providers due to the lower levels of cash and cash equivalents held. Click here to download the 2018 Listed aged care provider analysis.

StewartBrown was invited to make a submission to the Aged Care Workforce Strategy Taskforce by the Chairman, Professor John Pollaers. The Submission includes: a summary of benchmarking survey results, commentary on the industry and an organisational analysis. Click here to read the StewartBrown submission so the Aged Care Strategy TaskForce

The StewartBrown March 2018 Aged Care Financial Performance Survey (ACFPS) incorporates detailed financial and supporting data from over 911 residential aged care facilities and over 21,700 home care packages (412 home care programs) across Australia. The quarterly survey is the largest benchmark within the aged care sector and provides an invaluable insight into the trends and drivers of financial performance at the sector level and at the facility or program level. Click here to access the Residential sector report for March 2018. Click here to access the Home Care sector report for March 2018. For more information on the Aged Care Financial Benchmark Survey click here.

On 10 May 2018 the Australian Senate referred an Inquiry titled “the financial and tax practices of for‐profit aged care providers” to the Economics References Committee, with a report due by 14 August 2018. In particular, the Inquiry is to cover: the use of any tax avoidance or aggressive tax minimisation strategies; the associated impacts on the quality of service delivery, the sustainability of the sector, or value for money for government; the adequacy of accountability and probity mechanisms for the expenditure of taxpayer money; whether current practices meet public expectations; and any other related matters. Click here to read StewartBrown's Submission to the Senate Inquiry into Financial and Tax Practices of For-Profit aged care Providers.

The StewartBrown December 2017 Aged Care Financial Performance Survey (ACFPS) incorporates detailed financial and supporting data from over 915 residential aged care facilities and over 21,400 home care packages (401 home care programs) across Australia. The quarterly survey is the largest financial benchmark within the aged care sector and provides invaluable insight into the trends and drivers of financial performance at the sector level and at the facility or program level. Click here to access the Residential sector report for December 2017 Click here to access the Home Care sector report for December 2017 For more information on the Aged Care Financial Benchmark Survey click here.

The listed aged care providers Estia, Regis and Japara have recently released their results for the six months to 31 December 2017. StewartBrown has reviewed the Listed Providers Financial Reports and Investor Presentations and a summary of this analysis can be found in the Listed Providers Analysis Report (December 2017). This report focuses solely on the three listed providers in order to provide a timely snapshot and commentary on their results. The results and analysis for those providers in the StewartBrown Aged Care Financial Performance Survey will be made available within the next few weeks. The key highlights from the report are summarised below. The comparison period is June 2017. Occupancy Estia experienced a slight increase in average occupancy however Japara’s average occupancy decreased from 94.6% to 92.3% due to “abnormally severe influenza outbreaks” whilst Regis average occupancy fell from 94.9% to 93.1% due to “more virulent influenza and gastroenteritis than usual”. Number of operational places Across the three listed companies, the number of operational places increased slightly in FY17 and to December 2017, mostly due to operational places being released as new facilities were opened or existing ones upgraded. ACFI The average ACFI per bed day increased for Estia and Japara whilst staying the same for Regis. Staff costs Staff costs are the most significant of all expenses aged care operators face. All three listed providers experienced an increase in staff costs as a percentage of operating revenue. EBITDA EBITDA is defined as earnings before interest, tax, depreciation and amortisation. The EBITDA per bed per annum has decreased for both Regis and Japara due to impacted by lower occupancy from influenza outbreaks, the effect of the cuts to residential aged care funding, and staff costs increasing at a greater rate than revenue. The EBITDA per bed per annum has increased for Estia due to growing occupancy rate and higher government revenue. EBT Whilst, the sector primarily uses EBITDA as a measure of financial performance, this measure doesn’t consider depreciation and as this is a significant expense for residential aged care facilities, we consider that EBT (earnings before tax) should also be given equal consideration when assessing overall financial performance. The EBT per bed per annum varies considerably between the three listed entities, with a decrease occurring for each of them. Click here to access the Listed Providers Analysis Report for December 2017. For more information on the Aged Care Financial Benchmark click here.

The StewartBrown Aged Care Financial Performance Survey incorporates detailed financial and supporting data from over 830 residential aged care facilities and 420 home care programs across Australia. The quarterly survey is the largest benchmark within the aged care sector and provides an invaluable insight into the trends and drivers of financial performance at the sector level and at the facility or program level. Click here to access the Residential sector report for September 2017 Click here to access the Home Care sector report for September 2017 For more information on the Aged Care Financial Benchmark Survey click here.

The StewartBrown Aged Care Financial Performance Survey incorporates detailed financial and supporting data from over 950 residential aged care facilities and 500 home care programs across Australia. The quarterly survey is the largest benchmark within the aged care sector and provides an invaluable insight into the trends and drivers of financial performance at the sector level and at the facility or program level. Click here to access the Residential sector report for June 2017 Click here to access the Home Care sector report for June 2017 For more information on the Aged Care Financial Benchmark Survey click here.

We recently conducted the 2017 Corporate Administration Survey and had a response from a large number of aged care providers covering 457 residential care facilities with 35,164 operational places, 12,972 home care clients and 15,395 occupied independent living units. Across the 58 organisations that submitted data, revenues totalled $4.8 billion and aggregated total assets were a total of $15.8 billion. The number of FTEs in these organisations totalled 36,135. The survey shows that corporate administration costs continue to increase at a rate greater than the increase in revenue, with a particular increase in corporate administration staff costs. Organisations are on average spending 15.39% of their operating revenues on the administration of their business. Further analysis on the composition of corporate administrations costs and analysis by different characteristics such as locations, net assets, revenue type are set out in the attached report. Please click here to download the report

Want to know what the latest trends are for aged care providers? The StewartBrown Aged Care Financial Performance Survey (ACFPS) incorporates detailed financial and supporting data from over 479 Home Care programs and 869 residential aged care facilities across Australia. The quarterly survey is the largest benchmark within the aged care sector and provides an invaluable insight into the trends and drivers of financial performance at the sector level and at the facility or program level.

It could be said that from the initiation of the new Aged Care Funding Instrument (ACFI) in March of 2008 that the aged care sector was in a ‘revenue phase’ that saw the cumulative Care Income grow to 71% at March 2017 as shown in Figure 1. FIGURE 1 Cumulative revenue Now there will be a number of people who may see this figure and suggest that providers have done very nicely out of this growth, but while the revenue grew, so did the costs. For example Care Wages grew more than 75% in the same time period. During this same period the Care Result (care revenue minus care expenses) grew from $4.40 per bed day in June 2007 to a sector high of $14.92 in September of 2011. Then the first fiscal cliff appeared as the government looked to reign in the growth of their share of care revenue, so that by June 2013 the Care Result had fallen back to $6.79 per bed day. Figure 2 Cumulative income expenditure As this new reality dawned on providers they adjusted and reached a second precipice of September 2015 where $12.56 was the Care Result until another fiscal cliff has resulted in a March 2017 Care Result of $9.93. As we see ACFI income reduced in real terms we are not seeing the escalation of costs ease in the same manner, presenting a pressing cost management environment providers must now deal with. The combination of income stagnation and a continued escalation of expenses indicates that cost management is a key focus item for providers and is the key differentiator between the top quartile and the remaining 75% of the sector in the Aged Care Financial Performance Survey. Although all providers saw upward pressure on expenses during the 12 months to March 2017 Table 1 below highlights that revenue is relatively even across the industry with only $1.76 per bed day separating the top and bottom quartiles. To underscore this point for the residential segment, we can see that the Care Revenue for both the top quartile and bottom quartile is almost line ball in terms of quantum with only expenses being the differentiator. Table 1 Revenue Expenditure comparison However, as the table wonderfully highlights, the top quartile performs significantly more efficiently in managing their cost base and provides the engine room for the strength of their consolidated result. So in both Home Care and Residential Care the importance of understanding our cost drivers is critical to the sustainability of aged care businesses as a whole. As the reform program continues we can expect that a number of possible changes will push providers to consider their approach to: More consumer choice in home and residential care Publishing their prices for care and everyday living services (residential and home care) A deregulated price environment to accompany price transparency A single funding instrument based on assessed needs (across home care and residential care) An independent assessor of client need and therefore funding amounts When combined with the existing changes, the market forces inherent in the reform roadmap will require a contemporary aged care provider to be: Market/consumer driven Flexible and adaptable to a changing market Targeting the consumers it wishes to serve Productive and efficient, in both direct and indirect services Able and prepared to put capital to work Business focused; and of course, Will need to make a profit or surplus to be sustainable In order to ensure providers are able to manage their controllable costs they will need to understand the cost levers within the business and how they impact on the overall result. Although it is challenging to start it will be imperative that providers grasp the importance of knowing their units of service at a granular level. This granulated approach will allow staff and management to monitor performance and keep people accountable for the outcomes required to achieve the very necessary profit or surplus for the business. Once attained these units of service can be combined in standard or non-standard ways to produce the services that consumers want while allowing the business to set appropriate, and in some cases premium, selling prices for the outcomes attained. Naturally, StewartBrown encourage the use of benchmarking to drive improvements in financial and operational performance, adding another layer of accountability, insight and trend identification that will assist providers with achieving the right care mix; at the right time and at the right price for all parties.