Capital Financing for Aged Care
For the purposes of responding to the Royal Commission’s paper on capital financing arrangements for residential aged care, we have taken a broader approach and provided comments on capital financing more generally. UnitingCare Australia considers it is important to look at capital financing as it applies in a system in which service distinctions are less marked.
- Critical points that UnitingCare believes must be considered in the context of arrangements for capital raising
- Annex 1: Funding Principles and implications for future capital funding arrangements
- Annex 2: The current state of capital investment and infrastructure in residential aged care, including whether the sector is undercapitalised and any evidence that the capital stock is not of sufficient quality
- Annex 3: The appropriate role for the Australian Government in capital financing for the residential aged care sector
Throughout the Royal Commission process, UnitingCare Australia has advocated for systems in which the sector is able to flexibly respond to the needs of individuals and their circle of support. We believe that to support equity of outcomes for all members of our community, existing concepts need to be challenged. We have, for example, supported the separation of ‘accommodation’ services from care and support services. This is necessary in our view to promote innovation in service delivery so that user preferences – most importantly the widespread preference to ‘age in place’ – can be met.
Critical points that UnitingCare believes must be considered in the context of arrangements for capital raising
Most aspects of services for older people are associated with some form of built or other capital investment. Many types of service are highly capital intensive, notwithstanding the very high cost of labour as a proportion of delivery costs. The capital-intensive nature of the current ‘high density’ model of residential aged care is self evident. Less ‘front of mind’ are the capital needs of services ranging from meals-on-wheels to seniors’ gyms to day centres and respite services. Likewise, it is well recognised that the cost of new investments is significant, and an important aim of any arrangements to support capital raising must be to increase the capacity of infrastructure in line with population growth. Arrangements must also, however, ensure the availability of capital to support ongoing investment in existing infrastructure required to comply with quality standards for environmental design, which go beyond routine maintenance and ultimately include a perpetual schedule of investment in refurbishment and upgrades.
The current financing arrangements for the capital requirements of the age care system are in need of reform. It is essential however that financing arrangements are considered as part of an integrated package that takes into account:
- the models of service, accommodation and support that exist now and are needed into the future to provide choice and affordability for the service user;
- the confidence of providers/investors to invest the substantial capital required to meet the likely needs of the ageing population;
- the current negative returns that many age care providers are experiencing;
- government regulatory controls over system requirements and funding arrangements that often reflect little credible consideration of associated costs imposed or revenue forgone.
With this in mind, it is difficult for UnitingCare Australia to propose in detail alternative suggestions for capital raising. There are issues with reliance on the Refundable Accommodation Deposits Scheme now and into the future:
- RADs provide a source of capital at lower than market borrowing cost, however the inability of providers to retain part of the RAD to cover depreciation and renovation/replacement of the asset is problematic in an economic environment in which these costs cannot be covered by interest on investments;
- assuming the trend towards use of Daily Accommodation Payments continues, this may increase operating revenue cash flow but could involve a significant shift towards private borrowings, increasing the cost of services to consumers and the Government;
- the COVID-19 pandemic has led to an increasing demand for refunds of RADs (as residents are leaving) while occupancy is decreasing along with deferral of entry by new residents, and correspondingly fewer DAPs or RADs are coming into the system—as this is occurring this is placing considerable liquidity stress on providers that may threaten sustainability of some;
- uncertainty around the Australian Government’s commitment to the Accommodation Payment Guarantee Scheme (the Guarantee Scheme) represents an unquantifiable but highly problematic risk to the sector—where providers who manage and maintain sustainability could be required to fund a levy based on liabilities of other providers who were not able to refund RADs as required by legislation.
We believe that there is merit in considering the relative benefits (in terms of system objectives) of changes to the RAD scheme to address these issues, and alternative arrangements to support capital raising. Creation of a capital facility along the lines of (or in connection to) the Australian Affordable Housing Bond Aggregator (https://www.nhfic.gov.au/) or state-based local government financing facilities (for example https://lgfa.com.au/services/) could be an effective way of facilitating borrowing by the sector, and therefore lowering costs of capital-based services for consumers and governments. It is impossible however to assess whether they are attractive alternatives or complements to the RAD scheme without understanding the full package of proposed reforms.
The impacts of any changes to the aged care system on viability of providers must be fully considered and mitigated in a way that supports stability of the sector. The worst case scenario involves exit of a significant number of existing providers, who cannot sell their services as the market for home care increases. Operations running at a loss with considerable RAD debt obligations will not find buyers. The Guarantee Scheme will be heavily called upon. At the same time supply of residential services will drop.
Government must contribute to funding capital investments to ensure that individuals are able to access the services that they need, when and where they are needed. Separating consideration of accommodation services from other types of capital is important in terms of ensuring that public subsidies are provided on the basis of need, and do not interfere with the level of supply in the private market. We note in this context that the government contribution to people with high care needs via Specialist Disability Accommodation places under the National Disability Insurance Scheme is around four times greater than the contribution for care and accommodation costs of Supported residents via the aged care system.
There must be a systemic approach to improved alignment of health, disability, ageing and community services provision, to ensure that capital investment, particularly that which supports services to financially disadvantaged or other special needs groups, is as efficient and effective as possible. There is a pressing need for small, community-run services in remote areas. Arrangements must support the needs of these services, for example by accommodating ‘auspicing arrangements’ whereby community-based organisations retain autonomy but can reliably access capital, governance and other expertise, back of house services etc. ‘at scale’.
Financing arrangements must enhance incentives (for governments, individuals and providers) to take positive steps to improve public health for the future. UnitingCare Australia sees the greatest potential for dramatic improvements in wellness through
- access to re-ablement services and preventive approaches to public health
- more effective allocation of resources to meet consumer preference and optimise care in the community.
A key consideration must be that there is access to capital for developing community services, particularly in ‘thin markets’, in addition to access to capital for developing mainstream residential services.
The preconditions for certainty of investment must be in place. The sector must be able to respond to demand through business models that create reliable, safe and high-quality services of various types, according to the needs/demands in different communities. Current arrangements do not meet this requirement for a range of reasons, including a number relating to the degree of government control over the range and location of services offered, and the price paid for those services.
UnitingCare Australia believes that if the following conditions (based on those included in the Tune Review recommendations in relation to market deregulation) are met, the sector can invest as it must to meet future demand for services.
- Government, the sector and related sectors (e.g. VET system) need an accurate understanding of the underlying demand for aged care services.
- Arrangements must be in place to enable consumers to make equitable and sufficient contributions to the costs of their care and (where relevant) living expenses, without those contributions being so high that they create a disincentive to accessing care.
- There must be a robust system for assessing eligibility for government-funding for aged care services.
- Government policy needs to ensure equitable supply of services across different population groups, and in settings where there is limited choice or competition, such as remote locations.
UnitingCare Australia’s position is that to meet the fourth condition, there must be
- rigorous costing and funding systems that ensure providers are able to cover the cost of services and reinvestment
- finalisation of the Government’s position on whether and how to replace the Aged Care Allocation Round (ACAR) process, with the assurance of demand-driven funding for both residential and community-based services, preferably through a legislated entitlement to services.
The table at Annex 1 sets out principles of funding design previously submitted, now applied to the question of capital financing. This approach reflects the belief that the funding model must cover the cost of capital where appropriate.
Annex 2 responds to the Royal Commissioners’ question regarding the current state of capital investment and infrastructure in residential aged care, including whether the sector is undercapitalised and any evidence that the capital stock is not of sufficient quality.
Annex 3 expands on our views regarding the appropriate role for the Australian Government in capital financing for the residential aged care sector.
Funding Principles and implications for future capital funding arrangements
Implications for capital funding
1. Outcome Focused
The model should be aimed at maximising health and wellbeing, and support re-ablement, prevention and restorative approaches to aged care services. Performance should be measured through the achievement of outcomes (not merely inputs or outputs) while funding recognises the cost drivers, such as workforce demands and required skill levels, in achieving the desired outcomes.
2. Transparent and Simplified
The model should be simple and completely transparent to support trust and engagement between funders, providers and consumers, and to make it easier for consumers to understand and providers to administer.
Funding should support all consumers based on their assessed needs, including those with special needs. This requires flexible funding allocations, weighted on individual needs to ensure diverse consumers are able to be appropriately supported. The approach should also ensure that specific consumer groups (e.g. rural and remote, LGBTI, CALD, Indigenous, older people living with disability, those with mental health needs or people who are socially isolated) have access to quality support and care. It should further take account of the particular complexities encountered in appropriately supporting consumers with multiple chronic diseases and problematic behavioural patterns.
4. Consumer Choice and Control
The model should support consumer choice and control across the continuum, recognising different cost structures in the delivery of aged care services. The model should also recognise that consumer choice, control and flexibility can be achieved in aged care services through models including, but not limited to, the funding following the consumer model that will be implemented for home care packages.
5. Flexible and Scalable
The model should ensure that it can be adapted, where the funding follows the consumer across the continuum of care (home-based, residential and respite etc.), to support longer term planning and goal setting for individuals and to support an integrated aged care system. Regulation and application of funding should enable supplementary resource allocation for episodic, short or medium time periods to provide for very specific needs associated with acute episodes of illness, post-acute periods or for palliative care.
Minimising red tape should be a key feature of any future funding model. All possible resources should be allocated to direct service delivery. The funding model should support evidence-based practice and discourage practices that do not deliver tangible benefits to the consumer.
7. Certainty and Sustainability
The model should ensure the aged care system is financially sustainable and not prone to financial volatility. Investment in service expansion and innovation to achieve positive outcomes for older people and their families will follow stable and predictable baseline funding, which anticipates projected areas of growth in the number and changing profiles of care needs of residents. The model should recognise a commitment to quality, safety and continuous improvement as standard prerequisites for service providers.
8. Value for Money and Affordability
The funding model should represent value for money and affordability for consumers and for government. Those consumers who can afford to pay should contribute to the costs of their care, but Government should provide a safety net for consumers who are unable to make a financial contribution.
The funding model should recognise that providers need to generate market-based returns, at an appropriate level to support delivery of effective services and to continue to invest in the sector. The model should also recognise the need to support those providers who deliver aged care for communities where a local market may not otherwise sustain them.
The model should support seamless interactions between the sectors that care for older people, including aged care, primary and allied health, and acute care.
The current state of capital investment and infrastructure in residential aged care, including whether the sector is undercapitalised and any evidence that the capital stock is not of sufficient quality
The current environment for investment is vastly different than it was [two-three] years ago. The viability of core operations is under threat on many fronts. The negative impact of insufficient indexation has hit our organisation very hard, and as a result, enthusiasm for large capital outlays has dropped significantly. We also predict that many facilities will come onto the market in a “fire-sale” environment”, with most organisations hesitant to acquire given the lack of certainty around viability. Key reform items such as the deregulation of bed licences and the [AN-ACC] funding model, heighten concerns about future viability of residential care.
Residential aged care infrastructure requires ongoing maintenance and regular refurbishment, the costs of which are not funded through the current fee structure. The decision to prohibit residential aged care providers from charging ‘depreciation’ costs against refundable deposits means that they have to recoup these costs elsewhere: this is not possible. It is a simple equation: if a provider borrows $10M and builds a new facility, takes in residents who pay $10M in RADS, and operating costs only are met by ACFI no surplus is available for future investment. If there are no RADS and all DAPS then all income would be used to service the loan.
While ACFI is low, profitability is low, to the point that service providers won’t invest in capital infrastructure… even if RAD investments and DAP payments are low service providers would be prepared to use ‘operating profits’ to pay for capital – clearly demonstrating that the [current] capital financing is flawed.
Although RADs are often characterised as ‘interest free loans’ given the current environment these funds generate minimal returns via permitted investment strategies. The individual resident’s payment for their occupancy is the ‘opportunity cost’ of the RAD. In the current environment, in which interest rates are projected to remain at very low (if not negative) levels, there is little to no prospect that on average this system will cover the ongoing costs of maintaining beds ‘funded’ through RADs. DAPs improve income in the short term, but do not meet the long term need to secure capital.
As the Royal Commission has heard, one of the key opportunities to increase efficiency in the provision of residential care is through design of facilities. More importantly, improved design contributes to the quality of care and the resident experience. UnitingCare Australia is concerned that capital investment must be sufficient to serve two purposes: to increase the stock to the level necessary to meet demand for residential services without excessive waiting periods; and to continually improve the quality of infrastructure as needs and practices change.
Internal surveys last year and in March 2020 asked our network organisations to comment on the [then] current capital investment environment. Most responses indicated that major capital projects were on hold either ‘until conditions improved’ or indefinitely. As a result, there are limited opportunities for growth, and some contraction of the infrastructure is likely. Some organisations predicted a reduction in the scale of residential care services as non-viable or decommissioned facilities are closed without any strategy for replacement. In at least one state, this prediction is starting to be realised, accelerated by the effects of the COVID-19 pandemic.
Funding is insufficient to generate a return that exceeds the cost of borrowing and providers are operating in an uncertain environment so when an organisation chooses to develop a site it will be in a community where prospects for high occupancy and consumer contributions are relatively good. This is not a scenario under which providers are able to establish facilities in under-serviced markets, where revenue from government subsidies is substantially below the cost of delivery.
Without major change, we expect the ongoing failure to meet home aged care needs will continue to put upward pressure on residential care, and without ongoing investment we are heading for a major shortfall in supply. In the context of consultations on alternatives to the ACAR system, we highlighted that the current system is not needs based: it is based on a population methodology looking at the ageing population and the percentage of people who will most likely need care. This is relevant to the question of whether the sector is adequately capitalised. Answering this question ‘on average’ does not give an accurate representation of issues in the sector or effectively account for individual characteristics, disease trajectories and other factors impacting people’s need for services. While on average pre-COVID occupancy rates were at a reasonable level, this statistic does not account for the ‘lumpiness’ of supply, in which some communities are underserved and, presumably, there is a high vacancy rate elsewhere.
We believe that Australia’s relatively high (internationally) rate of use of residential care represents an underuse of more appropriate services in the community—whether these be services within the system (home care options) or outside, for example housing services. This form of misallocation can be due to lack of diversity in services offered by the sector (for example for higher levels of care in the home) or substitution due to inadequate funding of services such as palliative care or social housing. There is underinvestment in respite, early intervention services and services that promote lifestyle changes that would reduce risk of chronic conditions such as dementia, which could be highly effective in terms of ‘return’ on investment.
The appropriate role for the Australian Government in capital financing for the residential aged care sector
UnitingCare Australia believes that governments should ensure that optimal investment is directed towards alternative system designs that promote consumer behaviours that maintain independence (for example buyers demanding universally accessible housing designs) and further embedding of reablement approaches and preventive attitudes in the model of services for older people. In this context, there must be coordination of investment between all levels of government.
This might include supply or demand side measures e.g. systemic incentives for uptake of preventive or rehabilitation services by individuals, more support for integration of short term and rehabilitation services with longer term care services, as well as interventions in health and wellbeing—particularly for groups in the community at risk of premature ageing—well before individuals are eligible for ‘aged care’.
We believe that it is critical that the approach to investment is designed around the known benefits of early and adequate use of services such as physiotherapy, occupational therapy, hearing and sight services balanced against the potential to ‘ration’ subsidised services.
The market must be able to operate as freely as possible, responding to demand and setting the price, while recognising that this is a market for essential services. Government contributions to capital financing should be targeted to ensuring service availability or delivered via service payments that factor in capital requirements. In other words, government investment should not crowd out private investment or promote investments that do not respond to community needs.
- It is critical that the sector moves away from a ‘supply driven’ approach. The government must however monitor and respond rapidly and appropriately to failures of the market. Deep subsidies must be available to those who cannot afford to buy services, with additional incentives if necessary to promote provision in all localities and to meet the cultural and other safety needs of all individuals. Information failures must also be addressed via the public health system, to promote preventive and early interventional responses to avoidable conditions of ageing.
- Prioritisation methodologies and fiscal management mechanisms (including equitable means testing and consumer contributions based on ability to pay) must be considerably more sophisticated and work towards the most beneficial health and social outcomes for the community as a whole. Allocation systems must support the continuum of care approach, including transferability across community and residential care models and appropriate integration of aged care and other health and social services.
- Reforms now need to be consistent with the range of future states that consumers will demand, by not foreclosing options. In remote or low population areas there will often be a ‘once in a generation’ opportunity to create infrastructure to support services. Reforms must therefore be cognisant of the risks of entrenching ‘single provider’ status, for example by requiring locally co-designed responses as a prerequisite for access to publicly-funded capital investment.
In keeping with the Government’s responsibility for ensuring a stable and consistent supply of services, consideration must be given to the structural adjustment needs of existing service providers should these new forms of service become a reality. COVID-19 has led to a drop in occupancy of existing residential care places, which we anticipate would be replicated if higher levels of funding for home care packages were to come into play. Measures must be in place to enable residential services that become less viable as a result of system changes to transition to a sustainable model of residential service. For example, targeted investment would be needed to support a transition to a model where permanent places are complemented by time limited rehabilitation/restorative services. With no other change, residential aged care services will continue to operate at a loss rendering expansion of services into new markets impossible.