Aged-care funding cuts could slug taxpayers

Taxpayers would be forced to foot the bill to return residents’ aged-care deposits if a provider fell into distress.

Australia’s aged-care operators have been forced to update funding models.

Taxpayers would be forced to foot the bill to return residents’ aged-care deposits if a provider fell into financial distress — an increasing concern as funding cuts hit the sector.

Australia’s aged-care operators have been forced to update funding models after a series of changes to how the federal government funds the sector.

The three listed Australian aged-care companies lost almost $400 million of their value earlier this week, with their shares savaged when details about the fees they can charge were released into a market already jittery around cuts to aged-care funding.

It isn’t just listed providers concerned about the cuts, with one industry insider suggesting about a third of operators were not making a profit, meaning funding pressure could lead to casualties.

The funding issues have raised concerns about the ability of a company to repay a resident’s ­refundable accommodation deposit, or RAD, due when the resident dies or leaves the facility.

A scheme exists under the Aged Care Act to guarantee the repayment of aged-care residents’ deposits and bond balances if an Australian subsidised aged-care provider was bankrupt or insolvent and had failed to refund one or more outstanding balances.

Australian-listed Estia Health, which has lost half its market value in the past week on concerns about its government funding model, said 76 per cent of its new residents elected a refundable accommodation deposit as their payment option. The company is required to keep 5 per cent of its $653.3m in refundable accommodation deposits for any refunds to be made to its residents — about $33m as of June.

Estia had $223m of debt at the end of June and a $24m dividend payout looming in November, while it has a $41m payment due to finalise its acquisition of ­Kennedy Health Care, following a $41m payment made in July. Its upcoming payments and its refundable accommodation deposit reserves take it above its $330m debt facility limit, but company ­insiders deny there is a liquidity issue or a need for a capital raising.

“The combination of net operating cash flows and net RAD receipts, together with the debt capacity available, will mean the company is able to meet its financial commitments,” an Estia spokesman said.

Shares in each of the listed aged-care operators rebounded slightly yesterday. Estia closed up 5.4 per cent at $2.93, Japara rose 6 per cent at $1.84, and Regis added 3.5 per cent to $3.83. The sector’s funding shake-up has raised concerns about future funding models given about 70 per cent of operators’ revenue is directly government-funded. The government provided estimated funding of $17.5 billion in the 2017 financial year to support aged-care consumers and the sector.

Cameron O’Reilly, chief executive of industry body Aged Care Guild, said the government’s approach to how it had made some funding decisions had created regulatory shock, compounding the impact on sentiment around the sector.

“The companies are the victims at the moment, but in the longer term, if the government doesn’t take note of this, the future bed supply is the biggest problem for them going forward,” he said.

A major funding mechanism for providers is the aged-care funding instrument, which involves the government paying a fixed daily amount per person, with more funding available for residents who need more ­attention. The government, faced with a forecast $3.8bn blowout in the cost of the ACFI over four years, said in this year’s budget it would cut $1.8bn from that funding mechanism.

A spokesman for the Department of Health said the government was engaging with the sector, principally through the Aged Care Sector Committee, on the implementation of the announced reforms to ACFI and on longer-term options to reform the arrangements to deliver more stable funding.

“The measures do not change the requirements on providers to provide quality care to residents, with the Aged Care Act 1997 setting out the responsibilities approved providers must meet,” the spokesman said.