Aged care: little transparency as nursing home companies rake in profits

Nursing home operators are making millions without having to make clear the value of, or spending on, the care they offer.

The report said there was “no direct driver between care needs and care expenditure” in residential aged care, or the connection was being masked by other factors. Picture: Supplied

The nation’s largest nursing home operators are making significantly higher profits than similar businesses in Europe and North America, with independent analysis finding there was little evidence of a connection between how much money they spend and how much care they provide.

A new audit of the $25bn-a-year largely taxpayer-funded aged-care sector found the Health Department’s limited financial reporting rules meant aged-care providers with opaque corporate structures made it difficult to ­establish a link between money spent and care provided.

The audit, conducted by accountancy firm BDO for the aged-care royal commission, warned of “a lack of governance and transparency” within large aged-care companies, which make it difficult to understand their real profits.

“The current model favours more sophisticated providers who have the necessary financial acumen to manage diverse portfolios and capital structures,” the report concludes.

“(This) arguably weakens the link between the drivers of return and the quality of aged-care service provided by the provider.”

Lack of transparency

The report said there was “no direct driver between care needs and care expenditure” in residential aged care or the connection was being masked by other factors. “Providers … utilise group structures to maximise their returns and minimise risks. This is a perfectly legitimate model. However, it does reduce transparency over the financial transactions within the aged-care sector,” the report said.

Despite the lack of transparency, the report establishes that in residential aged care, the top 10 providers made $220.5m in profit in 2019, while the other 860 made a total of $138m in profit.

Aged-care funding is a significant component of the overall federal budget. In 2018-19, government spending on aged care was more than $20bn, with 66 per cent of that allocated to residential aged care.

The most recent budget committed $21.6bn to the sector.

Government funding accounts for about 68 per cent of the total funds flowing to residential aged-care providers, with the balance being private contributions from residents.

Local profits outstrip global counterparts

The study compared the profit margins and return on equity of approved providers of aged care internationally in the 2018 financial year, finding the top 25 per cent of providers by profit came out well ahead of similar organisations in Europe, North America and the Asia-Pacific region.

Net profit after tax as a proportion of total income was 9.13 per cent for the top-performing providers, compared to 6.53 per cent for the Asia-Pacific, 6.56 per cent for Europe and 6.02 per cent for the US and Canada.

The difference was even starker for return on equity (measured by net profit after tax as a proportion of equity), with Australia reporting 59.45 per cent compared to 16.13 per cent for the Asia-Pacific, 14.63 per cent for ­Europe and 14.29 per cent for North America.

The Australian ROE was significantly lower for Australian listed companies that were approved providers, at 11.16 per cent.

“This would indicate that unlisted For Profit Approved Providers behave quite differently from their counterparts (for example they may be distributing a higher proportion of profits out of the entity (and retaining less),” the report said.

Overall the BDO report concluded that on figures for the 2018 financial year, 74 per cent of aged-care providers were profitable and 13 per cent were unprofitable.