Reform fatigue without boundaries

Health

Aged Care

Now that the Aged Care Funding Instrument (ACFI) changes are in, we look into what’s wrong with the ACFI, including the impact to industry, and examples of the uncertainty that will evolve.

During 2016, we highlighted substantial government funding changes in aged care. Much of this focussed specifically on the Aged Care Funding Instrument (ACFI) payment cuts, with some of the measures implemented from mid-2016, and some in January 2017. We also considered more broadly the impact on the industry of the Federal Government’s penchant for surprises.

The ACFI changes are in, and have already commenced to negatively impact operator profitability and asset values. Whilst these changes will take two to three years to fully factor in. Industry bodies have united to call loudly and often for funding, regulatory stability and predictability, urging the Government to let operators get on with business.

Stability and predictability are the preconditions for attracting the capital needed to build enough beds for Australia’s ageing population. However, we now anticipate that 2017 and 2018 will bring the exact opposite. There will be further substantial but less predictable change, driven again by Government budget constraints, and its seeming inability to enunciate a clear and well-articulated pathway to a market-based industry, that maximises choice for care recipients.

The following are examples of this uncertain environment:

  • In April 2017, the Department of Health tabled recommendations to replace ACFI with a new funding model, one that will take at least two years to implement, and with unknown operator revenue outcomes. While this new model is being developed and implemented, ACFI will be further tightened.
  • A review of the effectiveness of the Living Longer Living Better (LLLB) reforms, known as the Tune Review, is due to be delivered to the Minister for Aged Care by 1 August 1 2017. This will provide the Government with another opportunity to ‘finesse’ aged care.
  • The Government’s version of aged care utopia, its 2016 Roadmap, envisages among other things a true market-based system, without existing supply constraints. Delivering this outcome will represent a major departure from the existing, problem plagued licence allocation process that remains an unreviewable black box. At this stage, no detail has been articulated by the Department on how these outcomes will be delivered.
  • The ability for operators to adapt their business models to incorporate additional service offerings remains vexed post the Department’s communique of 2 September 2016, that challenged these initiatives. This uncertainty reached a critical stage with ASX-listed operator Regis Healthcare launching Federal Court proceedings to allow it to continue to levy residents an ‘asset replacement charge’ which was banned by the Department of Health in September 2016.

What's wrong with ACFI?

ACFI is the principal payment mechanism for the provision of residential care. Simplistically, the more care required by the resident, the higher the ACFI payment. In the post LLLB environment, the Department views ACFI spend to be out of sync with projected spend, and to be unsustainable.

There are two sides to this coin. Post LLLB, the mix of care recipients in the ACFI system is on average - higher acuity than before, (with lower acuity tending to dominate care in the home payments) requiring more care to be provided that simply was not factored into Department ACFI projections. The flip side is that ACFI is perceived to be too subjective and capable of being ‘gamed’.

Having just hacked at the ACFI tables last year by recategorising outcomes in the complex healthcare domain, the Department is now seriously considering throwing the entire system out.

Its consultants have put forward multiple replacement options, but are recommending one that treats most residential care operating costs as ‘fixed’, supplemented by ‘variable’ payments in isolated situations when residents require less typical care outcomes. If adopted, this approach may assist in standardising payment amounts, contrasting with the present environment where each operator’s revenue per bed outcome is somewhat unique.

Acquirer, Investor and Lender Caution

We have seen a marked slowing of corporate activity over the past 12 months – tempered by perceptions of sovereign risk, and evidenced by absence of aggressive acquisition activity and by more conservative lending.

We consider that this caution will continue, as it will co-exist with reform fatigue.

If the Government holds true to its reform agenda the end may indeed justify some of this uncertainty. But the shorter this period is, the better for all.

 

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