Review the Government’s Aged Care Reform Package April 2012

Living Longer, Living BetterReform Report #1

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Welcome to Grant Thornton’s first report on the aged care reform package, Living Longer, Living Better, released by the Government on 20 April 2012. This reform package represents an important initial step in a reform process that is well overdue.

This report focusses on the key reform initiatives included in the package. We explore the key strengths and weakness and consider some of the implications for the sector.

Over the coming months, Grant Thornton will be providing commentary on the reform process with the support of Australia’s peak bodies, leading aged care providers and industry experts. This will provide support to the reform process and enable the sector to share information about the changing landscape and its impact on aged care services throughout Australia.

We look forward to sharing this journey with you.

Cam AnsellNational Head of Aged CareGrant Thornton Australia

Contents

01 Welcome

02 Reformpackagehighlights

04 Summaryofissues

06 Criticalissuesandimplications

12 Futurereports

13 Contacts

Welcome

2 Grant Thornton April 2012

Reform package highlights

The Government’s reform objectives outlined in the package are to build a responsive, integrated, consumer-centred and sustainable aged care system that is designed to meet the challenges of Australia’s ageing population and to ensure ongoing innovation and improvement.

The following summarises the key features of the package. More information is available here.

• Establishment of a gateway service – focussed on improved access for consumers and better integration of aged care services.

• Consolidation and harmonisation of home care services and graduated funding mechanisms to better match client support needs.

• Changes to arrangements for user contributions (and means testing) in community care and residential care.

• Increasing the supply of home care services accompanied by a net reduction in planned residential aged care places.

• Continued rationing of aged care services, with a review of possible deregulation options after five years.

• Removal of distinction between high and low care in residential aged care, allowing residents to pay a refundable lump sum or periodic charge for accommodation.

• Increasing the accommodation supplement for supported residents from $32.58 (currently) to $52.84 from 1 July 2014 for facilities built (or significantly refurbished) after 20 April 2012.

• Recalibration of the residential aged care funding model to reduce the rate of growth in care subsidies and redistribute $1.6 billion over five years to other reform measures, largely the workforce initiatives.

• Creates a Workforce Compact to improve wages, working conditions and retention - $1.2 billion allocated over five years to the Workforce Productivity Strategy.

• Establishment of the Aged Care Financing Authority to make pricing recommendations to Government and approve charges for accommodation and optional extra services.

• Introduce measures to improve care for people with special needs - dementia, palliative care, people from diverse and marginalised backgrounds, and rural and remote communities.

• Creates a new agency which will accredit and monitor residential and home care providers, while retaining the Department of Health & Ageing’s role with the Complaints Scheme and compliance.

The package outlines a ten year plan for the introduction of the reform initiatives to be overseen by an independent Aged Care Reform Implementation Council, supported by a dedicated Transition Office (within the Department of Health & Ageing (DoHA)). The Transition Office will be responsible for the management of the reform process.

Key features of the package

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Year 1 - 2 (2012/13 - 2013/14)

Year 3 - 4 (2014/15 - 2015/16)

Year 5 - 10(2016/17 - 2021/22)

1. Establish the Aged Care Reform Implementation Council

1. Means testing for home care 1. Introduce gateway agency

2. Introduce the Transition Office (DoHA)

2. Harmonise capital funding for high and low residential aged care

2. Consider entitlement system

3. Consolidation and harmonisation of home care programs

3. Freedom to charge for additional services in residential aged care

3. Planning and review of:

- Demand impacts

- Means testing adequacy

- Financing / pricing arrangements

- Workforce strategies

4. Escalated release of home care packages in ACAR 2012 and 2013

4. Escalated release of home care packages in ACAR 2014 and 2015

5. Establish Workforce Compact 5. Design and planning for gateway

6. My Aged Care website6. Increase in accommodation

supplements for facilities built after 20 April 2012

7. CAP wage funding increase – Workforce Compact

7. Major review of changes implemented and planned

8. Increased funding for dementia

and special needs

The following summarises the key components of the timeline:

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Although the initiatives set out in Living Longer, Living Better are not as progressive as those recommended by the Productivity Commission, the potential for structural reform is tempered by a constrained political and fiscal environment. The Government has made some headway to address the challenges facing a sector in distress but there is much still to be done if the reform objectives are to be achieved.

The research and monitoring mechanisms built into the package should help to support more substantial structural change in the future for an industry that has seen little positive reform in over a decade. Specific provision for this has been made for this in the ten year implementation plan.

Progress has been made on the sensitive issues relating to increased user contributions to enhance choice, service flexibility and facilitate new investment. Strategies to enhance interfaces between consumers and services should support improved consumer accesses and there is scope to build on this over time.

If properly implemented, the removal of the distinction between high and low care will help to provide the additional capital so desperately needed to fund the redevelopment of Australia’s dated building stock and further investment in new facilities to accommodate an ageing population. Access to lump sum contributions or commercially based periodic payments would help encourage investment and greater consumer choice.

Consumers will also be granted the ability to request additional or premium quality services from providers on a commercial basis.

The Government has acknowledged the importance of harmonising and expanding home care service programs as demand escalates. Living

Longer, Living Better projects that around 90,000 new residential aged care places will be required over the next decade and estimates that $18.5 billion in new investment is necessary to meet the demands of an unprecedented number of older Australians.

However, there are a number of issues and challenges associated with the package and the reform objectives are unlikely to prove successful without a commitment to further review, specifically:

1. The over-regulation of supply

The Productivity Commission recommended the staged reduction in the regulation of aged care service supply and the introduction of a consumer entitlement system. A commitment to this reform will be instrumental in achieving greater levels of service flexibility, responsiveness and choice for older Australians.

2. Role of the Aged Care Financing Authority

The reform initiatives are designed to encourage increased innovation and competitiveness among providers. In these circumstances, it is inappropriate and impractical to increase regulation over consumer payments for accommodation. Government’s role should be limited to addressing exceptions to an otherwise competitive market.

3. Adjustment to funding instruments

A substantial portion of the funding of the package has been sourced from adjustments to the residential aged care funding instrument. This instrument was developed without using comprehensive data on the cost of delivering care. Consequently, further changes to the model will be uninformed and investor confidence in the viability of the sector will be undermined.

Summary of issues

Review the Government’s Aged Care Reform Package 5

4. Projected changes in service mix

Further savings and consumer choice benefits are anticipated through an increased emphasis on home care services, reducing dependence on more expensive residential aged care services. Our research in Australia and overseas demonstrates that these services are not perfect substitutes and the combination of an ageing population and the maturation of existing home care services may see a marked increase in demand for residential aged care services in the short to medium term, which may negate any anticipated saving.

We recognise that there are other important issues and implication to be considered in this package and we are working with industry experts to provide further commentary in our upcoming second report, particularly in relation to:

• the implications of changes on consumers, means testing and likely payment preferences

• the investment potential resulting from the changes to the supported resident accommodation supplement and the eligibility criteria

• the adequacy of funding and support from providers of specialist care, regional and remote locations and culturally/linguistically diverse backgrounds

• the likely impact on other related services, including retirement living and the acute sector

• bond insurance and the removal of retentions

• the affect of the “cooling off period” on provider capital budgeting and investment activities

• The Workforce Compact role and the potential regulation of the care giver wage market

• the practical applications of consumer directed care models in residential aged care settings; and

• industry planning strategies to navigate a reforming industry

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Critical issues and implications

The Government has justified this approach on the basis of the quantum of initial investment required for the Productivity Commission initiatives and the assumption that the industry and Australian public were not ready for such progressive structural reform.

It is acknowledged that the Government is operating under tight political and financial constraints, however, we consider that a number of departures from critical Productivity Commission recommendations are likely to materially compromise the desired reform outcome. Furthermore, the introduction of additional regulation in what the Government acknowledges as an over-regulated environment will reduce investment potential and erode provider confidence.

The following are some of the key elements that require further review:

Over-regulation of supply

The allocation of residential aged care places and home care packages is heavily regulated by Government. Providers of aged care services have limited capacity to respond to the changing needs of older Australian’s requiring their services. The Productivity Commission and Grant Thornton research demonstrates that the over-regulation of

price and supply are the greatest impediments to building a responsive and sustainable aged care system (click here). This is a concern shared in the commentary of the Government’s reform package:

“While rationing helps manage the Commonwealth’s fiscal risk and helps secure important policy objectives, such as geographic equity of access, it can create artificial scarcity that limits competition, blunts incentives to be more efficient and innovative and limits consumer choice.”

The key recommendations made by the Productivity Commission was for the introduction of an entitlement system in which funding would be allocated to individual consumers rather than providers, and the gradual phasing out of supply rationing. These initiatives would have formed the cornerstone of a dynamic system that would empower consumers and facilitate greater levels of competitiveness and innovation within the sector.

Despite acknowledging these advantages, the Government’s plan defers consideration of this critical reform until after 2016/17.

While the Government has made some important moves toward building a more dynamic and responsive aged care system, the level of structural reform described above was far less than was recommended by the Productivity Commission’s Caring for Older Australians Report 2011.

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Given the importance placed by the Government on consumer choice, and in the context of its broader reform objectives, it is paramount that the process for the phasing out of supply constraints be undertaken as part of the structural reforms scheduled for years three to four of the implementation plan (2014/15 to 2015/16).

Without a commitment to this fundamental reform, the Government’s key objectives for choice, responsiveness and flexibility cannot be fully realised.

Role of the Aged Care Financing Authority – Price restrictions

The reform package proposes the establishment of an Aged Care Financing Authority (ACFA) which will ensure, among other things, that consumers are only charged for the “costs” of accommodation in residential aged care. It suggests that the accommodation bond amount, or accommodation charge, would be closely linked to the underlying cost of the accommodation service provided. The intention of this change is to avoid the charging of “super-bonds” or unreasonably high accommodation charges that do not reflect the true value of supply.

Detailed consideration was given to this in the Productivity Commission review but it was not adopted in the final report. This is largely because the “value” of accommodation and services cannot be reliably measured.

For the provider, establishing the cost of accommodation supply is more complicated than just sourcing original construction or acquisition information. The proposed approach assumes that

equitable bond/charge prices would be achieved through an aggregation of input costs rather than valuing the operator’s accommodation quality and service.

An operator’s investment in the physical infrastructure of the service is an ongoing requirement over the life of the facility and the cost of accommodation includes less tangible contributions that enhance the service quality and reputation of the facility. These elements would be difficult to apply and measure constantly across the sector to arrive at an accommodation “value” or “cost”. It will be virtually impossible for the ACFA to police this effectively.

If the reforms are successful in stimulating competition and innovation, market forces should ensure that accommodation charges remain competitive without the need to introduce another layer of bureaucracy that is unlikely to be effective in protecting consumers.

The Government should monitor accommodation bond and charge levels as a basis for determining the success of other components of the reform package and, by exception, to identify instances where consumers have been unfairly treated.

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Funding Instrument (ACFI)/Claiming

Included in the reform initiatives is the redirection of funding currently paid to residential aged care providers through the Aged Care Funding Instrument (ACFI). This follows concerns regarding the potential $2.3 billion blow-out (over the four year forward estimate period 2011-15) based on current claiming levels.

Under the reform package, $1.6 billion of ACFI revenue will be reallocated to the Aged Care Workforce Compact and other aspects of the reform package.

Much attention has been given to the level of claiming under the funding instrument introduced in March 2008. The reform package suggests that many providers are “over-claiming” for subsidies and indicated that further rigor would enable substantial savings in this area.

The ACFI funding instrument was developed without the use of comprehensive information on the cost of delivering care. Without the benefit of this data, major changes to the instrument or claiming processes could place at risk the ability of providers to meet the costs of supporting people with increasingly complex care needs. Despite the language used in the package, the increased funding from the Workforce Compact will not offset the proposed subsidy reduction.

Grant Thornton research confirms that current levels of funding for aged care are inadequate to encourage investment in new supply (click here). Reductions in the principle revenue stream as part of the reform package may result in providers gaining access to the capital required to build new facilities, only to find that they cannot be operated viably.

The timeline provided in Living Longer, Living Better predicts that the reform initiatives will immediately stimulate investment activity in the sector:

“Investment and building activity in the residential care sector will begin to increase, as providers seek to capitalise on future capital income streams.”

However, the investment appetite for the sector will be influenced by the ability of providers to access both capital and operational funding streams. Without certainty around care revenue, it would be inappropriate for providers to progress their expansion plans.

To address this uncertainty the Productivity Commission recommended that a comprehensive costing study would be conducted by an independent agency to inform Government on the future pricing of aged care services, based on the actual costs of delivering services.

Without a commitment to this initiative, the Government’s objective for capital investment in the aged care industry is unlikely to occur.

ACFI subsidy reduction

$1.6 billion

Conditional adjustment payment

$1.2 billion

Other reform initiatives

$400 million

Review the Government’s Aged Care Reform Package 9

Increasing home care packages

The reform package includes initiatives to support consumer preferences to age with access to care in their home. This includes increased investment in home care packages and a reduction in planned spending on residential aged care services of $450 million or 25,000 places over ten years.

Although older Australians would overwhelmingly prefer home based care services to residential aged care, it is not practical or safe for many to remain in their own homes. Around three quarters of people in residential aged care require high care support - predominantly intensive supervision that cannot usually be provided in the home. Further, community care programs often require a level of ongoing support from the spouse, children or friends. Because of the structure and composition of the baby boomer population, access to such informal support will decline proportionately over time.

140,000

120,000

100,000

80,000

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40,000

20,000

Hom

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2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22

Additional Home care package places from More Aged Care Places measure Current projections

Homecarepackages,2011-12to2021-22

10 Grant Thornton April 2012

The Government appeared to acknowledge this condition in their assessment of informal carer requirements:

Since the 1980’s successive Governments have been able to support older Australians to live longer at home through community care programs. To an extent, this has decreased the number of people requiring residential aged care support, particularly in low care services (hostels). However, the extent to which community care services can substitute residential aged care is limited and a more sophisticated analysis is required to determine the impact that increased home care would have on the demand for residential aged care.

Health economists and clinical experts engaged in Grant Thornton’s review of the New Zealand’s aged care system determined that that residential aged care and home care services are not perfect substitutes. The combination of an ageing population and the maturation of existing home care services is projected to cause a marked increase in demand for residential aged care services in the short to medium term (click here).

“…the supply of informal care is likely to diminish relative to the size of the older population, due to changes in traditional family structures and the trend for younger cohorts to have fewer children… This will have implications for the delivery of community care, which often relies on the availability of an informal carer.”

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In Western Australia, substantial increases in the allocation of home care packages have already been made in recent years to compensate for a very low take up of residential aged care places. However, this has resulted in an excess supply of home care packages in a number of regions in which demand for residential high care services continues to outstrip supply.

In the context of the reform process, it is paramount that the Government:

1. Undertakes more comprehensive analysis to model demand levels, taking into account demographics, informal and formal care supply and the changing functional dependence levels of older Australians accessing aged care services; and

2. Provide a commitment to removing the supply rationing mechanisms which limits service responsiveness to actual need, as discussed above

1,800,000

1,600,000

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Age

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2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026

Scenario A Scenario B Actual (constructed)

Demandprojectionsforresidentialagedcare-NewZealand

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This first report has focussed on the major reform initiatives and assumptions that require immediate review. We recognise that there are other important changes that demand more detailed examination.

In partnership with industry experts, future Grant Thornton reform reports will focus on these areas and provide insights into the implications of the reform process on the aged care industry.

Future reports

Further informationIf you would like to discuss any aspect of this report, or possible coverage in future reports, please contact Cam Ansell or your local Grant Thornton office:

T +61 8 9480 2062 E Cam.Ansell@au.gt.com

ContactsContacts

AdelaidePhilip PatersonT +61 8 8372 6601E philip.paterson@au.gt.com

BrisbaneDan CarrollT +61 7 3222 0304E dan.carroll@au.gt.com

Graham McManusT +61 7 3222 0224E graham.mcmanus@au.gt.com

MelbourneBrad TaylorT +61 3 8663 6137E brad.taylor@au.gt.com

George LiacosT +61 3 8663 6183E george.liacos@au.gt.com

PerthCam AnsellT +61 8 9480 2062E Cam.Ansell@au.gt.com

Jeff VibertT +61 8 9480 2190E jeff.vibert@au.gt.com

SydneyAndrew RigeleT +61 2 8297 2595E andrew.rigele@au.gt.com

Trevor PogroskeT +61 2 8297 2601E trevor.pogroske@au.gt.com

Review the Government’s Aged Care Reform Package 13

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