Aged care has become a property play – perhaps even for some church groups?

Sep 22, 2020

Whenever governments outsource or subsidize a community service, it is amazing how quickly and cleverly the private sector finds a way to milk it.

The Royal Commission into Aged Care Quality and Safety has skilfully engaged the services of tax accountants and academic researchers to lift the lid on a hitherto unrecognised profit-shifting scheme that has turned the provision of residential aged care into a low risk, unregulated and highly profitable property play for the big league investors.

Australia’s governments can now borrow money for 10 years at one per cent, effectively a negative interest rate. If, instead of borrowing, a government outsources the provision of an item of infrastructure such as a road or tunnel, generally to avoid potentially damaging pressure from an opposing political party to not increase debt, a Public Private Partnership (PPP) or similar is entered into. An investment bank skims a multi-million dollar fee for putting the scheme together, the fee necessarily forming part of the cost of the project, and typically investors earn a return in the order of 10% – effectively risk-free in most cases, because of a government guarantee. The community consequently pays too much for what is often an inferior quality facility.

Residential aged care facilities are a form of infrastructure, in that they provide an essential community service. The specialists engaged by the Royal Commission have now revealed, perhaps unsurprisingly, how John Howard’s outsourcing of residential aged care in 1997 has ultimately, with help from the ALP, allowed for-profit providers to turn residential aged care into a serious property play. As reported recently in The Saturday Paper, this is how the scheme works.

Residents entering an aged care facility generally pay an Accommodation Bond, more recently called a Refundable Accommodation Deposit (RAD), of somewhere between $100,000 and $2 million – typically in 2019 it was $318,000 – on which no interest is earned by the resident. The aged care provider (say, entity A) then loans the RAD to an associated entity (say, entity B), a property development company.

Entity B buys a site, develops a residential aged care facility, and rents the facility to the aged care provider. This rent is accounted for as a cost by entity A, and as such forms part of the negotiation when determining the amount of government subsidy to be paid. There is apparently no control on the amount of rent payable, a form of transfer pricing, so it might well be structured so as to cause entity A to make little or no profit while maximising the return on investment of entity B, the property developer. Note that the interest-free RADs fully or partially fund the site acquisition and development costs via a related-party loan. All legal as the law now stands.

Hey presto! The aged care provider struggles to break even, so it has no choice but to cut costs – the largest component of which are staff costs. Meanwhile its associated entity B, according to a report prepared for the royal commission by BDO Australia, a tax specialist, is a highly profitable property development company. Interestingly, it appears that the potentially profitable property development entity, in the case of not-for-profit facilities run by charities, is often a church or religious body.

As reported by The Saturday Paper:

“While the analysis shows that for-profit aged-care providers in Australia have broadly similar profit margins and asset returns when compared with companies in the Asia-Pacific, Europe, and the United States and Canada, they differ in one remarkable way.

Nowhere in the world do similar systems have as high a return on equity as in private Australian aged-care operators – usually a reliable measure of income generated from investment. These providers have a return that’s almost 10 percentage points higher than the value for listed companies in Australia, and 4 percentage points higher than the closest cohort in the Asia-Pacific.

The top quarter of all private aged-care companies in Australia have a return that is almost four times higher than the best performers elsewhere in the world.”

Where do the cost-cutting savings come from? Again, according to The Saturday Paper, “the nurses were the first to go”.

“Before John Howard’s 1997 aged-care changes, the number of registered nurse (RN) hours that a typical nursing home with 60 residents was funded for and received was 308. Within a decade, it dropped to just 198.

Today, it is 168 hours in a week.” And furthermore:

“In 2003, there were 16,265 full-time equivalent RNs in Australian nursing homes, representing 21.4 per cent of all direct care employees in these facilities. Even with an explosion in the number of older people receiving care, by 2016 there were only 14,564 registered nurses caring for them, representing less than 15 per cent of all staff.

“Enrolled nurses (ENs) fell by almost 2000 full-time positions – dropping from 14.4 per cent of all employees to 9.3 per cent.

These clinical roles were replaced by low-paid and low-skilled personal care workers, often migrants who are given little or no support and face language barriers in the workplace. More than 26,000 such jobs were created between 2003 and 2016, pushing the proportion of these still-overworked employees from 56.5 per cent to 71.5 per cent of the entire direct care workforce.”

According to The Saturday Paper, Mark Butler, as health minister in the Gillard government, finished the privatisation job that Howard was unable to complete. In 2012 he extended the authority to charge Refundable Accommodation Deposits (RADs) to apply to all levels of residential aged care – previously RADs were restricted to low-care beds.

Any wonder then that, as reported in The Saturday Paper, Peter Rozen, QC, told the Royal Commission into Aged Care Quality and Safety in August: “It can be seen, commissioners, that the aged-care system we have in 2020 is not a system that is failing,” “It is the system operating as it was designed to operate. We should not be surprised at the results.”

This royal commission deserves high praise for the work it has done to date. Hopefully it will result in a return to mandated professional staffing levels similar to those that applied prior to 1997.

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