The dead hand of government in aged care reform
By Julie McStay13 Sep 2016
This article first appeared in the Australian Financial Review on 13 September 2016. Click here to access the AFR version, please note you will need a subscription to the AFR.
This article has been reproduced under licence from the Australian Financial Review.
It was not pretty to watch. And it was entirely unnecessary.
Put simply, the Department of Health issued guidance to aged care providers about the fees that residents of aged care facilities could be charged for additional services beyond the usual provision of care and accommodation. The guidance related to additional services, "capital refurbishment fees", "asset replacement contributions" and other similar fees.
The guidance was broad and some of it was an unnecessary government intrusion into what should be private arrangements between aged care providers and residents.
All participants in aged care agree on the need to reform how the sector is funded. But for reform to succeed, the government must not interfere when care providers and residents reach mutually agreeable arrangements regarding long term care and accommodation that is over and above what has been funded by government.
The events of the past week show government should step back and let the market operate. Aged care is highly regulated and, given the vulnerable cohort of residents, so it should be. But government should resist the temptation to control matters that go beyond the legislation and are agreed between residents, their families and providers.
While the department's guidance was broad and is certainly untested in the courts, investors leapt to the conclusion that it would restrict the ability of listed aged care providers to grow revenue over time. Investors beat an unseemly race to the exits to sell down their holdings, with some share prices down almost 30 per cent in a single trading session.
This was, to say the least, an over-reaction.
The funding of aged care in Australia is already undergoing much-needed change. Federal Treasury estimates show that over the next 40 years the proportion of the population aged over 65 will almost double to 25 per cent.
This is a structural change. With the relentless march of demographics driving the growth of Australia's aging population, the Commonwealth recognises that government can't fund all aged care. The market and the consumer must play their part.
The Living Longer Living Better process was intended to provide a package of reforms to allow for the long-term viability of the aged care industry.
A fundamental principle of the reforms was that funding shortfalls could only be met by user contributions by those who could afford them.
In the May budget the industry was again hit by significant funding cuts, to the tune of $1.2 billion over four years. Providers are now looking for ways to be sustainable while relying less on taxpayer funding. This is consistent with the intent of the current reforms.
It was also acknowledged during the process that providers could charge residents for care and services over and above the care and services for which they receive government support, and that these fees would not be controlled by government but would be matters agreed between the resident and the provider.
Consumers must take more responsibility
The guidance issued by the Department of Health goes beyond what is the subject of the legislation and is, frankly, contrary to the intent of the reforms, which acknowledged that consumers must take more responsibility for the cost of their care. They also indicate that aged care providers must become more self-sufficient and rely less on government funding.
That leaves consumers and aged care providers needing to work together to fund the gap. It is not helpful then if government tries to control what providers can ask consumers to pay for services for which they receive no government support.
The government wants the market to prevail, but then can't resist meddling with that agreement between provider and resident. A market mechanism can only work if the heavy hand of government resists the temptation to interfere.
As the legislation stands, there is plenty of scope for aged care providers to build sustainable revenue streams from additional services to their residents, just as long as they are providing care and services over and above what they have been funded for by the government, the resident receives some benefit for the service and the resident agrees to pay for those services. The business model is sound.
Investors would do well to consider the long-term demand for aged care services and retirement living accommodation in Australia, just as government would do well to allow the providers and the residents to negotiate agreements free of unnecessary intervention.
Julie McStay is a Director at Hynes Legal and leader of their national aged care and retirement living team.