Health reform passed, but aged care entrepreneurs still struggling

While the national health system is set to receive a boost in funding due to the reform plan signed by federal and state governments yesterday, entrepreneurs in the aged-care sector are still struggling to survive.

Despite the growing demand for aged-care services and a number of companies set to take advantage of the aging population, the industry could face a decade of struggle as profits remain thin due to customers’ inability to pay for services and a reliance on Government assistance.

The health deal signed yesterday will see the Federal Government take full responsibility for aged and primary care, with 1,316 extra beds to be provided mostly outside the public hospital system. More emphasis on reducing the rates of hospitalisation of aged-care patients is also included as a priority.

But experts say this won’t save aged-care entrepreneurs, many of whom are struggling to make a profit. Recent results from the Bentley’s 2009 National Aged Care Financial Survey found that more than 40% of aged-care providers are operating at a loss, and average profits have halved in the past three years to be less than 5%.

Heath Shonhan, director of national accounting association Bentleys, says the reform itself doesn’t address the greater need for the aged-care system to move away from government assistance and into a user-pays model.

“I don’t think that Government money is the most efficient way to deal with the issue here. The demographic is slowly changing. The change in the reform will have an impact, but the reform needs to move to a user-pays system where the Government gives less money and those that can afford it, do pay for it.”

“Currently the Government is giving money in the form of zero-interest loans, or loans at CPI and currently there is a cap on how much providers can charge. So all the Government has done is extended that program, and it hasn’t moved the system towards market-based forces.”

Shonhan says the extra funding will not save the industry, which is in trouble due to a range of factors including limited finance from banks. He says this will only be solved when the Government removes caps on how much providers can charge, and eventually move aged-care to the free market.

“The industry is in trouble, on a few different levels. Banks aren’t lending to construction projects, and they are also being told to scale projects back a bit. That is restricting providers on what exactly they can do.”

“The whole situation does require a passage to a user-pays system. For people in 40 or 50 years time, they will have had super being paid in and we will have wealth beyond the family home, whereas that isn’t the situation now. That expectation of having the state pay for aged care will eventually disappear.”

IBISWorld senior analyst Ed Butler says entrepreneurs in the aged-care sector are struggling because the older population is finding it hard to pay for these services out-of-pocket, dictating a need for a high level of government assistance.

He says this is the biggest challenge facing the nation over the foreseeable future, and says that while demand will remain strong, the ability for people to pay for aged care will be a key factor in the industry’s success.

“The Government is attempting to minimise the amount of hospitalisation going on, and technological advances have made home care easier than before. The older generation can stay at home and be taken care of with new technology to keep them in touch with a GP or relative.”

“But providing this care is expensive, and will eat into people’s savings. Whereas superannuation was providing for 15-20 years previously, people are living until 90 years old and are still retiring in their early sixties. So while demand will be strong and revenue will grow, profits will be hard to come by.”

The deal signed by the majority of Australian governments yesterday will put more control of the system into the hands of the Federal Government. The Commonwealth will use 30% of the states’ GST revenue to ramp up its spending of health care costs from 40% to 60% from July 1, 2011.

West Australia premier Colin Barnett was the only state leader not to sign on to the plan, keen to hang on to the state’s GST revenue. He is confident of securing a deal in the next few weeks that would see his government pay into a pool, rather than directly to the Federal Government.

In order for Prime Minister Kevin Rudd to win the states’ approval, he agreed to let the states remain “system managers” of hospitals. Public hospitals will be run by networks, and will eventually be funded on a per-service basis, rather than through larger grants.