Introduction by Croakey: The response from aged care stakeholders to the Prime Minister’s announcement of a planned $10 billion funding package in the upcoming 11 May Federal Budget has focused on whether this commitment is sufficient to address the identified needs within the sector.
However, just as important as the quantum of money going into aged care are the processes in place to ensure this funding is spent effectively and efficiently to deliver tangible gains for aged care consumers.
Without a robust reporting and monitoring system, there is a danger that this additional aged care funding could be shunted into increased profits for providers with no guarantee of improvements in the level or standard of care they provide.
Charles Maskell-Knight PSM was a senior public servant in the Commonwealth Department of Health for over 25 years and worked as a senior adviser to the Aged Care Royal Commission in 2019-20.
In the second instalment of Croakey’s The Road to Aged Care Reform series (see the first here), Maskell-Knight identifies two major problems with the current funding and reporting system for aged care: a lack of overall transparency; and a financing and regulatory regime which allows providers to make a profit while delivering poor quality care.
He analyses these flaws and proposes a solution which would increase the transparency and accountability of aged care funding, including drawing from the government’s experience in overseeing the (significantly lower) levels of subsidies provided to the private health insurance sector.
Charles Maskell-Knight writes:
In a recent ABC Background Briefing program reporter Ashlynne McGhee delves into the relationship between St Basil’s Homes for the Aged in Victoria and the Greek Orthodox Archdiocese. A real estate agent told her that the rent paid by St Basil’s to the archdiocese appeared to be about double the market rate.
The Background Briefing report suggests that the church is making money out of the aged care business and using it to fund other expenditure.
A review of the financial report for St Basil’s for 2019-20 lodged with the Australian Charities and Not-for-profits Commission shows the organisation made a loss of $615,339 after paying rent of exactly $1,850,000. If it had paid rents at half this rate it would have made a profit of almost $310,000.
It is important to stress at the outset that there is nothing illegal about these arrangements. If the board members of a charity such as St Basil’s considers it appropriate to enter into a related party transaction on a non-commercial basis that is a matter for them.
If the owners of an aged care provider wish to lend at zero interest every dollar of accommodation bonds received by the provider to another company they own, that is not against the law.
Public policy concerns
But there are two public policy concerns. The first is that the current financial reporting regime for aged care providers means the Government has no idea about the true financial state of many aged care providers, and hence the aged care sector as a whole.
The second is that the aged care financing and regulatory regime does not prevent profits from being drawn down while poor quality care is provided. I suggest below an approach to address the first concern, and in a later article I will address the second.
Aged care providers are required to submit to the Government aged care financial reports on different elements of their operations (home care, residential care, short term restorative care) as well as consolidated approved provider income and expenditure and financial position reports, together with a General Purpose Financial Statement for the aged care segment of their operations. Only the General Purpose Financial Statement is required to be audited before submission.
There are a number of ways for the parent entity of an aged care subsidiary to receive profits from the aged care business other than through a profit distribution. St Basil’s is an example of one: the parent entity owns the building and charges the aged care provider inflated rents.
Another method is for the parent entity to lend the aged care provider the money to construct the building or acquire other assets, and then charge inflated interest on the loan. In early 2019 Bupa reached an agreement with the ATO under which the company paid $157 million to resolve outstanding taxation matters including what Guardian Australia described as “transfer pricing issues” over acquisitions in 2007 and 2008.
A related option is for the aged care provider to make loans to the parent entity at concessional interest rates.
Another method is for the parent entity to charge the aged care provider “management fees”, which can run into tens of thousands of dollars per aged care resident per year.
A lack of analysis
The Government requires the approved provider level reports submitted by providers to differentiate between rent, interest, and management fees paid to related parties and those paid to other parties. Unfortunately it does not appear to carry out any analysis of this data – or if it does, it does not report the results.
Reports from the Aged Care Financing Authority acknowledge that related party transactions exist, but do not attempt to quantify their impact on the financial performance of the sector. They do provide data on the volume of related party loans for residential care providers: at 30 June 2019 aged care providers in aggregate had outstanding loans to parent entities of almost $5.6 billion, and loans from parent entities of just over $2.3 billion.
However, there is no published data on the interest receivable/payable on these loans as compared with third party loans.
The Aged Care Royal Commission contracted accountancy firm BDO to advise it on the financial position of the aged care sector, using the financial data reported to the Government. BDO’s report was published by the Royal Commission as its Research Paper 12.
The need for transparency
BDO noted that there was significant variance between providers in some categories of expenditure, particularly management fees, interest and rent. It analysed the impact on aggregate expenditure in these categories of capping expenditure at the level of the 75th percentile of providers, and calculated that this would have reduced 2017-18 aggregate expenditure on management fees by $226 million, interest by $128 million, and rent by $47 million.
These are not insignificant amounts in aggregate, and are likely to make the difference between a reported loss or profit for many individual providers.
In its executive summary BDO commented that “an improvement in transparency [of transactions and other dealings with related parties] would positively impact the extent of analysis possible and allow for more informed decision making in relation to policies and investment decisions”.
I think this can be paraphrased as “in the absence of clarity about related party transactions it is impossible to reach an accurate conclusion on the financial state of the sector”.
The private health insurance model
If the Government really wanted to know what was going on with aged care finances it could draw on the model applying in the private health insurance sector. Companies are required to conduct their health insurance business through a separate health benefits fund which is effectively ring-fenced from other business the company may conduct.
The audited financial results of this fund are reported to APRA and published, together with a wealth of other information including the number and amount of benefits paid and the level of administration costs. While profits withdrawn from the insurer are not separately reported they can be easily calculated, and high levels of management expenses relative to the industry are obvious and can be questioned.
If this level of public accountability and transparency applies to a sector where the Government underwrites less than a third of costs, why should it not apply to a sector where the Government funds over three quarters of costs?
Unless a much more robust financial reporting regime is introduced there is a high risk that much of any additional Government funding for aged care will be syphoned off in profits rather than used to improve the quality of care.
See here for the first story in Croakey’s The Road to Aged Care Reform series.
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