In response to recommendations from the Aged Care Royal Commission, the Federal Government has increased the information publicly available on aged care providers.
But do the changes made to public reporting practices deliver the transparency and accountability required for the proper resourcing and regulation of this sector?
Below, former senior public servant Charles Maskell-Knight analyses the new reporting regime and recommends some further reforms to increase government scrutiny and ensure taxpayer funds are being spent to deliver maximum value.
Charles Maskell-Knight writes:
When I started work for the Aged Care Royal Commission in early 2019, I acquired a copy of the Aged Care Financing Authority annual report. I was expecting to see something like the annual report released by APRA on the operations of registered private health insurers, with tables setting out profit and loss and assets and liabilities reports on a provider by provider basis.
I was sadly disappointed. The ACFA report breaks results down by type of provider (for-profit, not-for-profit, government), location (metropolitan or rural), and scale, but does not report by provider. And unlike APRA, which must report on health insurers “as soon as practicable” after 30 September, the ACFA report is often released a year after the financial year it covers.
Part of the information gap is filled by the accountancy firm Stewart Brown, which releases timely quarterly reports on aged care providers participating in its survey (about 40 per cent of nursing homes and 55 per cent of home care services). This information is often picked up by the media, which reports on the overall sector profit or loss without mentioning caveats such as the limited coverage.
Significant improvements
The Aged Care Royal Commission recommended significant improvements in the public availability of information on aged care providers. In response to these recommendations, the Department of Health and Aged Care has now begun its own quarterly financial reporting on the aged care sector. It has just released the report for last year’s September quarter – a lag of five months.
The reports are based on a new framework introduced to replace the previous financial reporting framework which generated the data underlying the ACFA reports.
While it is great to see the Department accepting responsibility for providing regular financial information about the aged care sector, there are a number of disappointing aspects of the new regime.
Disappointing aspects
Firstly, the reports ignore the impact of related party transactions. It assumes that payments recorded on the books of aged care providers for items such as rent, interest, and management fees reflect genuine transactions between parties at arm’s length.
An examination of the raw data underlying the ACFA reports – provided by the Department to the Royal Commission – showed that many payments in these categories were made to related parties at inflated rates. For example:
- A chain of Queensland providers paid exactly the same rent per approved place per year – at a rate sufficient to rent a two bedroom apartment – to a related party.
- Loans from related parties often involved interest rates well into double figures, compared with an average for arm’s length loans at that time of about 7.5 per cent.
- Management fees paid to related parties sometimes amounted to tens of thousands of dollars per approved place per year, far in excess of the management costs incurred by providers who managed their affairs internally.
These practices have the effect of reducing the potential profit of the aged care provider and increasing the revenue stream and potential profit of the related party. In the case of for-profit providers, the related party receives a pre-tax revenue stream rather than a post-tax profit. If it is able to reduce its effective taxation rate below the rate that would have been paid by the provider, it is better off.
In the case of not-for-profit providers, the related party can use the revenue to subsidise other (hopefully charitable) activities, while still being able to claim that all aged care funding is being spent on aged care.
On the other side of the ledger, a number of providers adopted the practice of lending every refundable accommodation deposit (RAD) they received to a related party, under an arrangement with zero interest payable. This practice provides the related party with a source of interest-free capital, which can be used to fund non-aged care projects.
Assuming the average RAD per approved place is about $200,000 (allowing for low-asset residents who do not pay a RAD), and assuming an interest rate of 5 per cent, the interest revenue forgone by the provider under such an arrangement is $10,000 a year, or just over $27 per day. This coincidentally happens to be just under the net pre-tax loss per resident per day of $27.90 reported by the Department for the September quarter last year.
The Royal Commission concluded that governments from both sides of politics had systemically underfunded aged care for several decades, and I am sure that many residential care providers are under financial pressure.
But until the Department is able to identify related party transactions and adjust them to reflect arm’s length terms, we really don’t know how much financial pressure the sector is under.
Insufficient detail
The second issue is that the Department’s analysis of the data falls far short of the detail provided in the Stewart Brown reports.
For example, Stewart Brown separates residential care costs into direct care, indirect care (mainly “hotel services”), and accommodation, and for each category reports on revenue, several types of direct costs, and apportioned overhead costs. For the 2021-22 financial year this demonstrated that homes made a small profit ($1.85 per resident per day) on direct care, but lost $4.45 on indirect care and $12.06 on accommodation.
This suggests that improving care funding may improve quality of care as long as the extra funds are allocated to care, but will not address the losses in accommodation. (Although to the extent that these losses are caused by providers giving related parties interest free loans, this may not matter.)
It is a pity that the Department’s report does not contain a similar level of detail, to help inform public debate of the best funding models for aged care.
The need for provider-level data
The third issue is that the Department is not releasing information at a provider level. In the Royal Commission’s final report Commissioner Lynelle Briggs AO put forward her view that
“providers should report openly to the Australian public on their operations and performance… [including] financial reports, including profit and loss and balance sheet information [and] details of the provider’s related party transactions such as… transactions between the provider and another entity which is part of the same corporate group” (volume 3B, p.466)
As I indicated above, APRA publishes an annual report setting out for each insurer details of its profit and loss account and assets and liabilities. This is a requirement under the Private Health Insurance (Prudential Supervision) Act 2015, and was a requirement under the National Health Act 1953 from the 1960s onwards. It is a mechanism to allow public scrutiny of the operations of a heavily regulated sector delivering a social policy objective.
Since 1998 the sector has also benefited directly from taxpayer support, first through the Private Health Insurance Incentives Scheme and then the private health insurance premium rebate, which currently meets around a quarter of insurers’ costs.
Just like private health insurance, aged care is a heavily regulated sector delivering on a social policy objective. And just like private health insurance, it is subsidised by the government, but by about three-quarters of costs.
More scrutiny needed
The case for public scrutiny of the affairs of aged care providers is at least as strong as the case for scrutiny of insurers.
For example, if entrants to residential aged care are to be compelled to make an interest-free loan to the provider (in the form of a RAD), they deserve some assurance that they will benefit from the provider’s use of the loan. If they understood that the provider would simply pass on the loan to a third party, so that the loan would not provide any benefit to residents, they might seek another provider.
Some people have argued to me that public scrutiny is not appropriate, as many small aged care providers are essentially family businesses, and publication of financial information would infringe on the privacy of the family.
While this may be true, family businesses can choose what activities they conduct. If they choose to provide aged care, and accept a government subsidy for three-quarters of their costs, they should accept the level of public scrutiny necessary to ensure that they are spending the money wisely for the purpose for which it has been provided.
See here for Croakey’s archive of stories on aged care
