Introduction by Croakey: Labor’s aged care election policy has five elements, including registered nurses on site 24/7; a mandate that every Australian living in aged care receives an average of 215 minutes of care per day; a pay rise for aged care workers; and better food for residents, with mandatory nutrition standards for aged care homes so every resident gets good food.
The fifth leg of the platform – that residential care providers will be required to report, in public and in detail, on what they are spending money on, with new powers for the Aged Care Safety Commissioner to ensure accountability and integrity – will require significant reform effort in the face of likely resistance, according to health and aged care policy analyst Charles Maskell-Knight.
It will also require the Department “to realise that its role in aged care is to support the public in obtaining information about the sector, not to support providers by maintaining secrecy about their affairs”, he writes below.
Charles Maskell-Knight writes:
One of the aged care policies announced by Labor recently involved greater transparency about the finances of aged care providers.
This commitment (see below) represents a major step away from the current arrangements, where the Department generally refuses to reveal any information about aged care providers because it is “protected information” under the Aged Care Act 1997.
As ever, the devil will be in the detail. While some providers will welcome greater transparency, and many others will accept it, some will seek to avoid it, as it will highlight the extent to which funds provided for care are being diverted to other purposes.
To help the Department of Health get off the mark quickly if a Labor Government is elected, here are some ideas about implementation issues arising from this commitment. (If it helps the Department to take this free advice seriously, I am happy to receive a McKinsey-scale consultancy fee at any time.)
Require aged care finances to be ring-fenced
The first hurdle to overcome in improving financial transparency is understanding clearly what is and isn’t aged care expenditure.
Under current arrangements this can be difficult, because an aged care provider can carry on other activities. Many larger providers operate retirement villages as well as residential care. Some church and other not-for-profit providers operate aged care services as part of a portfolio of charitable activities including support for low-income families and groups such as refugees, foster care, youth work, and even legal advice services. Some family-owned businesses operate food supply services or property services under the same corporate structure as their aged care business.
Until the 2020-21 financial year, approved aged care providers with diverse business lines were only required to report on the aged care segment of their business. It was a matter for judgement by the provider and its accountants as to which items of revenue, expenditure, assets and liabilities related to the aged care segment and which related to other business lines.
However, providers are now required in addition to submit a “Consolidated Parent Level Segment Note – capturing income, expenses, assets and liabilities data across the consolidated related group”. This is intended to show the financial situation of the entity operating the provider, and highlight situations where the fragile nature of the balance sheet as a whole might jeopardise the provider’s ability to repay Refundable Accommodation Deposits.
This is a good move, but it does not provide the Government and the public with solid information about the financial performance and position of the aged care sector on a standalone basis.
The private health insurance model
Better information could be obtained if the private health insurance model of ring-fencing the regulated business was adopted.
Under the Part 3 of the Private Health Insurance (Prudential Supervision) Act 2015 health insurers must carry out their health insurance business through a health benefits fund, and maintain a separate bank account for the fund. The fund must receive all revenue from the private health insurance business, and hold all the assets associated with the business.
It would be conceptually easy to adopt this model for aged care, particularly in relation to revenue and expenditure.
There may be challenges for some providers with diverse interests in apportioning assets and liabilities between the aged care fund and other activities, but these should not be insuperable.
However, unless this model is adopted there can be no clarity about the profitability – or otherwise – of aged care provision, or the underlying financial position of providers individually or the sector as a whole.
Should “aged care assets” be moved out of the sector?
A related issue is whether or not providers should be required to retain assets derived from the aged care business in the ring-fenced fund, or whether they should be available for reallocation by the providers.
A recent report suggested that a charitable provider had merged its general business with its aged care business so as to use aged care assets to meet potential liabilities from child sex allegations. Without accepting the truth of this suggestion, it highlights the fact that aged care assets or profits could be used to offset liabilities or losses in other activities of a provider with a diverse business.
On the one hand it could be argued that the owners of aged care assets – as with any other assets – should be able to reallocate them as they wished, as long as the interests of Refundable Accommodation Deposits payers were protected.
On the other hand, there is a tenable view that much of the value of the aged care assets derives ultimately from government support of the sector over many decades, and that the assets should thus be held in the sector for the benefit of aged care recipients.
I imagine that the regulars at the Edgeworth Tavern – now the definitive pub test – would favour the second approach.
Another obstacle to a clear understanding of the financial position of the aged care sector is the existence of related-party transactions. Data provided to the Royal Commission showed a wide range of such transactions, including:
- “Management fees” paid to related parties at a level sufficient to meet the annual salary of a full-time clerk for every resident
- Loans to related parties with interest rates close to zero
- Loans from related parties with interest rates over 10 percent
- Annual rents per resident paid to related parties at a level sufficient to rent a two-bedroom house on the open market.
All these transactions had the effect of lowering the reported profitability of the aged care provider by transferring funds or benefits to the related parties – effectively taking profits from the aged care provider under disguise.
While the data did not disclose the motivation for these transactions, one can only speculate that the applicable tax regime offered more benevolent treatment to the related party than to the aged care provider. This issue appears to have been at the heart of a dispute between Bupa and the Australian Taxation Office that was resolved a few years ago.
If the Government and the public are to obtain a clear idea of the financial state of the sector, the submitted data must be adjusted for the impact of these related party transactions. This could be achieved by benchmarking the data against standards derived from genuine arm’s-length transactions.
But beyond that, any decision to require providers to meet benchmarks for expenditure on services such as food, or to acquit care funding against care expenditure, will be useless if providers can inflate expenditure through contracts with related parties at inflated prices, meeting the expenditure standard without delivering the appropriate level of resources.
Addressing these issues will require:
- development of rigorous reporting standards, and
- conferral on the regulator (the Department) of strong auditing powers to enforce compliance with the standards. The powers should include the power to obtain records from the provider and from related parties, and the power to examine officers from both entities under oath.
Of course, some aged care providers will lobby strenuously against these developments.
And these powers will only be effective if the Department is prepared to exercise them when required. The Department will also need to encourage and support a staff culture of sceptical inquiry in the financial monitoring group to replace the current approach of accepting pro forma compliance.
Making transparency work
If Labor does win the forthcoming election, implementing a commitment to greater transparency by the aged care sector will require major changes to current arrangements, which will not be popular among some aged care providers.
While consultation with the sector will be important, the Government will need to be very clear that it is seeking advice on how to make transparency work, not on whether transparency is a desirable objective.
And successful implementation will also require the Department to realise that its role in aged care is to support the public in obtaining information about the sector, not to support providers by maintaining secrecy about their affairs.
Charles Maskell-Knight PSM was a senior public servant in the Commonwealth Department of Health for over 25 years before retiring earlier this year. He worked as a senior adviser to the Aged Care Royal Commission in 2019-20.
Read Croakey’s archive of articles on aged care