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Why greater private sector participation has not improved aged care performance

For-profit age care facilities are the most expensive residential aged care option, but researchers have found that less-expensive, government owned facilities provide higher quality care.

In the article below, Dr Ou Yang, Professor Anthony Scott, Associate Professor Jongsay Yong, and Professor Yuting Zhang of the Melbourne Institute of Applied Economic and Social Research outline the findings of their study examining the prices and quality of care provided by residential aged care homes in Australia.


Ou Yang, Anthony Scott, Jongsay Yong, and Yuting Zhang write:

In Australia, competition and consumer choice have been key components in aged care reforms since the 2011 Productivity Commission Report.

On 26 June 2013, the Australian government passed the Aged Care (Living Longer Living Better) Act. The aims were to promote greater consumer choice and increase the role of markets and private sector participation (Department of Health, 2017). It was believed that the reforms would help to improve nursing home care by improving quality of care and containing costs for the sector.

As the role of markets and private sector participation increases, it is important to ask whether better quality care and/or lower prices have been delivered.

The question takes on greater importance and urgency for Australia following a series of widely reported events of mistreatment of nursing home residents. A Royal Commission investigation, concluded in 2021, has called for fundamental and systematic reforms of the sector.

Our recently published research examines prices and the quality of care provided by residential aged care homes under different ownership types in Australia.

We used a comprehensive set of de-identified data on residential aged care facilities, including their quality of care, prices and facility characteristics. The data, provided by the Royal Commission into Aged Care Quality and Safety for the years 2013-14 to 2019-20, captured almost all facilities in Australia during this period.

Quality and price

We compared quality and prices across three types of ownership status: government-owned, private not-for-profit, and for-profit facilities.

We compared 11 quality measures covering a diverse range of quality domains: antipsychotic use, emergency department presentations, falls, premature mortality, dementia hospitalisation, pressure injuries, adverse medication events, reported assaults, number of complaints, and staffing hours (total care hours and registered nurse hours per resident per day).

Prices were measured from the provider’s perspective (ie, the total fees providers received from residents and the government).

The results showed that government-owned facilities provide higher quality than for-profit and not-for-profit facilities. We also found that government-owned facilities on average charge lower prices than not-for-profit and for-profit facilities. For-profit facilities on average charge the highest price among all ownership types, yet we find no evidence of better quality.

Our results suggest that greater private-sector participation in aged care has not improved quality but has increased prices. Policy reforms in Australia that promote competition and user choice have failed to yield superior outcomes for users.

Why have reforms failed?

First, basic economics tells us that consumers can make informed choice only if they are informed about quality and costs. This is not the case in aged care.

While the private sector has strong incentives to keep costs low, this will harm quality if quality is not publicly reported and minimum quality standards not strongly enforced.

Market failures can arise due to a lack of publicly available information on quality and the complex structure of pricing.

Unlike the US and UK, Australia does not have a functioning system of public reporting and rating of aged care facilities. It is extremely difficult for an average aged care user to gather information on quality and prices that is useful and relevant for the purpose of choosing a provider.

The complex pricing structure arises not only from having numerous components of fees, but also due to complicated rules of means testing and numerous payment options.

Second, demand in this market often arises from users who experience changes in cognitive and physical conditions that make it difficult to search for information, weigh their options and exercise choice, as would be required for a competitive market to properly function. Instead, they rely on family members who often need to make decisions very quickly, reducing the opportunities for search and deliberation.

Third, the government restricts the supply of residential care places through a bidding process known as the Aged Care Approvals Round (ACAR), which places limits on both the number of care places and the locations where they can be offered such that entries of new competitors are restricted.

In addition, there is also an increase in concentration in the residential care industry, with the share of very large providers (with more than 5,000 places) of total approved care places rising steadily from 16% in 2009/10 to 39% in 2018/19 (Royal Commission, 2020). This has reduced competition and choice.

What can we do?

We need to re-organise the market to ensure that resources are properly and efficiently allocated in the sector. Policies should focus on addressing sources of market failures to improve choice and information, while also using new funding models and more carefully regulating residential aged care providers.

First, a system of public rating and reporting of quality of care aiming at facilitating consumer choice is urgently needed in the residential aged care sector. This is in line with the Royal Commission’s report (Recommendation 24).

Second, price transparency, or the lack of it, is another source of market failure that requires policy actions. The current pricing structure should be simplified so that consumers can compare products and services from different providers with reasonable ease, for example via a comparison website.

While the Royal Commission recommends an independent pricing authority (Recommendation 6), there is no mention of simplifying the pricing structure in aged care. Price transparency is a crucial component of reforms for market forces to function.

The policy focus on consumer choice is important, but if consumers aren’t able to drive competition given the difficulties of implementing informed consumer choice, then governments need to step in to act on behalf of aged care residents. This could include a system of pay for performance for providers, that links funding to the quality of care provided.

Third, consumers need an advocate to be on their side in their bargaining with providers. The advocate must be independent and have no vested interest in the transaction. The advocate should have an understanding of the needs and preferences of the consumer, and services provided in the local area.

The setting up of advocacy services is also a recommendation made by the Royal Commission (Recommendation 106), although we think the advocacy role could be integrated into the current home care services.

Given that most consumers transition from home care to residential care, this will provide an integrated pathway for consumers as their needs change.

Over reliance of markets in health and human services can lead to bad outcomes for consumers. Policy makers seem to routinely ignore these issues in aged care and in healthcare in general. Transparency about quality and prices will help these markets to work better, but there needs to remain strong government oversight to ensure that quality improves and prices fall.

Dr Ou Yang, Professor Anthony Scott, Associate Professor Jongsay Yong, and Professor Yuting Zhang of the Melbourne Institute of Applied Economic and Social Research.


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