Home' Australian Ageing Agenda : AAA Mar-Apl 2013 Contents Life Care in South Australia knows about
quality -- their 'Live every day' program won
a 2012 Better Practice Award.
interest rate movement
and the increased cost of
insuring bonds, we have
identified six key areas that
operators should consider
as they prepare for the 1
July 2014 start date:
1. Disaggregation of
activities and greater
charges are separated
from other costs of care
they will become far more
transparent and operators
can expect greater
scrutiny of their pricing.
An easy way to understand
this is to consider what
has occurred in the airline industry, where
progressively, all the inclusions in the
fare have been removed and passengers
are increasing making decisions on a
carrier based on price. We anticipate the
disaggregation of the charges in residential
aged care will have a similar impact.
2. Bond bias
The intent of the daily fee and bond
option is to create equivalence between
the two. However the mechanism adopted
to determine the equivalent bond does not
address this from a resident perspective;
rather it looks at the existing system for
setting payments in lieu of a lump sum
(the maximum permitted interest rate).
While such an approach provides
equivalence to the current system, it does
not address the economic cost to the
resident of paying a bond compared with
a daily charge. This creates a bias towards
bonds from a resident perspective.
For example, if a resident currently
has the funds or a bond invested in a term
deposit then they will lose interest on that
deposit in paying a bond (approximately
4.5 per cent). Whereas keeping the bond
invested and paying the daily charge
involves a cost of 7.62 per cent.
In this example the bond is a far cheaper
alternative to the resident. Our modelling
suggests that, taking tax into account, it
is unlikely there can ever
be equivalence from a
between bonds and a
daily charge under the
3. Cash flow
Whether the resident
chooses a bond or a daily
fee directly impacts the
cash flow of an operator.
Many operators use
bonds from low care and
extra service places to
provide capital to manage
the debt and equity used
to fund developments.
They use accommodation
charges and high care
places to provide the ongoing cash flow to
operate the facility.
Taking the extreme situation, if all
residents were to choose to pay bonds
then this is likely to drive a facility into loss
because of the permitted use constraints
on bonds and the relative low yield they
could earn from this permitted use.
4. Changing resident profile
Residents are entering care later, with higher
care requirements and staying for shorter
periods. To the extent that residents choose
bonds, this may require operators to maintain
higher bond liquidity levels which will
increase pressure on operating outcomes.
5. Capital verses income
For private operators in particular,
increased use of daily charges means
increased profit and debt. With regulated
pricing, too many residents paying daily
charges may mean insufficient after-tax
cash flow to meet loan repayments. This
poses a direct threat to viability.
6. Permitted use
For many existing operators who have
funded their facilities with capital or
related party loans, new bonds cannot be
used to reduce this capital and debt. This
means limited ability to manage the return
on capital that is vital for sustainability.
Our modelling of the impacts of the
issues outlined above, suggests that
following these five recommendations
below will assist operators to best adapt
to the changes:
1. Use activity based reporting to directly
measure accommodation services income
and costs, to provide transparency on the
outcome of decisions made relating to
accommodation changes and bonds.
2. Cash flow modelling will provide
insights into the impact of changing
levels of bonds at a facility level. While
every situation is different, it appears
that where bonds exceed 45 per cent of
places, this can cause serious operating
cash flow issues.
3. A strategy over the mix of bonds
and daily fees will ensure your bond
accommodation fee mix stays within an
4. If price is the only differentiator, then
residents will choose places based on
price. Effective marketing strategies
that help residents to understand the
true costs and benefits will enhance
a facility's capacity to maximise daily
charges (and bonds).
5. Understanding 'permitted use' of bonds
and its many traps and opportunities,
will enable operators to structure their
financing arrangements to maximise
flexibility in the use of bonds, thereby
achieving superior results to those who
take a simplistic approach. n
Bruce Bailey is national head of aged care
services at RSM Bird Cameron.
created a bias
from a resident
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