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Australian healthcare system evolving to vertical integration

The Australian healthcare system is undergoing unprecedented, systematic change and driving a convergence between what were traditionally care silos being residential aged care, home care, retirement villages and hospitals.

As reported in the Colliers International’s Healthcare & Retirement Living Research & Forecast Report, this convergence is leading to an evolution of the historical co-located model, to that of vertically integrated retirement villages with residential aged care, and allied health.

Shalain Singh, Head of Healthcare & Retirement Living at Colliers International said the aged care reform is pushing the sector to evolve into a consumer-driven, market-based system where price, provider and care type is determined by the consumer.

“In residential aged care, reforms will likely seek to increase consumer choice across the continuum of care, support industry consolidation and continue the transition from public funding to consumer funding based on means.

“The consumer with even marginal assets and income will be required to contribute increasingly towards their cost of care and accommodation no matter the environment. Ultimately, lower cost options are going to emerge.”

“Operators will need to adapt service models to ensure occupancy and earnings are maintained in the realm of aged care and scale will become increasingly important to provide additional levers to manage earning.

“Aged care providers will also look to further specialise in care services like mental health in order to potentially diversify revenue streams. Further deregulation is more likely to be promoted as structural changes to allocation of licenses is likely to occur.

“The merger and acquisition market for individual aged care facilities and portfolios is increasing with mega mergers more likely in the future, increasing the number of large operations. Private sector involvement is increasing and is expected to continue over the medium to long term.”

According to Mr Singh vertical ‘apartment-style’ villages integrated with medium, high and allied care are anticipated to increase in the coming years, such as the Stockland’s medium-rise development in Ashfield and Australian Unity’s six-story village in Melbourne’s Carlton. 

“The rising volume of baby boomer retirees preferring to remain in urban settings with access to cost effective care delivery will underpin demand.

“In our view, this and homecare package deployment coupled with effective deregulation of the care delivery outside hospitals and aged care environments,  will benefit villages blurring the line between aged care and retirement living, providing village operators the ability to lengthen residents’ stay, resulting in an expansion of their revenue stream.

“Further opportunity will be unlocked within metropolitan areas, especially within the 10km ring of the CBD. This will allow the construction of vertical villages thereby allowing ease of aged care amenity integration.

“As a result of the convergence of various healthcare profiles, coupled with the increasing number of people using retirement village environments, superfunds and offshore investors by way of pension or private equity funds are expressing strong interest within the sector – the return profiles are good and getting better.

“Consolidation has been a key driver of activity from companies such as Stockland, Lendlease and Aveo who have in recent times undertaken a combined total of $625 million of retirement acquisitions”.

“Convergence along the continuum of care means that the gap between demand and supply is smaller than commonly perceived.

“Ultimately, as consumers of care become more financially savvy, the cost versus benefit analysis of care receipt will become more paramount especially in the context of deregulation of care between where a home care package would cap out (20 hours a week) and where aged care at 24/7 kicks in.

“That said, where turbulence exists so does opportunity and we are anticipating that investment volumes from institutions will continue to rise in 2016, increasing their ownership concentration levels and improving the diversity of their portfolios,” Mr Singh said.

As outlined by Kristina Mastrullo, Research Manager at Colliers International and the author of the report, the ageing of population is being driven by increasing life expectancy and relatively low levels of fertility. “The number of Australian’s aged 65 years and above will grow disproportionately, more than doubling from 3.6 million to 8.5 million between 2015 and 2055. 

“On top of that, the proportion of working residents aged 15 to 64 is plummeting.  In 1985 there were 6.4 workers for every retiree but by 2042 this is forecast to reduce to only 2.5 workers per retiree, placing and increasing financial burden on working residents to support the retiree population. 

The combined residential aged care and home-based care places will cover 70 per cent of the population over the age of 85 years old,” Ms Mastrullo said.

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