NEWS

Healthcare sector roadmap paves way for structural shift in aged care

Operators may need to adapt business models to remain viable: Colliers International

Aged care funding cuts and structural reforms are set to change the way Australia’s healthcare sector caters for seniors’ health as operators consider adapting business models to remain viable.

Shalain Singh, National Director and Head of Healthcare & Retirement Living at Colliers International, says with recent changes announced by the government, the shift from publicly funded to privately funded healthcare is becoming increasingly evident.

“The aged care sector is going through a significant amount of structural reform and with a health care road map that seeks to effectively commoditise care, coupled with funding cuts and a consumer-pays structure, operators and consumers alike are faced with multitude of changes to consider,” Mr Singh says.

“The Aged Care Funding Instrument, the sector’s primary resource allocation instrument, is set to be cut by about $1.7billion over four years, affecting those residents with the highest care needs and, by nexus, attracting the highest levels of funding.

“Impact on operators will vary according to how many residents they have in mid or high level care under the complex health category at any one time. The impact could range between 9-15% of total government revenue, based upon all the analysis that is available in the market.

“These changes will further marginalise operators who were already struggling. Operators with strong systems in place to ensure accurate ACFI claims have scale to better manage costs and the ability to implement other revenue-based strategies will be the ones who will maintain their earnings.

“Pressure on viability of certain operators will grow given the increased take-up of care services outside the traditional residential aged care setting.

“The number of home care places is forecast to increase to 157,823 by 2025, which in turn is driving operators of retirement village and land lease communities, formerly known as manufactured housing estates, to provide increasingly higher levels of care. In short, they are progressing to low, perhaps even medium, levels of care traditionally the domain of residential aged care providers.

“As these care-integrated communities continue to emerge, additional pressure is placed on aged care providers as people enter that style of accommodation at a later stage of life, with higher levels of acuity and therefore stay for shorter periods of time, potentially changing their payment preferences and service demands."

Mr Singh says the integrated care delivery models for non aged care operators will require changes to existing facilities, which will have an impact on village design, infrastructure and civil services, and ultimately value.

“On the aged care side, we will see co-location playing a bigger part in the future of the sector as well as vertical integration with retirement village operators, which will be one of the most influential new trends for the care sector as a whole going forward,” he says.

“For aged care operators, scale becomes increasingly important. It hasn’t traditionally been an issue, as demand has outstripped supply and direct government funding has been strong. But if consumer pays comes into full effect and people potentially stay for shorter periods, payment preference for accommodation may increase in favour of Daily Accommodation Payments and margin pressure results. Scale provides some relief.

“In a sector where margin compression is evident, earnings growth can only really be achieved via an increase in scale.

“All of these changes are driven by budget blowouts as the rate of people relying on the system outstrips the rate of people contributing to the system. They are also government agnostic, in my view, and driven by central treasury."

However, Mr Singh believes market forces will come into play and result in the creation of new opportunities for both consumers and major players in the aged care and retirement village sectors.

“For some operators, these changes make their businesses less viable and it undoubtedly adds pressure to the sector,” he says. “The silver lining to this significant change is that it also provides significant opportunity.

“What we are seeing at present is small-to-medium sized operators who don’t quite understand the changes and the impacts, or what to do about it relative to the goals they want to achieve.

“Now is the time for these operators to be discussing their strategic options with their advisors, to best position themselves to adapt with these changes. In particular, there is potentially a greater role for merger and acquisition as well as joint venture activity across the continuum of care.

“The clients that we’re advising around this are going from a state of initial concern at the changes they are facing as an industry to understanding there are ways of offsetting this potential loss and also potentially diversifying their revenue streams."

Mr Singh says the healthcare sector more broadly currently represents the Australian government’s greatest area of expenditure and is continuing to grow. He says the service and demand gaps in the sector present a range of unique economic challenges.

“I am very optimistic about the future of the healthcare sector in general,” he says. “The second half of this decade will be critical as demand continues to grow and the systems evolve to keep pace.

“With new entrants from outside the traditional participants looking to service this growth – including a mix of not-for-profit organisations, private equity interests, global investors and expanding local operators and investors – together with regulatory changes, clients are increasingly seeking strategic advice combined with execution capability.

“This, in turn, is creating significant opportunities in the area of valuation and corporate advisory in addition to traditional transactional service requirements. Assisting with the development of strategic frameworks and then helping execute them, inclusive of raising capital, is becoming an increasingly important part of what we do.”

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