New funding models are set to transform the aged care sector, with consumers gaining an unprecedented level of market power. Aged care providers need to be ready to meet the demands of a growing population of older Australians looking for autonomy and control.
The aged care industry is on the verge of far-reaching change, with demographic, regulatory and financial forces uniting to reshape the way healthcare and support services are purchased, funded and managed.
For providers ready to embrace innovation, the opportunities are enormous, but the financing challenge can be complex. Here’s an overview of the trends reshaping the sector and the issues you need to be thinking about today.
The forces driving change
Over the next 40 years, the number of Australians aged over 65 is expected to double, while the number over 85 will quadruple. This new generation of senior Australians will be healthier and wealthier than any that has come before, yet much of that wealth is tied up in property. As a result, they’re asset rich, but cashflow poor.
For governments, the challenges are enormous. Medicare costs are set to soar as life expectancy increases. It’s estimated that a person retiring at age 65 will incur over $1m in Medicare spending by age 95 – and while an increase in the retirement age would help, it’s unlikely to be enough to make current spending models sustainable.
Against this backdrop, governments and other bodies have launched a long list of reviews, investigations and regulatory reforms. While the picture is complex, the overall theme is clear: a shift in the funding mix from government to consumer, with a bias towards encouraging home care. That makes good economic and social sense. Not only do many older Australians prefer to remain at home for longer, but a home care package costs between $22–$134 a day, depending on the complexity of the individual’s care needs. This is compared to $268 a day for an aged care bed and around $1,800 per day for a hospital bed.
The new landscape
The government’s aged care roadmap foreshadows greater reliance on consumers’ contributions as a source of funding, along with financing mechanisms that allow them to use their assets more effectively. Consumers will have greater freedom to choose providers and determine where funding is spent. This new aged care landscape will see :
- Care funding decoupled from accommodation
- Accommodation costs funded by residents
- Care funding more closely aligned to residents’ needs and specific health outcomes
- A continued move towards Consumer Directed Care, and
- In all probability, co-payments to supplement government funding.
Creating a compelling customer proposition
As the centre of gravity for aged care funding shifts from governments to individuals, the challenge for providers is to develop compelling products and services that will attract consumers and capture their lifetime value as they move through the different stages of an increasingly long retirement. There is also an urgent need to re-examine business and funding models to ensure they are financially sustainable over the long term, generating a healthy return you can reinvest in the higher quality facilities and services consumers will increasingly demand.
Those who can integrate and seamlessly deliver care, lifestyle and accommodation will be the industry success stories of the years ahead. The aim is to capitalise on emerging trends, such as:
- The growing demand for a range of flexible homecare services.
- The largely untapped market for lifestyle services across more than 450,000 customers of aged care homes, retirement villages and home care.
- An increasing need for purpose built accommodation, especially facilities that provide an appealing lifestyle, access to community services, complex health care and, ultimately, end-of-life care.
- Structured accommodation products that enable retirees to maximise cash flow (often through access to the aged pension) while retaining the family home.
Funding your new business model
The industry has a complex web of cash flows and capital flows. And with governments seeking to trim spending, care providers will be challenged to do more with less, while delivering greater choice to increasingly demanding consumers.
For aged care businesses, that means finding new ways to attract and retain customers while keeping costs under control. Both for-profit and not-for-profit providers need to maintain or increase earnings while operating as efficiently as possible if they are to provide the high standard of care expected by a growing population of older Australians.
The good news is that re-engineering your business model today could unlock new efficiencies and potential sources of profit for tomorrow. To do this, your financing strategy needs to address all the complexities, and avoid pitfalls such as tying up too much capital in non-income generating assets.
Our specialist Health team has a deep understanding of your industry and the unique challenges you face. To learn more about how we can help your business succeed in an evolving market, talk to Peter Jones, Corporate Healthcare, CBA.
For more information please visit commbank.com.au/healthcare
2015 Intergenerational Report: Australian in 2055, Australian Federal Treasury, March 2015.
Health Care Costs – From Birth to Death, Society of Actuaries, 2013
Schedule of subsidies and supplements from 20 September 2017, Australian Government Department of Health, 18 September 2017
CommBank calculations based on Hospital Resources 2015-2016: Australian Hospital Statistics’ Australian Government, 2016 and Aged Care Subsidies and Supplements New Rates of Payments from 20 September 2017, Australian Government.
Aged Care Roadmap, Aged Care Sector Committee, Australian Government Department of Health, February 2017
Funding and Financing of the Aged Care Sector, Fourth Report, Australian Government Aged Care Financing Authority, July 2016.