Oct 22 2018
Last month, Prime Minister Scott Morrison announced a Royal Commission into Australia’s aged care sector following allegations of patient mistreatment and concerns that industry operators were putting profits ahead of the welfare of their residents. According to IBISWorld, aged care providers are expected to make a combined $1.7 billion in profits in 2018-19. However, the industry’s profitability may decline if the government reduces funding and adds pressure on providers to provide a higher standard of care.
Profitability varies among aged care providers depending on the facilities and services the offer, the fees they charge, and the level of care they provide. Alongside the Royal Commission, several factors have influenced the profitability of the industry over the past five years.
Rising health conditions and utility prices
The cost of providing aged care services has increased over the past five years. “The rising incidence of complex and chronic health conditions among the elderly has placed strong upward pressure on provider’s health care costs. Additionally, the cost of utilities such as electricity have skyrocketed, further increasing expenses and eroding profitability,” said IBISWorld Industry Analyst, Hayley Munro-Smith.
Indexation pause to Aged Care Funding Instrument
The indexation pause to the Aged Care Funding Instrument (ACFI) in December 2016 has also significantly affected the industry.
“The pause has effectively frozen the subsidies received per resident and paid to providers through the ACFI at a time when operating costs and care costs are going up. As a result, profit margins across the industry have fallen on average over the past five years,” said Ms. Munro-Smith.
Not-for-profit versus for-profit providers
A substantial number of aged care firms in the industry operate on a not-for-profit basis, which keeps overall average profit margins low. For these providers, any surplus funds retained in a financial year are reinvested in the provider in the next year. Profit for the Aged Care Residential Services industry is estimated to account for 8.4% of revenue in 2018-19.
However, many of the larger and more well-established aged care providers operate on a for-profit basis and have reported growing profit margins in recent years.
Health sector veteran Bupa Limited operates Bupa Aged Care, which has recorded profit margins higher than the industry average during the past five years. DAC Finance Pty Limited, which operates Opal Aged Care, has also reported higher than average profitability in recent years.
“These players can leverage economies of scale across their expansive facilities, allowing them to reduce expenses per resident and boost profitability. Aged care providers are also able to set accommodation fees in addition to those set out in legislation. Many providers have increased their fees in an effort to offset falling subsidies under the ACFI,” said Ms. Munro Smith.
The Royal Commission Investigation
The Royal Commission into Aged Care may lead the government to institute minimum staff-to-resident ratios.
“A minimum staff-to-resident ratio would likely increase labour expenses for providers, placing downward pressure on profit margins,” said Ms. Munro-Smith.
The Commission may also recommend tightening the eligibility criteria for provider funding from the ACFI.
“As many aged care providers rely on the ACFI, any reduction in funding threatens their bottom line,” said Ms. Munro-Smith.
Any recommendations aimed at improving the quality of care and standard of living in industry facilities would likely increase costs for aged care residential service providers.
“Increasing costs, if not met with rising fees or government funding, will ultimately erode profit margins for aged care providers,” said Ms. Munro-Smith.
IBISWorld Industry Reports used in this release:
For more information, to obtain industry reports, or to speak with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: (03) 9906 3641 Mobile: 0422 773 995