In October 2020, Counsel Assisting for the Royal Commission into Aged Care Quality and Safety (Royal Commission) provided their final submissions recommending significant changes to the regulation of the aged care sector (Recommendations). Although the Royal Commission will produce its final report in February 2021, if these Recommendations were to be implemented, the commercial dynamics of the aged care sector would undergo an equally significant change. A combination of factors including Australia's ageing demographic, significant government subsidies and high demand for aged care services, make this sector particularly attractive for investors. In this paper, we consider the challenges confronting the sector and the commercial trends we see emerging in a post-Royal Commission aged care sector.

Key challenges for the aged care sector

Throughout the course of the Royal Commission, several confounding issues confronting the aged care sector were explored. A short, high level summary of the key commercial issues is provided below.

• Financial viability of providers: Counsel Assisting noted that in 'recent years, the aged care sector has been under significant and increasing financial pressure…' with the financial performance of providers deteriorating and the continued viability of a significant number of residential care providers being doubtful under current funding levels.
• Access to health services: In the aged care sector, there is insufficient access and connectivity to allied health services, disability services and acute care services. Most aged care providers do not provide an allied healthcare or acute healthcare offering or have limited connectivity to such services, which are critical to the care of residents.
• Clinical resilience of providers: The rapid shift from aged care providers providing personal care to high acuity clinical care presents a challenge to many providers. The necessity to promptly develop a clinical competency has involved increasing costs to providers in offering these services as well as diminishing profit margins.

Emerging trends and solutions

• Divestments: The Recommendations argue for a more stringent aged care regulatory environment. A new duty to provide 'high quality and safe care', a new regulator with enhanced enforcement powers and mandated minimum staff time standard for residential care will increase the regulatory burden for providers. Although government funding will likely increase to some extent, to alleviate this increased regulatory burden, it's unlikely that any such funding increase would stop the margin compression providers have been experiencing over the last few years. This trend will likely lead to some providers divesting their aged care portfolios, with larger players acquiring these portfolios. Furthermore, volatility in aged care asset prices due to near term regulatory risks present an opportunity for potential acquirers to obtain a favourable derivative position in listed targets.
• Unlocking capital: Many aged care providers are land rich entities owning the land on which their aged care homes exist. Some providers may consider selling an interest in, or the entirety of their interest in the freehold land, and leasing the sites back in a typical 'sale and leaseback' transaction. Unlocking value in these assets would enable providers to expand their operations to achieve scale.
• Vertical integration: The current aged care sector is fragmented. Allied healthcare providers, acute healthcare providers and residential aged care exist as separate offerings with no provider offering an integrated solution to care recipients. The Royal Commission recognised the need for a greater integration of these services and there are compelling commercial reasons for providing an integrated service offering. For aged care providers, it would make commercial sense to own the whole client relationship from the initial phases of aged care in providing allied healthcare services, graduating to a home care package and then residential care. Aged care providers could expand to other areas such as allied healthcare services, which would improve client access to these services, while reducing the costs to providers of offering these allied healthcare services as they would own the supply chain. Similarly, hospitals may consider expanding to include a residential aged care offering given the complementary nature of high acuity clinical services.
• Home care consolidation: The Recommendations propose funding changes to home care packages such that the level of funding for a person receiving care at home is the same as the maximum funding amount that would be available if they were assessed for residential aged care. Home care typical involves small margins, requiring scale to make the business profitable. With this proposed change, it is likely that further consolidation will occur in the home care space.
• Greater role for joint-ventures: In providing care recipients a 'continuum of care', providers could use joint-ventures or 'strategic partnership' structures to provide complementary services under a single service. In a residential aged care setting, this could involve enhanced access to allied healthcare by partnering with an allied healthcare provider. Alternatively, aged care providers may partner with independent living unit operators to seamlessly provide independent living units and residential aged care accommodation within a single complex.
• 'Small home' models of accommodation: The Recommendations include capital grants for 'small scale congregate living'. This represents a move away from large scale developments typical of many developments initiated by residential aged care providers over the last decade. Although this represents a long term opportunity given the construction of these communities will have a lead time, this represents an opportunity for many existing providers in the sector. Smaller residential aged care facilities may also be repurposed as a smaller group home model. The development pipeline of many providers may be augmented to take advantage of these capital grants.
• Changes to government payments: While the Recommendations include calls for immediate funding increases to the sector, it is likely that any increases will be offset by additional regulatory costs imposed through implementing the Royal Commission's recommendations. However, the Recommendations including the establishment of an independent pricing authority with jurisdiction for determining the pricing of certain aged care supplements, such as the Accommodation Supplement, may lead to increases in some government payments for providers. Further details around aged care sector funding measures are to be announced in the May 2021 federal budget.
• Telehealth: Telehealth is currently underutilised by aged care providers. Despite this, it presents many positives for older people as it is a means of avoiding the potential harm and distress caused by travel for frail older people. Accordingly, the Recommendations include expanding access to the Medicare Benefits Schedule funded telehealth services to aged care recipients receiving personal care at home. In the October 2020 budget, the federal government provided additional funds for telehealth services. We expect this trend of government support for these services to continue.

Aged care and other health providers may provide a telehealth offering in the interests of taking advantage of favourable subsidies.

An article examining these issues was published in the Australian Financial Review by Penelope Eden and Louella Stone on 7 December 2020.