Economic and financial aspects of aged care

Economic Papers (Economic Society of Australia), March, 2005 by Warren P. Hogan

The focus of this article is on the Report of the inquiry into residential aged care in Australia. Consideration is given to the results of a confidential survey of financial submissions from providers of aged care. Most attention is given to labour costs and earnings before interest, taxes, depreciation and amortization (EBITDA). The most important result is the evidence showing providers whatever their size, location, ownership and resident mix, can perform in the top 10 per cent and 25 per cent of providers as measured by EBITDA. Management is vital to the performance of entities whether they be 'for-profit' or 'not-for-profit' entities. Attention is also directed to other studies about efficiency and productivity and modelling. Treating technical efficiency as a measure by which the industry lags behind best practice, the analysis of regulatory efficiency explains much about ways to secure gains in efficiency

Keywords: Residential aged care, Efficiency, Costs

JEL codes: J14, K23, L84, L89

1 Introduction

Beginning in September, 2002 a review of aged care matters was undertaken at the behest of the Australian Government (Hogan, 2004a). It is not the purpose of this contribution to examine the recommendations and suggestions stemming from the Report emanating from the Review of Pricing Arrangements in Residential Aged Care. (1) Rather, the task is an analysis of the economic and financial aspects of aged care in Australia stemming from the work of the Review. However, reference will be made to the links between the results of this work and the implications for aged care.

Recognition of the prospects for strategic change in aged care stems from the expected rapid growth in the proportion of older citizens in the total population during the next four decades and what this means for commitment of resources to support them. These features explain the reasons for the Review. The very elderly, defined as those eighty-five years of age and older, is the fastest growing of all age groups in Australian society. They are the ones who are significant users of aged care facilities, comprising more than half the residents. When examining economic and financial matters in aged care technological aspects should be kept in sharp focus. For example, the development and application of pharmaceuticals to arrest the progress of afflictions associated with the group of neurodegenerative diseases known familiarly as 'Alzheimer's/dementias' would make substantial differences to requirements for aged care facilities, possibly their number and the relative balance between residential and domiciliary aged care. There is an assumption of a given state of technology, in this case pharmaceutical knowledge and applications, in the Review's work.

Explanations of what the Review was about, and how it went about its tasks, serve only as a basis for explaining the work on the economic and financial aspects of aged care activities. What is at issue is the relative mix of private and public spending as much as the relative scale of total spending on aged care. How far can the wealth held by the elderly, and the income generated from that wealth, be drawn upon to meet the additional costs of aged care during the next four decades? Commitment of some of that income and wealth for payments towards the cost of providing aged care services and accommodation is central to any strategic appraisal. Nevertheless it should be understood, Australia is relatively well-placed by international standards (Amies, 2003).

The structure of the residential aged care industry may best be understood as comprising six 'ownership' groups. These are set out in Table 1, which shows the numbers operational beds and percentage distribution of them as at 30 June, 2002, being the information available at the time the Review commenced. Operational beds or places offer the best measure of relative contributions to aged care from the various types of provider.

This division amongst six groups serves to bring attention to the distinction between the 'not-for-profit' institutions and the ones operating as profit-earning entities whether designated as corporate partnerships or sole owners. The distinction is of greatest importance because of

differential taxation treatments on net earnings and fringe benefits.

The distribution of places across Australia is not uniform for these six categories. The religious are more prominent in most states other than South Australia and, most of all, Victoria, where it is a low 24.0 per cent. By contrast, private providers are most prominent in Victoria as is also the case with facilities provided by the state government. This Victorian Government plays a major role being the single largest provider in that state.

The religious aged-care houses form the largest group. Their contribution falls within the definition of services provided by a Public Benevolent Institution (PBI). The same almost certainly applies to the community-based organizations. Together they provide about 54 per cent of all services. The charitable institutions are much smaller in their total contribution but are just larger than the total beds offered by state and local governments. If the distinction of this group from the other two is the tax definition as a charitable entity, there are still exemptions from tax though not necessarily so generous in impact. The private sector entities have in place more than a quarter of the total number of bed places listed in Table 1.