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As the royal commission prepares findings that will likely recommend a return to an earlier system of aged care, the crisis in the sector can be linked to Howard-era reforms that stoked greed and lowered care standards, and have been worsened by successive governments. By Rick Morton.

The collapse of aged care (part one)

John Howard in 2001, after announcing changes to aged-care policy in suburban Brisbane.
Credit: AAP Image / Dave Hunt

“It can be seen, commissioners, that the aged-care system we have in 2020 is not a system that is failing,” Peter Rozen, QC, told the Royal Commission into Aged Care Quality and Safety in August. “It is the system operating as it was designed to operate. We should not be surprised at the results.”

The series of events that led to this moment – with the country’s aged-care system teetering on the brink of collapse – stretches back long before the Covid-19 pandemic hit.

Its origins lie in the changes made under the Howard government in the late 1990s, which ushered in a 23-year failed experiment; a live study of human patients that saw falling care standards, dramatic loss of professional skill and soaring profits.

The Saturday Paper can reveal that Rozen, who is senior counsel assisting the commission, will recommend an end to this experiment when he makes submissions to royal commissioners Tony Pagone and Lynelle Briggs this week.

He will recommend winding back the clock, essentially, to where it was before 1997, by mandating significant minimum staffing levels in nursing homes.

For more than two decades, no such requirement – with an explicit prescription for registered and enrolled nurses, therapy and personal-care workers – has existed anywhere in aged-care law.

Before John Howard’s 1997 aged-care changes, the number of registered nurse (RN) hours that a typical nursing home with 60 residents was funded for and received was 308. Within a decade, it dropped to just 198.

Today, it is 168 hours in a week.

On its own though, Rozen’s staffing recommendation won’t be enough to untangle a system so plagued by opacity, so denuded of oversight or empty of responsibility. Whatever comes from the royal commission will need to correct decades of calcification that has paralysed hearts and minds to the horrors of institutionalisation, greed and corporate entitlement.

 

If you want to trigger an aged-care gold rush, you’re going to need money – a lot of it.

But the 1996-’97 budget offered no extra cash for aged-care services. In fact, the line item for “reform of aged and community care” saved the Howard government almost $570 million over four years.

Still, providers didn’t need these funds to win big. They had something better: the promise of sweeping deregulation gave providers carte blanche over hiring.

Immediately before the new act began, the old funding model stipulated a ratio of staffing qualifications.

It broke down like this: almost a third of all care in nursing homes was to be performed by an RN, 58.5 per cent by an assistant in nursing (AIN), 8 per cent for therapy (allied health) and 1 per cent by the director of nursing.

“The decision in 1997 around the new [aged-care] act was that the government would outsource Australia’s duty of care for older people to private providers,” Professor Kathy Eagar, director of the Australian Health Services Research Institute at the University of Wollongong, tells The Saturday Paper.

In all 345 pages of the first version of Howard’s Aged Care Act, the words staff and employees are mentioned only three times each. The bill’s “quality of care” provisions were extremely vague, requiring only that “approved providers … maintain an adequate number of appropriately skilled staff to ensure that the care needs of care recipients are met”.

The following year, 1998, the requirement that one registered nurse had to be on duty in a home at all times was removed.

The abandonment of minimum staffing requirements had private equity firms and American corporates salivating. Suddenly, frail older Australians had become big business.

The nurses were the first to go.

In 2003, there were 16,265 full-time equivalent RNs in Australian nursing homes, representing 21.4 per cent of all direct care employees in these facilities. Even with an explosion in the number of older people receiving care, by 2016, there were only 14,564 registered nurses caring for them, representing less than 15 per cent of all staff.

Enrolled nurses (ENs) fell by almost 2000 full-time positions – dropping from 14.4 per cent of all employees to 9.3 per cent.

These clinical roles were replaced by low-paid and low-skilled personal care workers, often migrants who are given little or no support and face language barriers in the workplace. More than 26,000 such jobs were created between 2003 and 2016, pushing the proportion of these still-overworked employees from 56.5 per cent to 71.5 per cent of the entire direct care workforce.

It’s little wonder, then, that nursing home tycoon and Liberal Party donor Doug Moran boasted of his role in designing the Howard government policy, which would throw open the doors to billions of dollars of investment.

Moran, who died in 2011, was particularly thrilled about the proposed introduction of new accommodation bonds, lump sum payments provided from a resident’s assets or the sale of their home that nursing homes could use as interest-free loans.

As the furore around this measure grew, Moran compared those who opposed the policy to corporate fraudsters Christopher Skase and Alan Bond. He called them “silvertails, next of kin [and] the hoarders of assets”.

“There are a lot of bludgers in our society and I think that’s got to stop because it imposes further costs on to the taxpayers of this nation,” Moran told The Daily Telegraph.

But Howard was spooked by the backlash, and the bonds policy was dropped on high-care places. It would be another 17 years before accommodation bonds were extended, by a Labor government, to the rest of the aged-care sector.

While Moran got everything else that he’d wanted – reduced standards and regulations you could drive a truck through – it didn’t stop him quitting the Liberal Party in disgust over Howard’s backdown.

 

The impacts of the changes, lobbied for by Moran and others, were sweeping.

In an October 2019 background paper on previous reforms, the Royal Commission into Aged Care Quality and Safety noted the 1997 system redesign allowed “greater reliance on resident contributions to the cost of care, including through a system of accommodation bonds, and residential care benefits subject to income testing”.

There was also “a relaxation of previous regulatory requirements, such as tight financial acquittal requirements, and their replacement by a ‘lighter-touch’ accreditation approach”.

Before the changes, all aged-care providers were required to prove that a portion of their funding was actually spent on direct care and staff duties.

Howard’s law erased this.

A senate community affairs references committee report on the legislation in 1997 warned that “any system that claims to be concerned about the quality of care in nursing homes must ensure that public money provided for nursing care is spent for this purpose”.

Although Howard did later make minor concessions based on issues raised in its report, none of the committee’s recommendations were adopted.

With its passage into law, the great Howard experiment marked a catastrophic shift in the sector that neither major party has proved willing to undo.

Rather, the free market only grew hungrier. It demanded to be fed, and it was.

The age of monolithic providers began slowly, at first.

By mid-1999, for example, private for-profit companies had a 27.6 per cent share of all bed licences in residential aged care. In June last year, their market share had grown to 41 per cent.

John Howard privatised the aged-care sector, but it was Labor’s Mark Butler who really accelerated changes in 2012.

As minister for Mental Health and Ageing, Butler spearheaded the Gillard government’s major reform to the sector, adopting large swaths of a 2011 Productivity Commission blueprint that finally delivered what Howard never could – vast sums of free money to providers.

Short of detonating the whole model, Butler had few choices. Providers were losing money on so-called high-care places that did not attract accommodation bonds, but charging eye-watering amounts for low-care beds where these funds could be levied. In Sydney by 2008 some were in excess of $2 million.

In reality, by 2012, almost every bed was now a high-care one.

Butler abolished these distinctions. Accommodation bonds that previously only existed in low-care homes were allowed to be charged across the entire sector, subject to approval from the new Aged Care Financing Authority.

Older Australians became “consumers” of services.

Bonds were renamed “refundable accommodation deposits” – or RADs – and residents could no longer negotiate their value. As consumers, they paid the market rate. They could, of course, choose to pay either a bond or a daily payment calculated as a function of the bond price and government interest rate – or they could pay by a combination of both methods.

Either way, though, the money flowed.

The average value of accommodation bonds held by providers in 2012-13 was $229,000 per resident. By last year, that had climbed to $318,000.

In the same time, the total pool held has more than doubled from $14.3 billion to more than $30 billion. These funds are guaranteed by the Commonwealth, should providers go bust.

Providers invest these bonds and skim the profits to buy up property or conduct infrastructure projects, which the law encourages, and return only the original amount to the resident or their estate when they leave or die. Essentially, the system has created billions of dollars in interest-free loans.

There is no clearer indication of how lucrative these changes to the system were than what happened either side of their legislated start date on July 1, 2014.

First, in April, aged-care provider Japara listed on the Australian Stock Exchange and almost immediately beat its own initial public offering price. Regis Healthcare, another mammoth operator that formed after Macquarie Group hoovered up several nursing home providers in 2007, followed with its public listing in October. Finally, Estia Health debuted on the ASX in December 2014.

By April 2015, the ASX was posting material to its investment and finance newsletter spruiking “profit from ageing population”.

The benefits, according to Richard Lie from Stockradar, included “government inducements” and “major consolidation”.

For-profit providers now represent 49 per cent of all aged-care operators.

The aged-care giants grew quickly. In early 2018, Regis had a market capitalisation of $1.2 billion – it has since dropped to $342 million following years of blows to the sector – and together this corporate trio has recorded $8.4 billion worth of revenue from government subsidies and resident charges in five years. Over the same time, the three listed companies paid out almost $600 million to shareholders.

 

While public companies have strict reporting obligations, there are only threadbare transparency requirements for private aged-care providers.

Research ordered by the royal commission from tax advisory outfit BDO Australia, published late on Tuesday, reveals that the “current model favours more sophisticated providers who have the necessary financial acumen to manage diverse portfolios and capital structures”.

In other words, the system is set up to allow operators to play hide-and-seek with government subsidies and across multiple “related” entities within a web of controlled companies.

This is a “perfectly legitimate” model, BDO says, with one important caveat: “The current approach of having no priority or obligations to report on the related entity … may influence the behaviour of service providers in unintended ways and lead to adverse outcomes for the taxpayer.”

Buried in the report is a significant detail.

While the analysis shows that for-profit aged-care providers in Australia have broadly similar profit margins and asset returns when compared with companies in the Asia-Pacific, Europe and the United States and Canada, they differ in one remarkable way.

Nowhere in the world do similar systems have as high a return on equity as in private Australian aged-care operators – usually a reliable measure of income generated from investment. These providers have a return that’s almost 10 percentage points higher than the value for listed companies in Australia, and 4 percentage points higher than the closest cohort in the Asia-Pacific.

The top quarter of all private aged-care companies in Australia have a return that is almost four times higher than the best performers elsewhere in the world.

“This would indicate that unlisted for-profit approved providers behave quite differently from their counterparts,” BDO says in its report. “For example, they may be distributing a higher proportion of profits out of the entity and retaining less.”

This is important, as BDO notes, because “property investment is a significant feature of residential aged care providers” and the Australian government may “make a contribution for the use of the property for each resident”.

“Which is effectively a payment of rent,” it says.

Basically, providers invest in property, often using bonds from residents, and then charge themselves, and by extension the government, for the rent of that property.

In addition to this payment – and separate to the care subsidy provided by taxpayers – aged-care companies can transfer accommodation bonds received from clients to these other entities as “related party loans” and “use the funds to buy property or other investments”.

“An approved provider can own the property asset under a different entity, most likely without recourse.”

They then pay rent to these linked companies, listed as an expense for the aged-care facility but which is income for the vehicle that holds the property. Companies need only complete an annual prudential compliance statement.

One of the worst-affected homes in Victoria during the state’s second wave of Covid-19 was St Basil’s Homes for the Aged in Fawkner. The home paid more than $14 million in rent to its owner, the Greek Orthodox Church, in the past five years.

At last year’s royal commission hearings, the inquiry heard about multiple care failures at another Victorian facility, Menarock Life’s Greenway Gardens, that occurred in 2018. Here, management had issued a staffing cap based on its financial constraints, rather than resident needs, which were growing more complex.

“You will see a rent figure of $350,000 for this facility. And that’s a payment to a related entity,” counsel assisting Paul Bolster asked Menarock’s director, Craig Holland.

“Yes, correct,” he replied. “The [aged-care] business operates through one legal entity and the property is held in another legal entity.”

Menarock Life purchased Greenway Gardens in early 2018. The year before the purchase, the facility’s previous owners paid just $70,000 in rent.

 

There are 873 residential aged-care providers in Australia. By income, the 60 largest aged-care providers in Australia and their affiliated entities account for 76 per cent of all revenue in the sector – almost $19.6 billion in 2019.

The data, published in BDO’s analysis, is particularly vivid because it shows how this concentration began.

In 2011, the year before Labor’s reforms, the top 60 approved providers accounted for 68 per cent of all income in the sector. In their wake, the 10 biggest aged-care juggernauts were able to almost double their income to $11.5 billion and increase share of all revenue in the aged-care sector to 44.7 per cent.

In the context of world-first research from the University of Queensland, also commissioned by the aged-care inquiry and released late last month, these trends are concerning.

Private providers with large nursing homes were the worst-performing group in Australian aged care. Small facilities run by state governments, meanwhile, were consistently the best across a full range of quality indicators.

The latter are also the fastest-shrinking type of aged-care provider.

In other research for the royal commission, the University of Wollongong’s Professor Kathy Eagar found the average Australian nursing home resident receives just 180 minutes of care each day.

That ranks at the bottom of what is acceptable around the world. To bring this to between 242 and 264 minutes each day – considered good practice – would require an “overall increase of 37.2 per cent in total care staffing”.

Crucially, Eagar found only 1 per cent of all Australian nursing homes meet the legislated standards for state-run homes in Victoria.

To meet Victoria’s requirements, the federal government would need to boost registered nurse and enrolled nurse care time each day by 265 per cent.  This information is vital to fully understand what happened next, when the Coalition came to power again in September 2013.

Tony Abbott inherited a precarious aged-care industry that was fat with profit, starved of care and had an insatiable appetite for growth.

The sector had become a property play with a funding mechanism that was despised by both sides of politics. Political leaders and bureaucrats had no way of knowing, nor apparently any desire of discovering, where the money provided ended up.

It was a top-heavy, free market enterprise that also happened to be charged with the care of older people experiencing the most complex medical conditions in the country.

Rather than fix the mess, Abbott, and successive Coalition governments since, simply raided the aged-care budget and redirected the savings elsewhere, conveniently using the greed of the biggest companies that aged-care policies had long boosted to attack the entire sector.

Within his first year, Abbott would rip out the two measures Butler legislated and relied on for the rest of Labor’s reforms to work: a workforce compact and the dementia supplement.

Now dangerously unbalanced, the sector ran headlong into misery.

“The only way you can be making profit now is to be delivering inadequate care hours,” Eagar says.

“It is impossible to make a profit and deliver adequate care hours to residents.”

Next week, part two of this investigation will examine how these historical issues laid the groundwork for a near-total failure of the aged-care system in 2020. Read it here.

This article was first published in the print edition of The Saturday Paper on Sep 12, 2020 as "The collapse of aged care (part one)".

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Rick Morton is The Saturday Paper’s senior reporter.