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The Covid-19 pandemic has highlighted two decades of aged-care mismanagement, but at the heart of the sector is a pyramid scheme that exposes the taxpayer to billions in liability. By Rick Morton.

The collapse of aged care (part two)

Prime Minister Scott Morrison.
Credit: AAP Image / Mick Tsikas

Part one of this investigation ran in last week’s issue. Read it here.

When the report landed with senior Department of Health officials early in the year, its warning was blunt. This was deliberate: the confidential dossier was intended to jolt a lethargic government into action.

“It remains our view that approximately 50 [aged-care] providers – one per week – are likely to walk away due to financial stress in 2020,” author Gary Barnier wrote.

“Not all of these providers will be in rural, regional and remote Australia. A substantial investment in the management of risk is warranted.”

Barnier, a member of the federal government’s Aged Care Financing Authority, and partner at Cooperage Capital, did not elaborate on how much money was needed to prop up these homes. But the department accepted his recommendation to establish a team of seven full-time employees to manage the problem.

The report, known internally as the “viability project”, found 141 of Australia’s 873 nursing-home providers were at “extreme risk of imminent failure”.

It found a further 89 providers “that will be in severe financial stress within two years”.

The report was commissioned by the Department of Health as evidence mounted that the government may have to repay billions of dollars in accommodation bonds should these providers collapse. Between them, the nursing homes listed by the “viability project” hold $5.3 billion in bonds.

These bonds are a fee paid by residents  to providers, usually based on property prices in the area. The average per resident is $318,000 – although they can be well over $1 million.

Providers can invest these bonds however they like, including on the sharemarket, although most are invested in property. The interest belongs to the provider, but the bonds must be returned to the resident or their estate when they leave care or die. If a number of bonds need to be returned at once, this creates a liquidity problem.

In trying to privatise the cost burden of an ageing population, governments – both Labor and Liberal – had transformed the aged-care sector into what was, essentially, a pyramid scheme. The bonds are central to this.

As long as the sector kept growing and money kept coming in, the only concerns for government were to manage taxpayer funding and regulate the care standards. But now some of these providers are struggling.

Covid-19 was still only a bit player in global aaffairs when the Barnier work began. None of the report’s analyses had factored in the unthinkable once-in-a-century devastation of a pandemic. Instead it was grappling with the reality of a man-made disaster in aged care.

If any single element in this astonishingly complex artifice fails, the whole of it breaks down. Bonds are one part of this, another is a steady decline in government funding and care standards, but the two are inseparable from each other.

 

Tony Abbott had been prime minister for only a matter of days when, in September 2013, he hit pause on the outgoing Labor government’s $1.4 billion “workforce compact” for nursing homes. This was a signal moment in the slow collapse of Australia’s aged-care system.

Over four years, the program would have delivered a down payment on wage increases of between 3 and 12.5 per cent for care workers and registered nurses, respectively.

Labor had designed the wage increases – which providers would ultimately have to fund after early support – partly as a way to fix a problem with the aged-care funding tool.

The tool, known as the Aged Care Funding Instrument, was the mechanism by which the government subsidy for individual aged-care residents was calculated.

The tool was an unpredictable burden on budgets because nursing homes made their own claims, based on their assessment of resident needs, and the federal government then paid.

Labor took all but $200 million of the $1.4 billion it needed for the wage increases directly from this funding instrument. This way, the government had a better idea of where the money was going.

Abbott made no secret of his disdain for the project, which he labelled “unionism by stealth”, but as prime minister he blindsided the parliament by introducing a bill to terminate it entirely.

Privately providers were ecstatic, particularly as Abbott returned the money saved to the general aged-care budget.

“The providers didn’t want to do the compact, but they wanted the bonds,” says a senior Labor figure from the time. “The consumers didn’t want to pay more but they wanted a better system …

“The providers were able to wriggle off the hook. The one thing they didn’t want, Abbott got rid of for them.”

In late 2013, the new government also moved policy development for aged care out of the Health Department and into the newly formed Department of Social Services.

While the change would be brief – lasting only slightly longer than Tony Abbott’s prime ministership – the bureaucratic whiplash only compounded existing problems.

Then, just six months after the workforce reform was killed off, the then assistant minister for Social Services, Mitch Fifield, torpedoed the Dementia and Severe Behaviours Supplement, saying it had been massively “oversubscribed”.

Initial modelling suggested 2000 people in nursing homes would receive the supplement. Instead, by March 2014, more than 25,000 people were being supported. This cost was met entirely by government.

More than half of all residents in nursing homes have some form of dementia. But rather than deal with the budget implications – an initial estimate of $11.7 million in funding in its first year blew out to $110 million – Fifield pivoted. He centralised dementia support in the Severe Behaviour Response Teams, at a cost of just $14 million a year.

Thousands of people who would have received specialist dementia care no longer received it.

These were cruel cuts, but the real trouble came with structural funding changes that would be introduced by Scott Morrison when he became treasurer the following year.

Morrison was just three months into his new job when he delivered the mid-year economic update in December 2015.

The treasurer booked a $472 million saving to be “redirected by the government to repair the budget and fund policy priorities”.

This money was found by freezing indexation of the Aged Care Funding Instrument and making it harder for providers to make claims under the subsidy.

The next year, Morrison raided the funding instrument again – finding a further $1.2 billion. “Savings from this measure will be redirected by the government,” budget papers stated.

Of course, Labor had similarly plundered the funding instrument just a few years earlier. But to understand why Morrison’s razor had a more severe effect on the sector, you have to focus on one word: “redirected”.

When Abbott intervened in the workforce compact, or when Labor made its changes, they kept the retooled funding in the general aged-care budget. Morrison, as treasurer, did no such thing. As far as aged care was concerned, the money vanished.

According to one registered nurse with more than 30 years’ experience in aged care, the $1.7 billion that Morrison broke off the funding instrument “brought the sector to its knees”.

 

Since 2000, the cost of providing care in nursing homes has risen by 116.3 per cent. But government subsidies to outsourced providers increased by only 70.3 per cent, royal commission analysis shows.

In new evidence tendered to the Royal Commission into Aged Care Quality and Safety last week, the Department of Health concedes that “the level of [subsidy] indexation has not been sufficient to cover the increasing cost of service delivery inputs”.

The department also gently reframed its previous allegations that providers were “gaming” the funding instrument – artificially boosting the care needs of residents in order to obtain more funding. It now says this was likely done because the direct care subsidy was not keeping pace with costs.

“In particular, low indexation arguably encourages providers to make higher-than-appropriate funding claims under the [Aged Care Funding Instrument] model,” the department told the royal commission.

We also now have evidence from two research reports to the government and the commission that whatever “gaming” was going on, it was happening in wealthy areas.

For the same class of residents, such claims were higher in cities than in regional areas. And both were higher than funding delivered in remote areas. Private providers claimed more for the same residents than non-profit providers, and both charged more than state and local government providers.

Morrison’s changes crushed services in remote and regional Australia, which were already claiming less than they should have been.

New analysis by industry accountants StewartBrown – which in the past year has also advised both the royal commission and the federal government – shows that 75 per cent of providers in regional and remote Australia are now operating at a cash loss.

Morrison’s budget saving was delivered on the back of these services.

 

At the time this was happening, and with the aged-care sector almost entirely reliant on government funding for general revenue, providers were raking in tens of billions of dollars in accommodation bonds.

Then, in 2018, two of the listed aged-care giants, Regis and Japara, lost a Federal Court ruling, which forced them and other large providers to repay residents tens of millions of dollars in “service” fees that had been charged for no actual service since late 2016.

At the same time, falling interest rates meant providers were making less from accommodation bonds.

The increasing frailty of new entrants to nursing homes, twinned with the expansion of home-care packages allowing older Australians to stay in their own homes with subsidised care for longer, meant the average length of stay in an aged-care facility fell to less than three years between 2003 and 2016.

Owing to this, many residents chose to pay a daily fee, rather than a bond.

In its submission to the royal commission, the Aged Care Financing Authority – which advises the Aged Care minister – painted a bleak picture of what led to the sector’s current woes.

“A legacy combination of a highly regulated system, funding pressures, low community status and at times esteem, incentives that do not reward innovation, together with elements of ageism in society, have combined with the result that the aged care industry has struggled in attracting management and leadership skills compared with better resourced and more dynamic industries,” it says.

The authority also warned of “the danger that the government may respond to the symptoms of deficiencies in policy settings, rather than dealing with the underlying structural problems”.

Moreover, with no mechanism to guarantee care hours or quality in aged-care homes, beyond vague accreditation standards, every seemingly disparate dysfunction in the sector has combined to diminish the quality of life for aged-care residents.

Abuse, neglect and premature deaths are not rare incidents in Australian nursing homes but features of this system. The royal commission has heard as much.

 

For the past two years, the Coalition has promised to crack down on the lax standards regulating $30 billion in bonds held by aged-care providers. So far, none of the measures announced in the 2018 budget have started or even been legislated.

That year, the Department of Health first commissioned the consultancy firm EY to recommend changes to the prudential oversight regime. The work was then revisited by Deloitte, which handed its report to government in March last year, and then by accounting firm StewartBrown, which was brought in to review both the EY and Deloitte reports, delivering their brief in October 2019.

In December, the government deferred the introduction of a mandatory levy on providers, which would be paid by every nursing-home operator in the event one or more aged-care facilities defaulted on their accommodation bond repayments by more than $3 million in any given year.

About the same time, Covid-19 was already spreading throughout the Chinese city of Wuhan. It would arrive in Australia in just a matter of weeks.

While the virus did not cause the decline of aged-care standards in Australia, it highlighted the weaknesses that were built in by nearly two decades of government mismanagement.

Last month, consultant Cam Ansell of Ansell Strategic provided a report to senior Department of Health aged-care officials with a sobering message.

In a sample group of aged-care providers, representing almost 10 per cent of all operators, Ansell found they had lost $134 million in bonds since Covid-19.

He estimated $1 billion had been lost across the sector as of July 2020.

By January, that figure is forecast to climb to $2.6 billion.

Residents have been dying or choosing to leave substandard homes in large numbers. If they are replaced, it is more likely now to be by new residents who choose to pay the daily fee instead of a bond.

The Commonwealth’s lawyers confirmed to the royal commission that the government was so spooked by the impact of Covid-19 it had arranged meetings with Health, Treasury and “major financial institutions”.

“There were discussions as to whether the institutions thought government intervention would be required and in what circumstances,” the lawyers told the royal commission.

This is the first time the public is hearing about how close the government has already come to having to bail itself out of its own mess.

 

One significant piece of work the Coalition has done since it came to power is to create the Aged Care Quality and Safety Commission, cobbled together from previously separate roles that once fell to a now-defunct quality agency and the Department of Health.

In January, the commission received its latest transfer of powers.

The regulator now “has primary responsibility for assessing and monitoring the performance of individual aged care providers against the Prudential Standards, and holding them to account for returning to full compliance where they are not meeting [them].”

It is a perverse arrangement. On the one hand, the government says the commission must uphold certain standards but at the same time it cannot afford for a provider to fail. And so many are now at that precipice.

In March last year, Deloitte advised the Department of Health that sanctioning providers that failed to meet standards could push them over the edge.

“In situations where a provider is already in financial distress, a potential disallowance of the ability to accept [accommodation bonds] by the Department may increase the likelihood of provider default,” the consultant’s report warned.

“Alternative options might be more appropriate in these instances.”

Throughout the pandemic, the aged-care regulator has been criticised for ceasing on-site compliance audits of providers. But this was a recommendation of consultant Cam Ansell in his advice to government, also handed over in March, about how to mitigate the loss of accommodation bonds.

“To focus on appropriate and safe care, without the distraction of a visit by the [Aged Care Quality and Safety Commission] it is recommended that on-site assessments be postponed for at least six months,” Ansell wrote.

During the pandemic, the watchdog has also been securing assessors through labour hire firms. One such application, seen by The Saturday Paper, shows the regulator is using the firm Programmed Health Professionals to hire casual assessors on one-year contracts in Melbourne. It lists the old, defunct watchdog as giving approval.

 

The aged-care royal commission, announced in late 2018, was tasked with fixing Australia’s broken system for caring for the elderly and infirm.

It was framed as a rebuke to dodgy providers, following multiple revelations of horrific abuse and neglect in nursing homes.

Announcing the commission on a quiet Canberra Sunday, just weeks after he had ascended to the prime ministership, Scott Morrison warned the public that “we should brace ourselves for some pretty bruising information about the way our loved ones, some of them, have experienced some real mistreatment”.

But this doesn’t start and end with providers. To fix aged care, the royal commission will have to unwind two decades of government policy that has gutted and privatised the sector, promoted profits over the wellbeing of residents and tried, above all else, to ensure that the cost of caring for a rising number of elderly Australians would not affect the government’s bottom line.

The inquiry will not hand down its final report until February. Calls for deep, broad reform and funding security were already urgent before its work began. A pandemic-induced depression has only put that urgency beyond doubt.

In his “viability” review, with its dire warnings of financial collapse in the sector, Gary Barnier says the Commonwealth can’t wait for the royal commission’s findings. It needs to act now.

This article was first published in the print edition of The Saturday Paper on Sep 19, 2020 as "The collapse of aged care (part two)".

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Rick Morton is The Saturday Paper’s senior reporter.