An uneven playing field: The risk new minimum liquidity standards pose

New Financial and Prudential Standards under the incoming Aged Care Act creates an uneven playing field that threatens to restrict development, force businesses to restructure, and challenge operators already under pressure to replace diminishing cash flows.

Setting the scene

Last week, the Aged Care Quality and Safety Commission published the draft of the new Financial and Prudential Standards. The Standards set out the minimum requirements for registered aged care providers as per three updated, focused Standards: Investment, financial and prudential management, and liquidity. 

Additionally, the Commission highlighted the following three changes as the most significant updates:

1. The introduction of a minimum liquidity amount to support financial resilience among providers following Recommendation 132 of the Royal Commission into Aged Care Quality and Safety. 
2. For the first time, home care service providers will also need to meet the Financial and Prudential Standards, specifically the Financial and Prudential Management Standard.
3. There are extra requirements for financial reporting, investment decisions and managing risk, to improve transparency and governance practices.

It is the changes falling under the Liquidity Standard that are arguably the most significant for aged care operators. 

A minimum liquidity amount has been introduced for all residential care providers providing funded aged care services and aren’t government entities or a local government authority, even those that don’t hold refundable deposits. 

The minimum liquidity amount is calculated as follows: 35% of cash expenses (all providers) + 10% of refundable deposit liabilities (only providers with refundable deposits). The Commission provides a more detailed breakdown of those calculations here. 

This will allow providers to meet their financial obligations and refund any refundable deposit balances if several residents leave without financial stability concern. 

An uneven playing field

The Commission has analysed and assessed the financial resilience of providers, determining that this threshold will allow 95% of providers to manage financial stress scenarios. It said approximately three-quarters of all residential care providers already meet or exceed the threshold.

Despite the majority occupying a positive starting position, aged care consultant and Principal Consultant at G5Strategic Stephen Rooke believes the new liquidity expectations create an uneven playing field because they capture all business types operated by a provider – even if those businesses have different risk profiles or cash flow needs.

“There’s no leeway in the draft standard. If you are a single provider and you want to build a new building, how do you do it if you don’t make enough margin to borrow from a bank and also cannot use your existing deposits to fund construction costs?” Mr Rooke told Hello Leaders. 

“Currently you’re allowed to spend all of your RADs to build new facilities, then put that money back into the bank when the facility is finished and new residents move in and pay RADs. You can’t do that anymore because you have to quarantine a portion of it in a bank account or a liquidity statement every quarter. This will put the brakes on building works. Providers can’t grow.

“These rules are important to stop cowboys from entering the industry looking for quick profits, but if we’re not careful an awful lot of good operators with very good financial management will not have the flexibility they need to meet future demand for aged care services.” 

Organisations with multiple service offerings are the most likely to feel short-changed by the new minimum liquidity requirements. 

Under the proposed Financial and Prudential Standards, a registered aged care provider operating within the same organisation as another business type means all are deemed to be aged care providers with the same capital funding and expense funding requirements.

Therefore, organisations with other healthcare services, disability services, childcare/early learning centres, cafe/retail precincts, etc will all be swept up by the same rules to put aside 35% of their previous quarter of cash expenses.

Aged care providers with independent living units and retirement village refundable amounts will have an even bigger burden, as they will have to retain 10% of those amounts on top of the 10% of RADs. 

“Providers may not have that money right now. We are working with several organisations who are going to need time to adjust while they finish development projects or adjust to the announced timing changes for residential aged care subsidies over the next two years,” Mr Rooke added.

Shifting goal posts

While the general consensus is that a floor on minimum liquidity for the aged care sector is necessary, Mr Rooke has several key concerns regarding the proposed Financial and Prudential Standards.

One is the timeline. He sees no reason for the Standards to be introduced from July 1, 2025 if they are not ready, insisting that providers have proven their strong track record of navigating financial crises in recent years and would be better off if the government focused more energy into clinical and other operational reforms already announced. 

This is partly because the government will also begin paying providers in arrears rather than at the start of the month from July 1, 2026. The change does not affect the amount paid to any residential care provider, however, it is still a significant change that coincides with providers solidifying their minimum liquidity amount. 

“When the government is asking you to find 35% of last quarter’s expenses, they’re also taking away some of next quarter’s expenses. They’re pushing $2.5 billion of government costs into the future over the next two years, which providers have to find on top of the new liquidity targets,” he explained. 

Another point of contention is the change in regulatory status for retirement living providers. The new obligation is vastly different to state retirement village legislations which have no similar restrictions on retaining liquid cash. They can invest more freely in running costs and new developments. 

Now, anyone with both a residential aged care arm and a village operation will be required to put aside 10% of deposits from both business arms. A stand-alone village operator which doesn’t provide aged care will not be covered by these rules, giving them a competitive advantage when sourcing funds or bidding for development sites.

“Retirement villages and residential aged care are different worlds with different cash flow requirements but they’re currently lumped in together. This doesn’t seem to have been advertised anywhere,” Mr Rooke said. 

“These businesses have different repayment terms, different obligations and one’s regulated by the states and the other’s federal. Having the Federal Government now impose controls on state-regulated business is a surprise, one that state governments have flagged to date and providers will suffer the burden of another government body telling them how to manage their cash flow.”

A necessary move?

First, it’s important to note that the Commission has provided plenty of information regarding the new Financial and Prudential Standards. 

Peter Edwards, the a/g Deputy Commissioner, Regulatory Operations, also reinforced that the Commission does not intend to take compliance action when a provider cannot show they have access to enough cash or cash equivalents to meet the minimum liquidity amount. 

“Our goal is not to catch providers out. We want to help them develop strategies that protect them from risk of sudden financial collapse, which can harm older people and put refundable deposits at risk,” he shared.

Despite this, the new Standards pose plenty of questions. For one, who pays if providers cannot find the additional free cash? There is a risk providers will be forced to charge more for services and accommodation. 

Then there’s the question of whether it’s a necessary requirement in the immediate future. Mr Rooke would not be alone in his preference for the Financial and Prudential Standards to be delayed until proper consultation occurs, especially as there’s no evidence of widespread financial distress. 

“Across the 2,600-odd facilities we have today, not everyone needs to have 10% of their RADs available. Large providers and small providers have different risk profiles and access to different tools to manage risk,” Mr Rooke said. 

The same is true for organisations servicing different sectors. Having aged care businesses wrapped up in the same blanket with other industries and sectors is likely to create unintended consequences. 

“If the aged care sector has not done a good job of predicting the future then these rules would be more than fair. I’m not seeing evidence that the industry is failing to properly plan and adjust.”

Highlighting examples such as the late 2000s global financial crisis and the COVID-19 pandemic, Mr Rooke said providers have handled challenging situations well. 

Meanwhile, he emphasised that providers exiting the sector today are doing so through orderly sales and business transfers. Sensible decisions to sell or consolidate before they become distressed show there’s no need to rush major financial reforms.

“You would need to see a lot of failures before you would say that we need to rush to a position of government intervention. We have the time to get this right, and create something more nuanced and tailored to the needs of the sector,” Mr Rooke added. 

Consultation on the new Financial and Prudential Standards is only open until the end of this week, Friday March 7, 2025.