Reform transition comes at a cost, StewartBrown report finds

StewartBrown’s latest aged care financial performance analysis paints a contrasting picture for the sector. Last year, modest revenue gains failed to overcome continuous growth in direct care and administration expenses.

The sector’s largest financial benchmark of the aged care sector also revealed the operating result remains a deficit of $8.45 per bed per day (pbd), largely due to rising direct care labour costs (19.9% increase) and administration costs (9.7%).

However, StewartBrown said the drop in operating results was expected as providers ramped up preparations for higher care minute targets. With home care providers also experiencing major operational changes, this transitional period will likely result in ongoing financial fluctuations amidst reform uncertainty.

Key points

• Revenue increases occurred across the board compared to September 2023, with a 5.9% increase in the average direct care revenue supported by notable everyday living (5.6%) and accommodation revenue growth (7.7%)
• The direct care margin for September 2024 was significantly lower than September 2023, dropping from $18.22 pbd to $10.32. StewartBrown highlighted that it was a transitional quarter as providers prepared for increasing direct care minutes and related costs were not funded
• With the average direct care minute target rising to 215 minutes per resident per day in October 2024, the September average sat at 210.54 minutes per resident per day

Care minute growth leads to funding deficit

Direct care results in the September 2024 Aged Care Performance Survey Analysis Report are the main attraction due to the significance of its timing in the reform journey.

Providers were preparing for new care minute targets with the sector average increasing by five total care minutes, including four registered nurse (RN) minutes from October 1, 2024.

However, despite residential care providers investing in increased staff and resources to meet their targets, government funding had not yet increased when the data was reported.

“The decrease in operating result is primarily due to a decrease in the direct care margin due to increases in direct care minutes and staff pay rates. Providers are in the transition period to prepare for higher direct care minutes target from Oct-24 and additional labour costs related to the transition were not funded for Sep-24,” the report explained. 

“Due to the increase in staffing levels to prepare for higher direct care minutes targets from 1 October 2024, despite a $7.13 pbd overall increase in direct care revenue compared to FY24, the Sep-24 quarter direct care margin at $10.32 pbd is lower than the FY24 average margin of $15.25 pbd.”

Positively, total direct care minutes and RN minutes continued to grow. At that stage, the sector average of 210.54 total direct care minutes and 41.22 RN minutes per resident per day were above the required target.

The AN-ACC starting price increased to $280.01 per day from October 1, 2024, which, in conjunction with other subsidies and supplements, should improve margins.

StewartBrown called for ongoing recruitment investments to replace most agency staff with permanent employees. It cited the high average agency RN hourly rate of $125.40 per hour as a major financial burden.

Home care profitability driven by revenue jump

Home Care Package (HCP) providers enjoyed a positive year-to-date with revenue per client per day increasing from $75.78 to $83.01.

Direct care costs as a percentage of total revenue remained relatively steady, as did administration and care management costs. The profitability margin increased from 2.9% to 4% in conjunction. Stability may not last long if providers are not prepared for change.

Reducing home care management funding will be one of the greatest challenges for service providers. StewartBrown reported that 88% of programs/packages charge care management at over 10%, the incoming Support at Home limit. 

It projects a $5.27 loss per client per day when the change occurs. In addition, removing package management fees means providers must build a total of $10.67 per client per day into service pricing. 

StewartBrown recommended that providers conduct a cost study to prepare for setting their prices and to inform their business model when price capping is introduced. 

“Although the Department is staging the introduction of service price caps, the 10% cap on the care management fee and the removal of the package management fee will still impact the pricing strategies and profitability of providers,” the report stated.

“It is suggested that providers conduct a cost study to prepare for setting their prices from 1 July 2025 and to inform their business model when price capping is introduced in 2026. This would help them understand the costs in providing each type of services, the efficiency for each service, and what level of margin will need to be generated to absorb administrative costs.”

Expenses remain a concern

Administration costs increased as providers continued transitioning from one aged care act to another. The $3.09 jump – compared to the 2024 financial year – was just one expense that contributed to ‘significant losses’ through the delivery of everyday living and accommodation services.

With several funding reforms on the horizon, including contributions to non-clinical care (direct care) and increased accommodation contributions, StewartBrown is predicting positive long-term revenue growth:

• Scenario 1: Operating result based on reforms as announced – By 2029, StewartBrown forecasts an operating surplus of $19.29 pbd if proposed reforms remain the same.
• Scenario 2: Operating result based on additional hotelling supplement with moderate accommodation price increase – Steadily increasing accommodation pricing and the hotelling supplement would allow providers to meet the cost of supplying everyday living services, resulting in a $29.38 pbd surplus.
• Scenario 3: Operating result based on additional hotelling supplement with full accommodation price increase – Gradual RAD pricing increases alongside hotelling supplement growth would contribute to an ‘optimistic outlook’ where providers return an operating surplus of $33.58 pbd.

The report also forecasted an operating EBITDA of between $15,415 and $20,283 in the 2029 financial year. A minimum $20,000 EBITDA would be required for financial sustainability, the report added. 

Click here to read StewartBrown’s full analysis and projections.