The Australian Aged Care Sector: Opportunity ahead?

In this thought leadership article, Australian Investment Council partner MinterEllison outlines how a blueprint for the future of Australia's aged care sector is taking shape, promising greater regulatory clarity for investors.

Over the past decade, the aged care sector has been subject to increased community and regulatory scrutiny. Ongoing legislative reform and the Royal Commission into Aged Care Quality and Safety projected the sector into the public consciousness. The aged care sector is now well understood by dealmakers and investors alike, but regulatory uncertainty has made investors wary.

The Final Report of the Royal Commission made 148 recommendations for the reform of aged care, but failed to address the key question of sector funding and viability. For several years, investors have been deterred and potential deals were ruled out, with distressed assets being the only assets to change hands. At first glance, the fundamentals of the aged care sector look positive. Australia's ageing demographics should provide strong tailwinds to aged care providers. However, these positive fundamentals have been stymied by regulatory uncertainty.

The Australian aged care sector has always been underwritten by the Commonwealth Government, which injects funding into the sector through the Australian National Aged Care Classification (AN-ACC) model. Providers in the sector received the overwhelming majority of their revenue from government subsidies. This has been attractive for investors. However, in recent years, the rate of indexation to these subsidies has been frozen or has only increased at a very nominal rate. This combined with other regulatory changes, increasing standards of corporate governance for aged care providers, along with other expensive regulatory changes, have pushed many providers further in the 'red'.

Hope on the horizon?

The change in Commonwealth Government in May 2022, with the election of the Australian Labor Party, brought with it a substantial reform agenda. ln December 2024, the Commonwealth released an Exposure Draft of a New Aged Care Act which involves a new regulatory model for the Australian aged care sector. The Exposure Draft set clear expectations from the Australian government of aged care providers, introducing stricter regulations and a sharpened focus on the needs of care recipients. Then, in March 2024, the Aged Care Taskforce – a taskforce commissioned by the Commonwealth Government to advise on aged care funding arrangements – released its final report.

The Taskforce's report contains significant recommendations involving financial viability and a greater role for 'user pays' aged care funding. This is not to say, however, that consumers will now be required to pay for their care needs; the Taskforce envisions a system where the Government continues to be the major funder of aged care, but consumers, where they have the means, take on an increased role for personal co-contributions 'to fund the gap in sector viability'. Care recipients would be responsible for paying for aspects of their care which they have been paying for the majority of their adult lives. Accommodation, home maintenance and gardening are some of the examples the Taskforce has proposed.

From a policy perspective, in addition to greater co-contributions, the Taskforce has also suggested the Government expands its funding for aged care through the AN-ACC to cover the care component in its entirety. What's more, the Taskforce recommends the role of the Independent Health and Aged Care Pricing Authority (IHACPA) also be expanded. Currently, IHACPA is tasked with providing pricing advice in relation to residential aged care and residential respite care. This will soon extend to home care pricing. The Taskforce believes that IHACPA should also take on the responsibility of pricing advice in relation to both the supplement for everyday living and rural and remote areas. To achieve this, the Taskforce encourages the closer communication between IHACPA and the sector.<

Outside the Taskforce's report, the Fair Work Commission also recently made a decision to increase the minimum wages for direct care employees in aged care. This was well received by the sector given its ongoing concerns, as the Taskforce recognises 'over workforce shortages', which have historically been a major factor in the uncertainty around aged care.

Looking further back, the sector moved towards a market-based system for residential aged care with the discontinuation of the Aged Care Approvals Round (ACAR) system from around 2020. The ACAR system previously capped and controlled the allocation of aged care places, hindering market contestability. The removal of ACAR, however, brought about greater choice for consumers, incentivising approved providers to ensure their delivery of high quality services, permitting market contestability.

Finally, regulatory certainty?

While it is not certain how the Government will respond to the Taskforce's recommendations, the report provides a very clear indication of what is to come for our ageing population.

The Taskforce's report identifies that until more funding is available to the sector, it will remain unequipped to meet the current demands of its present and future consumers. Funding is key to the sustainability of the aged care sector. Until investors have certainty on funding, deal flow will likely remain muted.

With the release of the Taskforce's recommendations, it is likely that regulatory certainty may be imminent, if the Commonwealth is to embrace the reforms proposed by the Taskforce. This, along with the increasing wealth of older people and their higher expectations for care quality, means the outlook for investors in this sector is brightening.

Tailwinds for investors

Australia's population is ageing. We are living longer. Our needs for aged care are becoming greater and more complex. Australians want to stay at home for as long as possible, avoiding institutional care models. The demand for home care is on a steep incline. The wealth of the incoming aged care recipients will benefit from increased superannuation balances. With this increased liquidity, the incoming generation – and those to come – will enjoy greater flexibility and choice in how they receive aged care. Not only this, the Taskforce found that Australians' aged care expectations are high, stating 'society is demanding higher quality aged care services' and that 'people are willing to pay more for home care services that are essential and increase quality of life and dignity'.

The Commonwealth is yet to legislate for these changes advocated by the Taskforce. Initial indications suggest that there may be bipartisan support for these changes. If legislated, these changes will sure up the sector and prompt investors and dealmakers to revisit this sector given the attractive fundamentals.

Original article

Published July 2024