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Staying competitive in a dynamic environment
With ~42,000 additional people needing aged care by 2030 (growth of 4%), and up to 194,000 additional people needing care by 2040 (growth of 19%)1,2 Australia is undergoing a generational shift. It is imperative that our aged care sector has the agility to meet this demand, and provide contemporary, sustainable services which align to customer preferences and requirements.
Figure 1. Australian population projection, 2022 to 2066 (millions)
Figure 2: Projected number of individuals using Home Support, Home Care and Residential Care, 2022 to 2066
Whilst the long-term growth offers a degree of opportunity for providers, recent reforms including mandatory care minutes, 24/7 registered nurse requirements, and the Fair Work Commission (FWC) 15% award increase are creating a period of uncertainty for the sector. Providers are preparing for more changes in 2024 and 2025, with a raft of reforms and regulatory changes taking place. In October 2024, we will see an increase in mandatory care minute requirements to 215 care minutes per resident per day (including 44 minutes of RN time). Then in 2025 alone, we expect to see:
Commencement of a Single Assessment system
Introduction of the revised rights based Aged Care Act and regulatory framework, including a new system for the registration of providers
Commencement of the new quality standards framework
Discontinuation of the Aged Care Approvals Round (ACAR) and introduction of ‘Places to People’, reducing barriers to entry and increasing competition
Commencement of the much-anticipated Support at Home program, which will significantly change the way that home care services are funded.
These changes are substantial and designed to deliver a sector with more consumer choice, increased competition, and a greater focus on quality of care. However, they are also having an immediate impact on workforce operations, which are already suffering from an extended period of strain:
- Workforce shortages continue to challenge providers alongside competition with the acute and disability sectors to attract and retain similar skill sets – there is a long-term expected shortfall of at least 110,000 aged care workers by 2031, and 400,000 by 20503
- Minimum care minutes have forced most providers to raise staffing levels and even the top quartile performers are yet to consistently meet targets4
- Service delivery costs have grown rapidly with ongoing infection prevention measures, increased compliance and quality reporting requirements, and inflation wage growth and agency spend driving up labour costs
Financial sustainability continues to be front of mind
These workforce challenges alongside the high inflationary cost pressures of our environment are making it challenging for providers to remain profitable. According to Stewart Brown reporting, 50% of aged care providers were operating at a loss as of March 20245. Whilst this is an improvement from March 2023, when 64% of providers were operating at a loss, it is still an alarming statistic6.
The projected operating result for FY24 increased due to the introduction of the AN-ACC funding model, which provided additional funding for direct care. However, this funding increase came with a requirement to boost direct care minutes, which providers have not yet fully met. As a result, they have benefited from higher revenue without the corresponding workforce costs. This improvement is not expected to continue as providers will eventually meet the mandatory care minutes, reducing their operating margins.
Figure 3: Government funding by sub-sector, 2018 to 2023 ($bn)
Figure 4: Operating result, FY19 to March FY24 (pbd)
Divestments, exits and closures
The combination of these factors is affecting providers of all sizes, however smaller providers are being disproportionately affected due to a lack of efficiencies of scale. Providers with more than 20 homes have the highest operating margins compared to other groups7.
Consequently, we are seeing smaller providers exit financially unviable market segments, consolidations and closures. Whilst the number of Home Care providers has remained relatively constant, the number of Residential providers has shrunk 7% since 2019. In Victoria, over 25% of councils have stopped Home Care programs over viability concerns of the new consumer-direct funding model and challenges in finding staff8.
As scale continues to be a significant driver of financial performance it is not hard to imagine that a new wave of industry consolidation is just around the corner.
Learning from the best
Given the scale of current and future demand for aged care services it is critical that the sector is able to meet this demand in a financially sustainable manner. The top performers within the sector provide an insight into how to succeed.
The average operating result for top quartile performers in Q1 2024 was a profit of ~$41.26 per bed per day (~$41.26 EBITDAR), compared to the wider residential sector, which reported an average loss of ~$0.64 per bed per day (~$0.64 EBITDAR)9. The top performers are achieving lower direct care costs (including significantly less use of agency staff), as well as lower hotel services costs and administration costs. They are operating with tight discipline and a focus on margin.
In our experience of working across the sector we have observed that leading providers are able to drive operational performance across the business.
Financial sustainability allows providers to reinvest back in the business improving their ability to deliver high quality care and a better customer experience.
The path towards transformation
Many providers are undergoing transformation to evolve their business and reach this level of performance. But too often we see these efforts fail or deliver short term benefits only. Many organisations have executed aggressive cost cutting programmes only to see the same costs reoccurring 1-2 years later. Indiscriminate cost reduction targets and a failure to reinvest in the business can demotivate teams and distract the organisation away from delivering on its strategy. Successful transformations get at least three things right:
- A clear link between the transformation and the organisation strategy. Teams can see and relate to the North Star and are motivated to change because they see and believe in the direction of the business.
- The ability to realign costs strategically and invest in differentiating capabilities. Not all costs are equal and leading providers are able to determine which areas to manage to benchmark and which areas require investment.
- A transformation capability that sustains change. Change is hard, especially when businesses are faced with a prolonged period of difficult operating conditions like the aged care sector has. Successful transformation requires a dedicated capability that can hold the business to account and ensure difficult decisions are followed through, whilst also championing the wins.
What to know more?
This article has provided an overview of the three key themes and how providers are staying Fit for Care in a dynamic sector set for big changes in the next 12 months. If you have any questions or would like to discuss further, please don't hesitate to contact us.
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Nick Meadows
Pharma, MedTech and Life Sciences Sector Leader, PwC Australia
Tel: +61 499 426 899
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