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Accommodation payment strategies in aged care

05 Apr. 2017

By Ken Ridgwell and David Ettershank – Principals Outcomes Plus

This paper is Part 3 in a series that examines some of the issues facing aged care Management and Boards. This week’s paper reflects on some of the accommodation payment strategies being adopted by residential care operators.

 

Accommodation payments

It is interesting to see the number of articles that have been released recently announcing accommodation payments as the panacea for ACFI cuts. Of course, this begs the obvious question – why did you wait for funding cuts to think about your accommodation payment strategy?

One of the things I have rarely experienced in aged care is an in-depth analysis of accommodation payment strategies at Board level. In the past, it has been left to management to figure this out and to do whatever gives the best result.

But how do you measure the best result and how do you report success?

One of the things we often come across at Outcomes Plus are residential facility managers bemoaning the fact that they get no credit when the organisation receives a refundable accommodation deposit (“RAD”), whereas a daily accommodation payment (“DAP”) goes straight to the facility’s bottom line.

The answer to this question is never simple and rarely tackled by management.

The first thing to consider when setting the 2018 budget is the priority to be given to capital (RAD) or income (DAP). In the past when interest rates were much higher, the lump sum payment seemed the preferred option for both the provider and the consumer. In today’s low interest rate environment, the answer is not always obvious, even if there are borrowings to repay.

Setting both RAD/RAC and DAP/DAC targets seems an obvious start but it needs to consider questions such as:

* How much capital is needed to repay borrowings?

* How much debt can be carried comfortably? – long term debt can be a viable strategy when maximum permissible interest rates are at least 100 to 150 basis points above the borrowing rate.

* Does the organisation place a cost on its own capital or reward each facility with a notional income from RADs?

* Will the organisation remove responsibility for accommodation income and expenditure from the residential facility and transfer them to central management where they originated?

It is one thing to set the accommodation target, it’s quite another to influence consumer behaviour on how it is paid. The Aged Care Financing Authority has reported the growth of the RAD/DAP combination payment. In part this was encouraged by providers trying to maximise their accommodation payment closer to the advertised price. Some offered incentives, easier payment terms and even a higher standard of accommodation. In part, it was also due to consumers realising that DAPs can get expensive.

Welcome to the free market!

There is much press speculation at the moment about the overheated property market and the likelihood of interest rate rises later this year. This could have a major impact on accommodation payments and the form in which they are paid. We would therefore say to each aged care Board considering their 2018 budget, be mindful as to how your budget is structured and the assumptions that underlie the projections.

* Have you structured your budget so that accommodation strategies have been clearly communicated to management?

* Do you fully appreciate the strategy behind your pricing of RADs and DAPs?

* Are you ready for a major property market correction and did this influence the RAD/DAP targets you approved?

A good accommodation strategy is certainly one way that aged care organisations can take the pain out of ACFI cuts. For many, its more than asking for a bigger RAD, its about tailoring the solution to your individual needs.

If you would like assistance with your accommodation strategy, we’d be pleased to help.

 

Ken Ridgwell and David Ettershank are founding Principals of aged care consulting firm Outcomes Plus.  To view their full credentials click here.

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