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Avoiding 2018 Aged Care Budget Shocks

14 Feb. 2017

By Ken Ridgwell and David Ettershank – Principals Outcomes Plus

It’s coming up to that dreaded time of year again when most finance and management executives become consumed in preparing the organisational budget. While it’s easy to say that the coming year will be one of great challenges and uncertainty, this is increasingly the “new normal” for the aged care industry.

This paper is Part 1 in a series to be released in the coming weeks that examines some of the issues facing aged care Management and Boards. In this first paper we briefly look at EBITDA projections in an environment of Commonwealth funding cuts and long term fiscal deficits.

 EBITDA Projections and funding cuts

Every year we at Outcomes Plus take great delight in reading the Aged Care Financing Authority’s report card on the financial health (or otherwise) of the aged care sector. (Yeah we know – we really should get lives). Many executives take great joy in seeing that their organisation has exceeded the average EBITDA of their competitors but in reality, are they being misled?

The budget funding cuts announced by the Government for residential care seem to be making quite an impression. We have seen quite a few articles over the last few weeks about ways in which aged care providers should be thinking about maximising accommodation payments to offset the impact of these cuts.

While there is logic in this approach, the first question we would ask most providers is about their understanding of their own business.

+ Do they really understand what is driving the surplus (or deficit!) in their business?

+ Do they know what they should be achieving financially from their services?

It is true that every aged care business is different – which is often the excuse used by management when things are going badly (or at least not as well as they might). Industry benchmarking studies are now giving operators useful data about the financial performance of their business by drilling down to specific cost and profit centres. Information at a higher level is also available from bodies such as the Aged Care Financing Authority.

While there has been an improvement in the amount and reliability of information available, this is often not reflected in the quality of reporting being made to Boards. One needs to look no further than the monthly reporting of EBITDA. In the past, it has been relatively simple to look at EBITDA as a single figure and reporting it against budget or a benchmark industry average. In our view, few organisations take advantage of all the information they have to improve this reporting.

For example, how many residential aged care operators recognise the insight they can gain by splitting their EBITDA results into care and accommodation services? They may be surprised at the impact that ACFI cuts are having on their care service results while at the same time, their accommodation services are benefiting from the dynamics of the property market. Overall, the opposing fortunes of each part of the service may be disguising important underlying dynamics.

The following graph, which has been reproduced from the Stewart Brown 2016 report shows just how volatile the “care result” has been.

Source Stewart Brown Aged Care Financial Performance Survey – Residential Care June 2016
Source Stewart Brown Aged Care Financial Performance Survey – Residential Care June 2016

 

Interestingly, every time the Government starts to pay out too much the rules or the funding tool usually changes. The recent funding cuts are a very good example and looking at the trend lines above, care results are due to take another dip.

How many providers reflected this in their Board reporting? Not many from our experience.

At Outcomes Plus, we undertake a lot of organisational reviews and have found this disaggregation of EBITDA results to be one of the more useful tools we can employ to better understand a service and enhance its performance.

In the next instalment, we’ll look at the home care market and the impact that reforms might have on providers after February 2017.

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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