Five things hitting the Australian aged care sector

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Australian Economy

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Recently, stocks from the Aged care sector including Estia Health Limited and Japara Healthcare were seen to have borne the brunt of the Australian Government’s move with regard to the sector based reforms and funding. Through this article, let us understand the aspects that have been hitting this sector for quite some time:

 Government’s outlook: The Australian aged care sector is so contingent on government handouts and is facing pressure given the ongoing changes in the regulations and the policies. Accordingly, highly valued health-care stocks are at risk especially because there is a lot of pressure in the environment in which the government is looking for savings in the health-care sector.

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Main aged care industry stakeholders (Source: Cepar)

Government is seeking efforts for cost savings: The Federal government currently pays a fixed daily amount per resident plus extra funding for residents who require more attention. The government had outlined a $1.2 billion funding cut and increased scrutiny for the sector in the 2016/17 budget. This slash is possibly due to higher than expected growth in expenditure coupled with intentions of maintaining the ongoing Medicare benefits for a further two years. By freezing the Medicare benefits, the government would save $925 million until 2018-19. A further $66 million would be cut over four years using “enhanced data analytics” to decrease “fraud, abuse, waste and errors” in Medicare. The government has also planned to reduce the indexation of the complex healthcare component of the funding instrument by half, while establishing a $53 million “transitional assistance” fund. However, the government would spend a further $10m on surprise compliance visits to aged care homes until June 2017.

Tighter rules on fees for services and refurbishments: The Aged Care Act 1997 regulates the amount of fees that aged care providers would be able to charge their residents. But, the Australia’s Department of Health has reported several payments which are not permissible under aged care legislation in future. This includes the fees that does not provide a direct benefit to the residents, or services that are part of the normal operation of an aged care home. As per the guidelines the fees for items like maintenance inside and outside the aged care home are not permitted. Repairs or refurbishments required on the back of normal wear and tear and capital costs are also not included. The legislation tells that the fees cannot be charged to the individual where the fee does not provide a direct benefit to the individual or the resident. Services required to be delivered as part of a provider’s responsibilities also cannot be charged. Moreover, the fees charged for ‘other care or services’ must be agreed with the resident beforehand and the provider must give the resident an itemised account of the other care or services. If the fees for the additional services are not included in the resident agreement, then the providers should ensure that residents are given a list or schedule of the services available and the cost of each item. Therefore, it is a provider’s responsibility to provide residents with an itemized account and this should be provided for each period in which the resident bought goods or accessed services. In addition, the fees for ‘other care or services’ can also not be charged unless the resident receives a direct benefit or has the capacity to take up or make use of the services. This differs from extra service fees that are charged for rooms within aged care homes (either individual rooms or across the home) that have been granted extra service status by the department. Extra service fees are for higher standards of food, accommodation and hotel-type services but not for care.

Directly impact earnings of the operators: The major operators in the sector are said to be levying fees of $15 a day including all similar capital charges, as of now. However, with the new guidelines, these firms’ earnings would be under pressure. Going forward, these companies’ performance would depend on their efforts to revamp growth track.

 Stocks pressure: Given the ongoing challenges in the Australian aged care sector, the stocks under the segment have been facing the heat. Estia Health stock has lost more than 56.6% during this year to date impacted by the investor’s concerns on its funding from the government. Moreover, the shares of Japara Healthcare have been down about 40.8% during this year to date while Regis Healthcare has fallen over 43.1% (as of September 13, 2016).

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