Aged Residential Care Service Review II

Overview
In 2010, New Zealand Aged Care Association (NZACA) partnered with the New Zealand Government to undertake the largest review of the aged care sector in the country’s history. The Aged Residential Care Service Review (ARCSR) study provided a comprehensive insight into sector resourcing and the key future influences on supply, demand and viability within the aged care sector.
NZACA commissioned a follow-up review in 2014 (ARCSR II) with a focus on the cost of delivering aged residential care services and trends since the original study. Consistent with the 2010 research, over 60% of New Zealand’s homes participated in the study (386 facilities) with a strong representation of services and sectors.
The following provides a summary of the findings from the updated research conducted by Ansell Strategic, Grant Thornton and NZACA.
Executive Summary
The research demonstrated a high level of responsiveness from the sector to the changing needs of consumers across the country. New Zealand is now recognised internationally for its contemporary integration models across retirement living, home care and aged residential care.
The study confirmed provider feedback that residents are presenting with increasing levels of functional dependence and this is being reflected in the level of resources required to care for people across dementia, rest home and hospital services.
The financial modelling of services operating in modern, contemporary environments revealed that operating costs had increased 17% since the 2010 study and the costs of construction for new homes had grown by 15%. Subsidy increases, particularly for dementia services, have helped to defray escalating costs, however, the study shows that net returns to operators continue to be inadequate to support the cost of building new facilities (the Investment Gap).
Research by Deutsche Bank estimates that even the top performing operators in New Zealand fail to make economic returns at less than 8.4% return on invested capital. The ARCSR II research demonstrates that post tax returns of at least 11.1% is required to encourage investment in new homes.
As a result, almost all homes built over the past decade have been a part of collocated villages to spread the facility construction costs across a wider cost base. Modern homes also generally levy “extra charges” to cover the increasing costs of meeting the demands of an increasingly frail cohort with higher expectations in relation to accommodation and service quality.
Two-thirds of New Zealand facilities are over 20 years old and new supply has grown at just 1.2% per annum over the past 5 years (excluding Canterbury). The Ministry of Health’s forecast models indicates that a severe shortage of supply will exist by 2022 if current growth rates are not increased. Others within the sector, including Ryman Healthcare, have projected the shortfall to come as soon as 2018.
Addressing this predicament will require a review of the country’s aged care policy and funding arrangements. In particular, there is a clear need for greater flexibility in relation to resident contributions and choice, and an improved allocation of subsidies to the areas of highest need.
Key Findings
Providers completed surveys on the financial and operational performance of their facilities. These were combined with site visits and interviews with operators and their advisors. The following is a summary of the key findings from the analysis of survey results:
Service Types and Building Profiles
With advancements in home care and retirement living services, aged residential care is progressively moving to high care/hospital level models and few stand-alone rest home level facilities remain.
Much of this change has been facilitated through the conversion of existing older homes. As described above, the investment gap on new facilities makes
it difficult to justify stand-alone greenfield developments and approximately two-thirds of New Zealand’s aged care facilities are over 20 years old. As resident acuity levels increase over time, it will be paramount that building stock is replenished to meet modern standards.
Around 80% of aged care developments over the past 20 years have been undertaken by the For Profit sector and the vast majority are collocated within a retirement village. The presence of a care facility within a village is viewed positively by most prospective purchasers of units and collocation can help offset the large capital investment and low returns from aged care operations.
Room sizes and resident amenities within facilities have increased over time with an average internal bedroom area of approximately 15.4m2 (excluding ensuite).
Consumer expectation for space, privacy and choice are reflected in the design of modern homes and this has an impact on construction and operating costs as described below.
Occupancy Levels and Staff Resourcing
As projected in 2010, analysis of the 2014 survey data showed a short-term decline in the occupancy for aged residential care services. For dementia services, the drop relates to the increased development/adaption for dementia beds since the last survey. The research found that the majority of expansion and redevelopment was in response to increasing demand and funding for dementia services.
At the facility level, the changing demand profiles are also reflected in the dependency levels of residents and reducing lengths of stay, particularly within rest homes. An analysis of roster information supplied by survey participants revealed a material increase in staffing across the service types, primarily for nurses and caregivers. This has resulted in low, stagnant financial performance and a continuing investment gap, constraining infrastructure investment outside of dementia care.
The levelling of substitution of home care and retirement living services for aged residential care has now reached saturation and demand levels are now increasing.
Extra Charging
The research reveals an increase in the number of facilities with “extra charge” contracts where accommodation and service offerings exceed ARC contract requirements. Approximately 62% of participating facilities provided this offering, however, most provided a choice of extra charge and standard contracts within the facility.
Despite a continued increase in the level of “extra charge” services, the profitability of these facilities was generally not greater than non-extra charge homes. The survey confirmed that the additional revenue from these charges was generally offset by the higher operating costs associated with larger floor areas, common amenities and additional resident services.
Financial Performance
The financial performance of providers was again surveyed at the level of earnings before interest, tax, depreciation, amortisation and rent (EBITDAR). The net performance of the majority of services remained consistent with the 2010 survey results with the exception of dementia services which have received the bulk of funding increases.
Escalating operating costs are the most significant contributor to the continued low financial performance, particularly in the areas of care staffing and catering. These expenses have grown much faster than inflation because of increasing functional dependence levels among residents and higher expectations in relation to food quality and options.
The survey concluded that based on expected capital costs for new homes of between $197,300 and $216,600 per bed (including land and fit out), financial returns investment in stand-alone facilities is sub-economic in light of the financial returns described above.
Conclusion
As projected in the 2010 research, the substitution of aged residential care by home care services has helped to balance demand and supply despite the low levels of investment in new homes across New Zealand. However, Ministry of Health statistics shows that the growth in the number of older New Zealanders, and the increasing frailty among this demographic, will cause
an acute undersupply of aged care beds if investment in new capacity is not forthcoming in the short term.
This will require greater flexibility in resident contribution arrangements and an improved allocation of subsidies to areas of need. Although Australia has lagged behind New Zealand on aged care policy, the recent Australian aged care reforms introduced in 2014 are having a positive impact on investment levels through lower levels of price regulation and increased choice for consumers.
In the light of these findings and wider economic conditions, it is timely to review Government policy and funding arrangements for the sector and to consider the measures
necessary to prepare the country for the unprecedented number of older New Zealanders who will soon require support.
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