Key points

• The Royal Commission into Aged Care Quality and Safety delivered a damning assessment of the nation’s aged care sector, in particular its weak regulation and ineffective governance. The federal government has now started to implement the recommendations from the Royal Commission.
• Macro factors including COVID-19, increasing regulatory compliance costs, staff shortages and wage pressure continue to negatively impact the sector.
• Aged care organisations will need to be flexible and adaptable to prepare themselves for the challenging macro and regulatory environment in the aged care sector.

The federal government has taken the first step in a sweeping reform of the aged care sector in response to the Royal Commission into Aged Care Quality and Safety by enacting the Aged Care and Other Legislation Amendment (Royal Commission Response) Act 2022. Aged care providers and lenders will need to ensure that they are informed of and are prepared for the changing regulatory landscape of the aged care sector in 2022 and beyond.

Here are five key agenda items for aged care providers and lenders to consider. 

1. Royal Commission and Law Reform

In March 2021, the Royal Commission delivered its Final Report containing 148 recommendations, including the introduction of an independent inspector-general to monitor and investigate governance, higher prudential standards and greater oversight of those holding management or director roles.

Of the 148 recommendations, 141 were taken up by the former Coalition government.

In August 2022, the Labor government enacted the Royal Commission Response Act, the first step in implementing some of the recommendations from the Royal Commission. The key objectives of this legislation include:

1. the implementation of the new Australian National Aged Care Classification (AN-ACC) funding model
2. the introduction of a new aged care Code of Conduct
3. the strengthening of governance of aged care providers
4. the expansion of the functions of the renamed Independent Health and Aged Care Pricing Authority

The legislation will enact parts of Labor’s $2.5 billion aged care plan, released at the start of the election campaign. Labor’s plan, consistent with the recommendations of the Royal Commission, includes:

1. mandating that every aged care facility must have a registered nurse on duty 24 hours a day, seven days a week
2. developing mandatory nutrition standards
3. toughening the regulatory regime, including giving greater powers to the Aged Care Quality and Safety Commission to ensure providers adhere to standards such as to require aged care providers to report on basic needs and nutritional expenditure
4. mandating that every resident receives a minimum 215 minutes of care a day, being 30 minutes more than the current standard
5. funding a pay rise for aged care workers should the Fair Work Commission agree to a 25 per cent increase in wages for the sector

It remains to be seen whether the Labor government will introduce some further reforms of its own that were not featured in the report of the Royal Commission. 

2. Compliance

In 2019, a more rigorous aged care accreditation process was introduced. There has since been a steady trend of increasing compliance costs to aged care providers. This upwards trend is expected to continue.

The Aged Care Quality Standards provide a framework of core requirements for quality and safety. Some Standards will apply differently to organisations, depending on the types of care and services they provide. The following eight Standards have been introduced:

1. Consumer dignity and choice
2. Ongoing assessment and planning with consumers
3. Personal care and clinical care
4. Services and supports for daily living
5. Organisation’s service environment
6. Feedback and complaints
7. Human resources
8. Organisational governance

The Aged Care Quality and Safety Commission is the statutory authority that accredits, and monitors Commonwealth funded residential aged care facilities to ensure they comply with legislated Standards and organisations are required to demonstrate performance on an ongoing basis.

The Commission may act when providers do not comply with relevant legislation, standards or the provider’s funding agreement.

For example, the Commission may issue a Notice to Impose Sanctions and Notice of Requirement to Agree to Certain Matters. The provider must agree to a series of actions to avoid the imposition of a revocation sanction under section 63N of the Aged Care Quality and Safety Commission Act 2018. The series of actions often involves training, regular reporting, close monitoring and the appointment of an independent adviser at the expense of the approved provider. Sanctions are generally in place for a six-month period.

If a revocation sanction is imposed, then a provider is prevented from admitting new residents. This will shortly give rise to cash flow issues for the provider since as residents depart, the provider has to fund the refundable accommodation deposits (RAD) withdrawal without an incoming RAD deposit as would ordinarily be the case if the provider were able to take on new residents.

3. The ongoing impact of COVID-19

COVID-19 has had a dual negative impact on aged care providers.

Firstly, COVID-19 has seen an increase in deaths and a reluctance in Australians to bring their elderly family members to take up residency for fear that the provider will undergo periods of lockdown. This has meant lower occupancy than normal. Pre-COVID-19, occupancy was generally no less than 90%. Now occupancy rates have dropped to about 80%.

Secondly, COVID-19 has meant that providers are experiencing staff shortages. Lack of immigration also impacts negatively on the industry. Whilst government is prepared to now grant more 457 visas, the processing time and paperwork requirements are causing delays. Aged care has to compete with the broader medical services sector, and often it is the last to be able to fill roles with medically qualified personal. Staff agencies are also under pressure as they cannot meet demand from providers for short term or causal staff.

Regional and small providers are most at risk, as they find it difficult to retain appropriately experienced and qualified staff. Small operators (less than 60 beds) may not have sufficient economies to fund the increasing compliance costs. This may mean that small regional providers close their facilities. Older facilities are also at risk of becoming non-economic as they find it difficult to attract new residents.

Simultaneously with staff shortages, providers are also dealing with increasing pressure on wages, relevantly:

1. aged care workers saw a 1.7% increase in income from the government, compared to the 3.5% wage rise approved by Fair Work Australia for the industry
2. wages are about 70% of operating costs, so even if all other cost and income items remained static, providers would be going backwards each year

4. Early warning signs for providers and lenders 

Faced with rising wage and compliance costs in an uncertain and rapidly developing regulatory landscape, providers and lenders ought to be on the look out for some of these early warning signs:

1. In relation to accreditation, this is generally given for a three-year period. If accreditation is only afforded for a shorter period, this may indicate that the provider has compliance issues or staffing shortages
2. A single failure to meet requirements of a Standard is not cause for alarm although Standards 2 and 3 are more important from a lender’s perspective. However, multiple “not met” notifications is cause for concern
3. Providers should carefully monitor the number of shifts that are vacant and to compare wage costs on a year-on-year basis
4. The Commission will generally schedule a visit each site annually but may conduct unannounced site visits on a more regular basis. Providers who are under lender review ought to be asked to provide a copy of the outcome of the annual site visit
5. Providers nationwide must lodge financial accounts electronically with the Commission by the end of October in each year. A copy should be available for the lender’s review shortly thereafter. Reform this year is expected to include a requirement for quarterly financial reporting to the Commission. The financial reports should include commentary about the provider’s ability to meet forecast RAD return commitments

5. Future-proofing your organisation

Aged care organisations will need to be flexible and ready to adapt to the many issues the aged care industry is facing now, and the sweeping reform which has now started to take place under the Labor government.

Organisations should ask themselves:

1. is the provider at risk of insolvency? At-risk organisations should obtain urgent legal and financial advice and consider the options available to them including restructuring and safe harbour
2. should the provider be looking at consolidation? Not for Profit providers have an advantage over the private sector in that they do not pay payroll or fringe benefits tax. The last two large sales involved Not for Profit providers acquiring private sector operators. Consolidation may also be a pathway for smaller providers at risk of insolvency to continue providing services albeit as part of a larger provider. This may provide a better outcome for staff, patients and other stakeholders
3. has the provider recently reviewed its key labour contracts? In this challenging employment landscape, providers need to review their key labour contracts to ensure that their organisation remains attractive to existing and new talent
4. has the organisation informed itself of the aged care sector reforms in 2022 and beyond? Prudent organisations will be looking at an early stage to inform themselves of the developing regulatory landscape and consider what operational, structural and financial changes are needed to future-proof their organisation

Get in touch for expert assistance

Should your organisation need any assistance with regulatory advice, solvency reviews, key contract reviews or preparation for consolidation, please feel free to reach out to us.