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The residential aged care industry is shared by three sectors – Government regulating the supply and funding for aged care services, aged care facilities providing care and accommodation, and frail and older Australia looking for the care and respect they deserve.

It’s obviously not shared by the article “The dead hand of Government in aged care reform” in September 12th Australian Financial Review by Julie McStay, who is a Director at Hynes Legal and leader of their national aged care and retirement living team.

If aged care providers were not intent in finding holes in the Living Longer Living Better (LLLB) legislation, reforming accommodation payment regulations, or the intent of the reforms and the legislation, owners would not have found themselves in dispute with Government.

If we go back to the reforms initiated by the previous Labor Government, we saw that a contribution paid by residents (retentions drawn from the Bond) would no longer be available to providers, and instead the Bond became fully refundable(known as the Refundable Accommodation Deposit or RAD). Providers were also given the discretion to set RADs up to $550,000, with higher amounts needing to be approved by the Pricing Commissioner. The industry quickly adapted by increasing the cost of the accommodation, with many RADs moving from around $350,000 to the maximum allowed without requiring Government approval.

Retentions previously gave providers around $4,000 per annum in additional funding, whereas the increase in room pricing of $200,000 amounted to about $12,000 per annum when used to offset debt.

Government was advised 12 months ago about the first of additional fees being charged to residents under the guise of Refurbishment/asset replacement by Japara Aged Care. Unfortunately it failed to realise the potential explosion by other providers, with decisions taken by Regis and Estia earlier this year to follow Japara.

What needs to be made clear is that these providers activated or decided to activate these charges prior to the Budget announcement of a reduction of $1.2b in care funding under the Aged Care Funding Instrument. These increases to residents were not as a result of the Government’s Budget announcement.

Eventually another five for-profit providers took up the same charge upon residents, which led to the Government’s clarification.

The provision of funding to meet the cost of care comes from two sources – Government and the consumer. Perhaps the aged care providers and their member associations should understand that Government is not an unlimited source of funding, and should be arguing for an increase in user contribution by adjusting the calculations and annual/lifetime caps accordingly.

The other fee clarification announcement related to services provided additional to those specified in the Aged Care Act. The intent of LLLB in regard to additional services was to highlight the longstanding provision of the Aged Care Act that providers have the option to charge fees for additional services on the condition that residents agree and have the option to opt in/opt out of receiving the additional services such as newspapers, wine, Foxtel etc.

Prior to July 2014, about 15,000 bed licences allocated to providers were used to charge for “extra services”, and the Government was paid 25% of the charged fee. In order to circumnavigate this, providers handed back their licences and substituted “extra services” with “additional services”, with many new residents unable to opt in/opt out, and paid for services they never received or were capable of using.

Consumer protection is vital. The decision to enter to aged care is often taken within days of a sudden event and the ingoing residents and their families have difficulty in not only understanding rules and regulations of aged care, but also the fundamentals of funding the future needs. Sales staff (admission co-ordinators) are trained to maximise the potential return of each inquiry.

Less than 10% of residents would have a total understanding of the future cost of their care and accommodation, and their families are trying to understand all of the interfacing considerations and decision making within days of potential entry. It is Government’ role to provide the protections for its elderly.

The IPO listing of three companies has been led by hedge funds and private equity investors. All are looking for a return on capital greater than other participants, with those returns being sought over a short timeframe and not as a long term investment.

Investment strategy seeking growth and profitability can often run into liquidity problems, with some companies unable to meet payments when required. Government has grave concerns over the potential of any provider not been able to repay Refundable Accommodation Deposits, as it provides a Guarantee for the return to the resident’s estate if such an event occurred.

No other industry receives interest free lump sum payments from clients to assist with the cost of running the business. The Roadmap clearly indicates there will be consideration towards the removal of the Government Guarantee on the repayment of the lump sum to the resident or their estate. It is becoming clearer that Daily Accommodation Payments may be the only option.

The cost of accommodation and care must be jointly shared by Government and residents, with user contributions increasing overtime. But it is the Government who must provide the parameters, for the protection of the frail and elderly whose decision to enter care is often taken under duress of leaving home or hospital and knowing they will never return.

Paul Dwyer is a Credit Adviser in aged care lending.