In this year’s Budget, the Government needs to give serious consideration to bridging the gap between investment and return for those looking to build new aged care facilities.

In 2010, the Grant Thornton Aged Residential Care Service Review predicted that by 2026 between 12,000 and 20,000 new residents would require aged residential care. It predicted the need to increase new beds in the sector by between 78% and 110% by 2026 to accommodate this increased demand and to replace aging facilities.

Approximately half the current aged care building stock is now over 20 years old. While the expected upswing in demand heralded by our 2010 study was not predicted to start biting until 2014, the timing of the report meant there was a three-year window to start tackling the problem. That window is rapidly closing and building new aged care facilities is now increasingly about playing catch up rather than being ahead of the demand curve.

Since 2010 we have seen some new aged care beds added in the sector, particularly in conjunction with new retirement villages seeking to offer residents care in a retirement village setting. The number of facilities that now charge residents premiums for services has also grown as operators respond to resident demand for greater choice. New offers around providing care within a retirement village contractual model have also been bought to market. The Not for Profit sector continues to invest in aged residential care facilities.

The debate around meeting future demand needs to be considered by the various segments of the market. Most of the above examples of new supply have an element of user pays that means that the return to the operator is superior to that from a pure subsidy-based stand-alone aged care facility. That return helps to justify the investment required to provide new capacity to the market. These facilities cater for those that can afford to pay extra.

But what about those people that cannot afford to pay extra? Many New Zealanders will reach the time they require aged care services without a large nest egg. Will there be aged care facilities for those people?

A large number of stand-alone facilities have closed since our 2010 report. This is not surprising given the review identified a significant number of operators who were not viable at the current level of subsidy funding. These facilities were most likely not charging premiums or part of a retirement village. The facilities that replace this capacity will need to provide a sufficient return to justify the investment required.

One of the greatest barriers to meeting demand is that current financial returns for aged residential care operations that are reliant on subsidy funding alone are insufficient to support investment in building new capacity and replacing aging facilities. The Government needs to address this issue in the Budget now. The level of subsidy in general will need to increase significantly if this gap is to be bridged. Specific adjustments related to end of life care and dementia should be made.

There are also options around how this capacity can be supplied. Financial structures around the different components of aged residential care services (namely accommodation, hotel and care) and determining the appropriate funder for the different costs could be explored. Australia is developing along an individualised funding model for health that may provide some policy pointers. The Not for Profit sector is playing a part in the development of new capacity and this will need to continue, but this part of the sector is unlikely to be able to build all the capacity required. Looking at a capitation approach for certain geographic areas where there is demand also needs to be considered.

The Budget needs to clearly quantify the impending demand for care for our elderly and establish pricing and policy settings that will ensure that our older generation is cared for with dignity and in a place that we will be happy for ourselves, our parents and our grandparents to live.

Further enquiries, please contact:

Martin Gray
Grant Thornton New Zealand, Head of Lead Advisory, Corporate Finance
T +64 (0)9-308-2983
E martin.gray@nz.gt.com