Respected aged care accountants StewartBrown will issue their latest Support at Home impact analysis tomorrow (Tuesday 3 December) – and it is a must-read.
The five-page report shows the margin for direct care services will need to increase dramatically from 1 July 2025.
The analysis states the Operating Result needs to jump from $2.76 per day to $7.94 (an increase of 187%), and the Operating EBITDA per package per annum needs to increase from a national average of $1,210 to $3,102 (an increase of 156%) to deliver a responsible 9.5% return on revenue.
StewartBrown says a 9.5% return would ensure home care is ‘investible’ and ‘sustainable’.
They have provided this chart based on four scenarios, up to a 9.5% return:
From three revenue streams to two
Currently, home care providers have three sources of revenue:
- Services (direct or brokered) – on average 69% of total revenue according to StewartBrown;
- Care management – on average 18.6% of total revenue; and
- Package management fees – on average 12.4% of total revenue.
Under Support at Home, there will be just two streams of revenue with package management rolled into the new service prices – due to be out in draft this month and in their final version in February 2025.
The Government also revealed in September it would cap care management fees at 10%, which was not a recommendation of the Aged Care Taskforce – down from the current 20% cap.
StewartBrown forecasts this will reduce revenue for operators by up to 10% depending on what the provider is currently charging though some of this difference may be returned in the price set for each service by the Independent Health and Aged Care Pricing Authority (IHACPA).
“The immediate financial implications of these changes could be significant, and adversely affect the financial sustainability of providers should the service prices to be set by government not fully compensate providers for those lost revenue streams,” states the analysis.
Direct services and increased margins key
Based on StewartBrown’s modelling, operators would need to increase their current revenue from direct services from 69% to 88.4% to maintain the current 3.5% average margin for home care – see Scenario 1 below.
The gross margin on service delivery would need to rise from 12.2% in FY24 to 31.5% to maintain current margins.
To lift the sector to a more sustainable return of 9.5% on revenue, revenue from direct services would need to be lifted to 89.1%, with the gross margin required to jump to 36.2% (Scenario 4).
“For the sector to continue to grow and meet the future demand and desired levels of service, it not only [needs to] remain sustainable it needs to achieve a return that is considered 'investible' (a point referenced by Aged Care Minister Anika Wells). The current average of 3.5% profit margin is considered to be insufficient to meet this criteria," the report underlines.
At StewartBrown’s Aged Care Finance Forum in October, Managing Partner Stuart Hutcheon had flagged that the margin in service prices would need to be around 40% to maintain the current margins in home care.
Given home care recipients will now be required to contribute to the cost of lower-level services such as domestic assistance and gardening (see below), StewartBrown notes there is a risk there will be a decline in these services which typically make up a major part of providers’ services.
For example, if a care recipient needs to pay more for their cleaner under their Package, they may opt to hire a cleaner for a lower price outside of their funding.
“I think those higher-level clinical care services will have to go up 60 to 70% because operators will not be able to achieve a 36% increase from those lower-level services,” Grant told The Weekly SOURCE.
“To compensate, you will need to attract a much greater margin for those services.”
Is there a solution?
StewartBrown notes that providers, IHACPA and the Government will need to take into account the mix of services when assessing prices to ensure financial sustainability is achieved.
The accountants also point out that the Top Quartile of home care providers have seen declining margins in recent years, with 40.2% of operators not in the Top Quartile running at a loss.
“The Bottom Quartile has an average operating loss of $10.62 per client per day. If the Bottom Quartile results improved to be at least a breakeven level, the overall average result for the sector would increase to a surplus of $4.35 pcd (5.55% margin)," concludes the analysis.
To reach these margins, Grant is advocating for a floor price to be put in for home care services – rather than a maximum price – to ensure care recipients are protected from price gouging and operators can remain viable.
Will the Government and IHACPA factor these findings into their thinking on the home care price list?
