Thousands of cases of patient neglect and abuse in Australian nursing homes will come under the microscope this week as the royal commission into aged care gets underway in Adelaide.
When the the veil was lifted on the maltreatment of the elderly by the ABC’s Four Corners program and others it sparked a public outcry and prompted prime minister Scott Morrison to announce an official inquiry.
The shock revelations left the industry reeling, with investors scrambling to make sense of what the inquiry might mean for the future of aged care.
The inquiry (as well as most Australians) will be focused on the confronting and important questions about how we treat our elderly.
But for investors in the sector and those that work in it, the royal commission will also undoubtedly have a major impact.
The two issues might seem far removed. But the difficult balance between caring for patients and protecting revenue is at the heart of the problem for the sector.
“we can only assume a royal investigation into aged care can get very, very ugly”
What we do know by now is that investors have good reason to be concerned.
During the first six months of the financial services royal commission, the four major banks saw shares fall up to 15 per cent as investors dropped out of the besieged sector.
And where the last commission received plenty of (warranted) outrage from the public, aged care has the potential to wring an even bigger emotional response.
It’s a scenario that Rudi Filapek-Vandyk, founder of financial analysis website FNArena, says investors should brace for.
“If we take any guidance from what other royal commissions have brought to the surface, we can only assume a royal investigation into aged care, potentially including retirement homes, can get very, very ugly,” he says.
The stockmarket seems to agree with Filapek-Vandyk’s sentiment.
On the Monday following Morrison’s announcement into the aged care commission last year, the sector’s largest listed company, Estia Health, plummeted by a staggering 19 per cent.
Second and third on the list, Regis Healthcare and Japara, both dropped by 17 per cent.
Then in a double whammy, Macquarie analysts downgraded both Estia Health and Japara just days later – citing the likelihood of rising compliance costs and narrowing profit margins.
Those stocks have to yet to recover to their previous highs.
Australia’s ageing demographic has long been upheld as a no-brainer for backing aged care.
With the number of Australians aged 65+ expected to double by 2054, the $20 billion sector is predicted to grow by five per cent annually over the next five years, according to IBISWorld.
“It’s not adequate to rely on the idea that an ageing demographic is going to be good”
But the industry has been under pressure from what it says is a serious lack of funding.
A senate inquiry in May last year saw peak organisations calling for immediate financial aid as understaffed aged care facilities face increasing stress.
Investment may be flooding out of the industry at the worst possible time.
And it’s expected to stay in the “in the dog house” for some time, in Filapek-Vandyk’s view.
“As an investor, there are much better places to find return, so why stick around?,” he asks.
No clear direction
The real problem for investors is the lack of clarity around what regulation will come out of the commission, according to fund manager Roger Montgomery of Montgomery Investment Management.
The sector already faces stringent regulations on the number of patient beds that are licensed, what operators can charge and how many operators are allowed to exist in any one area.
One of the fears is that the commission could compound these problems.
For Montgomery, that alone places the sector in the ‘too risky’ basket for the time being.
“You don’t know how it’s going to change. You don’t know what it’s going to look like in the long run,” he says.
“I don’t seethis as being a positive for investors in the industry”
“It’s not adequate to rely on the idea that an ageing demographic is going to be good. You need to think, yes, the demographics are positive and supportive, but what will the legislation be and how will it be managed? That’s a question I don’t think anyone can answer long-term.”
“We might even see that regulatory bodies are insufficiently funded and that some kind of levy is imposed,” he says. “So, I don’t see this as being a positive for investors in the industry.”
An end to regulation?
Ian Yates, chief executive of Australia’s Council of the Ageing (COTA) argues the commission might actually result in less regulation.
COTA and other industry bodies have long been calling on the government to ditch rules that prohibit operators from competing for customers in another’s territory.
This lack of competition has been blamed for the low-quality services provided since there’s little incentive for underperforming companies to improve.
Yates points to the financial services commission as an example.
“The banking royal commission is saying it’s not convinced that more regulation is the answer. It’s looking at a different way of working and a different structure for the industry,” he explains.
“Similarly, in aged care, it might be that some regulation actually comes off.”
Many of the predicted changes have been in the works for years.
In 2012, the government rolled out a ten-year aged care sector reform plan to improve standards for both businesses and patients.
Last year, Morrison appeased concerned industry bodies by promising the old plans would go ahead as scheduled.
“There’s the potential for the commission to be a bit of a circuit breaker on some of the structural and funding issues,” says Yates.
“Things like the constant chopping and changing on funding arrangements, the lack of clear commitments to reforms that have been recommended time and time again.”
He hopes the commission will lead to the adoption of an improved funding model that will see a better regime of consumer contributions.
“Those are the kinds of changes that would make aged care much more attractive for investors, and I think they’re a highly likely outcome.”
The future of aged care
A report by the Department of Health suggested we’ll need to triple our aged care sector workforce to almost one million over the next three decades in order to meet demand.
The residential aged care sector alone will need a further $35 billion to cater for the added weight of the ‘boomers.’
That’s likely to mean more thorough guidelines on patient care, more skilled staff and an overhaul of housing and bed supply rules.
“we will have unprecedented demand going forward for higher quality service compared to the past”
This, along with the fact that future generations will demand a better quality of life than previous groups, should put aged care reform at the forefront of policy, says Yates.
“One of the fundamentals of the aged care industry in Australia is that we will have really unprecedented demand going forward for higher quality service compared to the past,” he says.
“The numbers coming through over the next couple of decades will increasingly be people who have more and more resources to add to what the government provides.”
If there’s one thing we can bank on, it might be this:
“As with pretty much every other industry touched by the baby boomers, they’ll change the rules so that when they’re in that position it won’t be the same. It’ll be better,” Montgomery says.