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Residential and community aged care in Australia

CHAIR —I welcome representatives of the National Aged Care Alliance. Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. The committee has copies of your submission. I now invite you to make a short opening statement, and at the conclusion of your remarks we will put questions to you. Professor Hogan, would you like to make an opening statement?

Prof. Hogan —Yes, thank you very much, Chair. I think there is a growing public recognition of the need for a strategic reappraisal of the policy directions on aged care pursued by successive governments. This is apparent, I think, in two recent public contributions. Last September, the Productivity Commission offered a comprehensive study of aged-care services and the implications of the way trends in the provision of those services were developing. Just recently, the National Health and Hospitals Reform Commission provided an interim report which had much to offer about the provision of services to the elderly. Much emphasis in both reports is laid upon the need for aged-care services to be more responsive to the needs of the users of those services and their families. The issues posed in these two most recent contributions provide an impressive challenge to existing arrangements at a time, as we all know, of very difficult economic circumstances and harsh fiscal prospects.

The issues of choice, then, may be addressed in terms of the funding of aged-care services, which should be directed through users of services and their families just as readily as with present arrangements attaching funding to beds. By the issuing of vouchers to residents and potential residents for the value of their care to be met by government, these users could determine in discussions with the providers of their choice the type of service suited to their needs as perceived by the aged-care assessment teams. Similar provisions would apply as with domiciliary support. The recipients, by taking their vouchers to aged-care facilities, would be then better placed than now to judge the best place in which to secure the level of care suiting their needs.

In the same way, choice is no less important for boards and management of aged-care entities, whether for-profit or not-for-profit. By being able to determine their investment outlays on new or replacement capacity as well as adapting their offerings of care types, including respite, in their facilities, boards and management would be responsive to specific needs of users, which may be seasonal as well as structural. The underlying purpose is for enhanced competition and stimulus to quality, the two going hand in hand.

Thus, the existing regulated procedure for bed allocation should be abandoned, leaving the investment decisions to boards and management of entities providing facilities. They would be responsible for making investment decisions and determining the range and quality of the services to be offered.

Some reservations may be expressed about the applicability of these arrangements in remote and those rural spheres where supporting services are lacking. In these circumstances, there are grounds for implementing an auction system with bids sought on the fiscal support needed for capital outlays and operating budgets where facilities are to be established. This approach has the advantage over the existing administrative bed allocation device, in that existing regional providers and potential newcomers may bid on an equal footing.

Funding investment has to be considered in terms of the fiscal strains inevitable with the current financial and economic turmoil. There is every reason to explore the means to foster investment outlays in the light of the need to expand facilities to meet future demands. Accommodation bonds have been the one flexible funding measure available to boards and management. Accommodation bonds apply in low care and extra-service high care and are perpetuated, of course, in the processes of ‘ageing in place’. Bonds are a form of corporate debt provided by the resident or the resident’s family which are repayable except for some small annual charge, the retention sum. Accommodation bonds are not permitted in ordinary high care. The impact of this distinction is to make investment in ordinary high-care facilities less attractive than any other type of aged-care facility, yet high-care needs must increase relative to low care in coming years, especially so with the greater quest for or reliance on various categories of domiciliary care being a feature of recent decisions by successive governments.

Funding of operations, of course, is no less important than the funding of investment spending. Hence there is every reason that there should be a stress on the provision of pricing adjustment arrangements which call into a contemporary setting measures much more than simply adapting to the existing Commonwealth own purposes outlays system of indexation, COPO, plus the recent capital adjustment provision, the annual adjustment of recent years, coming out of the Myer review. It has to be more than that.

But there is also scope, I would stress, for new approaches. What I have addressed so far are really possibilities of bringing user influences to bear on the existing policy framework in order to achieve a greater responsiveness to users’ needs. What should be explored further are new ways to provide care. This, I think, is what the Productivity Commission and the National Health and Hospitals Reform Commission are pointing to in their writings. Firstly, might it not be timely, now that successive governments have tended to place greater emphasis on domiciliary care rather than residential, to extend the thinking to separate completely the care costs in aged-care provisions from the accommodation costs? Secondly, this tentative possibility could be tested further with placing more independence in users’ hands by adopting possibilities—already in place in some countries, such as the United Kingdom—for cash payments to users and their families whereby they could determine the care services they require. Thirdly, the coordination of care services to assist the elderly in potentially traumatic circumstances might be secured more effectively by closer ties between general practitioner and aged-care services. This would require a degree of flexibility for boards and management for bed use, which is certainly not available under the existing regulated regimes. I think these three possibilities are well worth exploring beyond the reconstruction of our existing arrangements, and I commend them for some attention. Thank you.

CHAIR —Thank you very much.

Senator HUMPHRIES —Do you want to make a statement as well, Mr Toohey?

Mr Toohey —Thanks, Senator, and thanks to the committee. TriCare is the largest private for-profit provider in Queensland and one of the largest in the country. I will keep my opening remarks brief. First of all, I would like to sincerely thank you for the invitation to speak today. I genuinely welcome that opportunity, so thank you for that. Having said that, I do not think I would want to be in your place. Having an inquiry into aged care and the future of aged care is a very daunting and challenging task, and it is so, in my view, for three key reasons. First of all, the political framework from which aged care is viewed is not particularly conducive, I suppose, to a great deal of transparency and openness in looking at the challenges of the future. Generally, aged-care providers are not held in high esteem by the community—I think that is fair to say. I think that, generally, governments of all stripes in the past have found it convenient to adopt more of a highly regulatory oversight approach to the sector as being conducive to what they think the community wants. That is not a good regime, as I said, for an open expression of where we need to go.

The economic framework we are working under at the moment is very tough as well; there is no doubt about that. The funding of aged care is expensive. The numbers in the future are going to be huge. We are not living at a time when any government is going to be necessarily open to putting huge amounts of more money into these types of programs—and that is understandable—so that makes it difficult as well.

Finally, I think that the biggest challenge we face is the demographic one. It is very easy in thinking about aged care and the future challenges to just consider the sheer numbers: there are so many thousands of people now who need aged care, and that will be threefold in 13 years or 15 years or whatever. Just focusing on that tends to distil this argument down to the purely economic, and I think we have to look beyond that. The people we are currently caring for in our facilities are people who had a vastly different life experience from all of us here. They are people who endured firsthand the Great Depression and the Second World War and were able to lift themselves out of those experiences to build the Australia that we know today. One of the factors that we can admire so much from that cohort is their stoicism and generally their fairly low expectations in terms of their daily surrounds and needs. In one short space of one generation, we will be dealing with their sons and daughters, who will regard it as a major problem if the pattern on the throw cushions does not match that of the curtains. The expectational change coming upon us is enormous, and I think that is something we should all consider going forward as well. Thank you very much.

CHAIR —It appears to me from the evidence that is coming before me and from just talking to people in general in the community that this industry is facing the same dilemma that the childcare industry faced. The community’s perception was that if you worked in child care you were just a babysitter. So the shop floor and the union movement had to work very hard to actually get the community to accept that these people who work in the community have a huge responsibility because, in looking after those little ones, they are looking after our future. Likewise, I see this industry is facing some challenges in getting the community to accept the very valuable work that is done. In fact, as you stated, the community has raised our expectations in that we do want everything to be here and now. We expect to have a plasma television and all those accessories, whereas the expectations of my parents and those people from their generation—at least one of them is in care at the moment—are very different. I think changing our expectations is a role for the community as much as a role for government or the industry itself.

Senator HUMPHRIES —I had to have a little wry smile when you made that point, Mr Toohey, about the stoicism of older people. I made very much the same point on ABC radio about a year ago during our inquiry into living standards of older people. I got into enormous trouble for it and I had to end up apologising for insulting older people. You expressed it rather better than I did.

Mr Toohey —I hope I do not suffer the same fate for it, though.

Senator HUMPHRIES —Let us hope that does not happen. Could I start with you, Professor Hogan. Your review some while ago was fairly seminal in setting out the challenges of aged care in Australia. Although, I am sure you would agree, certain things were not done as a result of your review, much was. When you were looking at the aged-care sector in 2003, were you forecasting the sort of position we are in today or has something changed which has depressed the outlook for the sector?

Prof. Hogan —In terms of the population trends there was no question that we had all the information from the Treasury and the ABS of the expectations about the future growth of the population and the growing proportion of people over the age of 70. Indeed, at that time, we were considering—and I was seriously considering—whether or not the issues associated with the provision of aged care should be shifted from the present focus on the population over the age of 70 to predominantly the population over the age of 80. But in the light of the age distribution of the population in residential aged care at that time, age 70 and over was capped.

As far as expectations of funding, I regret that I did not give a greater emphasis to accommodation bonds and the need for that type of flexible funding than appeared in the report. It is easy in hindsight, I am sure you would agree, Senator. Circumstances have now changed greatly. I would stress that the issues about funding, loans to equity ratios and the provision of capital, whether it is in the for-profit or not-for-profit sector, is now a much more serious issue that it was then. There are some basic structural issues which have changed significantly since the time of my report.

I should mention one other feature—that is, that the work that was established then and the survey of the industry was really the first survey of the industry on a systematic basis, trying to get an understanding of what was taking place. It was done on the basis of trying to find a comparative working arrangement between the for-profit and not-for-profit sectors. The only solution to making those comparisons at that time and ensuring that they be fully recognised was to concentrate on earnings before interest, tax and depreciation, EBITDA, so that we could look across those two major categories within the industry. That provision and that basis for comparison remains important to the present day; otherwise one is seriously caught up in the problems associated with looking at how capital is provided and then of course in the not-for-profit sector the issue about endowments, donations and all those sorts of things.

Senator HUMPHRIES —Mr Toohey made the point about the high level of regulation which successive governments have deemed necessary for the sector. I assume we are talking about two sorts of regulation here. We are talking about regulation of the financing of aged care and the regulation of standards in aged care. You would not regard the imposition of higher standards in the regulation of the quality of care and outcomes for treatment of people in aged-care facilities as having significantly added to the cost of aged-care provision in Australia?

Prof. Hogan —I would take the view that the provision of quality and the maintenance of quality in aged care is of paramount importance. How that is conducted is of course another matter. It requires and, I think, rests upon the good sense of those people who are undertaking reviews of quality. Nonetheless, there will always be occasions when issues about quality do arise and they have to be insisted upon. The impact of the quality of regulation upon the conduct of aged care really depends heavily upon the way the appraisals are done in relation to the workforce. I think it is important that it be done in such a way that ordinary members of the workforce do not feel that they themselves are subject to a degree of supervision and involvement which may make them very uncomfortable in their jobs and in recording what they are doing. There is a balance there, I think, that has to be looked at very carefully and requires the application of very good sense on the part of the regulators.

Senator HUMPHRIES —But is the imposition of that sort of regulation as to standards very costly? Is it one of the factors which have added significantly to the cost of providing aged care in the last 10 years?

Prof. Hogan —I do not think it would have added greatly to the cost of regulation. But, in terms of record-keeping and the like, there would be no question that there has to be a very clear understanding between the regulators and the management of aged-care facilities as to precisely what they are looking for as measures of performance. I think that is one of the critical issues at stake, which remains to this day.

Senator HUMPHRIES —Mr Toohey, can I ask you about the evidence given by the department of health in Canberra a few weeks ago. I know you took an interest in what the department had to say to the committee about the issues in this inquiry. You may be aware that the department is providing a supplementary submission to deal specifically with the issues of financial viability, which you and others have raised in their submissions. We do not yet have that supplementary submission from the department.

CHAIR —No, we do not. They are to appear before us on the 21st.

Senator HUMPHRIES —So we will have a chance to explore these issues further. Could I ask you for your reaction to some of the things that were said. The department indicated that, in their view, there was no crisis or emerging crisis in aged-care financing. They point to a number of things to emphasise that point. They said, for example, that insolvency in the aged-care sector is extremely rare. Do you agree with that?

Mr Toohey —In comparison with other sectors, that is probably correct.

Senator HUMPHRIES —Does that indicate that, in your view, there is not a problem? Wouldn’t we expect more aged-care providers to be going to the wall if there were an emerging crisis?

Mr Toohey —I think it is reasonable to say that, simply looking at any point in time and asking, ‘What are the insolvencies now in this sector, compared to other sectors?’ does not give a trend view. I would make the assertion very confidently that there are record numbers of insolvencies in the sector in the last couple of years and they are growing. I do not have statistics on that. I did attempt to get them from the ABS. Unfortunately, I was not able to in time.

Senator HUMPHRIES —You mentioned the ABS. The department made some reference to the fact that ABS figures suggested that there had been no slowdown in the building activity in the aged care sector. They said that the level of building activity in the industry is higher now than at any stage in the decades since statistics have been collected for aged care construction. They cited that as evidence that people are still building beds and that activity is going on. Do you think that that is an accurate measure of the level of confidence in the industry?

Mr Toohey —I think the level of building activity would have to be considered a relevant indicator. With respect to the ABS data I have some additional information, which I received last night, that I am happy to table today. TriCare was fortunate to be involved in an initiative the Brisbane City Council undertook last year to look at the barriers for the reasons that new residential care facilities were not being built in the numbers required within the confines of the city of Brisbane. They did not look at funding and regulatory regimes but rather those aspects of regulation that council had within its control. As part of that exercise—that is what alerted me to this when I read it in the transcript—the Brisbane City Council undertook research into ABS data as well. They reported to the task force that there were, in fact, no conclusions that could be drawn from the ABS data because there was not a specific measurement of residential aged-care facility development.

I undertook some further research on my own and spoke to some relevant officers within the ABS who confirmed that the category that they call aged care has a number of cohorts in it. Some are government funded residential aged-care facilities; some are not. Generally, they consider aged care to be any facility or construction which has a capacity to provide nursing care, meals or common areas. When I dug into that a bit further they informed me that they would regard any retirement village that could provide those as being something designated by aged care. The final aspect that sealed it for me was that they made the point to me very strongly that the ABS itself does not do any validation of the data. It accepts what local authorities tell it is aged care construction. For example, one local authority in Queensland might consider retirement villages as aged care, one in Western Australia may not. For the ABS purposes they are simply lumped into aged care. They do not validate the data.

Senator HUMPHRIES —I know in my own city there is a lot of activity going on with respect to building retirement facilities which people pay for and for which there are no government subsidies. You are saying the ABS data may well include that kind of activity to suggest that there is a high level of building activity.

Mr Toohey —It almost certainly does include that. I was provided with some information last night by the Aged Care Association of Australia, which they had apparently only just received, which is information from the department relating to the proportion of aged care homes undertaking building work. I am happy to table this today. The proportion of homes planning new building work into the future has declined from a high of 10.1 per cent of facilities in 2002 to a low of 3.8 per cent of facilities in 2008. While that has not been completely uniform, it has definitely been a very obvious trend. I am happy to put that on the record today.

Senator HUMPHRIES —Where are those figures from?

Mr Toohey —My understanding is that they came from the Department of Health and Ageing.

Senator HUMPHRIES —Okay. Is that across Australia?

Mr Toohey —That is correct.

Senator HUMPHRIES —I would be very interested to look at those figures, thank you. Talking about construction of retirement facilities as well as aged-care facilities, in the sense that we are talking about it here, I was asking the previous witnesses—I do not think you were here—about the extent to which some providers are actually providing both sorts of accommodation. They are building retirement units, which might be the sort you have buzzers to call somebody from the other facility if there is an emergency, but they are essentially building private accommodation designed for people who are older. In the same complex you might have an aged-care facility, a hostel or nursing home. Are you aware of the extent to which those sorts of facilities are being built on the one campus or being built by the one provider in proximity to each other so that one might end up providing the subsidisation for the other?

Mr Toohey —I will answer that in two parts, if that is okay. Certainly, I could say with a great deal of confidence there is a growing trend to collocate residential care facilities with retirement facilities. Unashamedly from a commercial perspective, it makes a village more attractive to outside consumers if they are aware that there is a level of ongoing care provided. Very importantly, though, from a consumer’s perspective—and TriCare have seen this firsthand; we pioneered this type of thrust about 20 years ago, suggesting there are three levels of high care—people age at different rates. It was a very common experience when an elderly couple would move into a retirement village quite healthy and able to take care of themselves, and there would be a dramatic medical event on one of their parts and they would require residential care. We saw firsthand, generally, elderly women having to get buses or trains to the other side of town to visit a partner they had been with for 60 or 70 years who had to find residential care there. There was a great easing of their minds if they knew that even though they might be physically separated it was only a matter of metres and they could see their partner every day and be involved with their care. So it is very attractive from their perspective.

In respect of the cross-subsidisation, I am probably not the best one to comment. I am aware anecdotally from a lot of providers that that is in fact what they do—they subsidise their residential care from their retirement villages. TriCare does not. We are a successful commercial organisation because we are fairly rigorous in terms of ensuring that each part of our business pays its own way. There is no doubt, having said that, however, that our investment over the last few years has been exclusively into the area of retirement villages or extra service residential care facilities because they are the only places that commercial returns are generated.

Senator HUMPHRIES —The Aged Care Alliance, presumably, could give us of some indication of what the picture is across its members. You might like to take on notice a question about that.

Mr Toohey —Certainly. Happy to do that.

Senator HUMPHRIES —I also do not want to probe into areas of commercial confidentiality. I would like an idea of how many of your members do provide both kinds of accommodation and whether they generally see the retirement villages as subsidising the other activities. I assume that as the residential aged-care sector part of the business becomes less profitable the pressures mount on that. For profit providers there would be a desire to separate those two things and retain a business in the profitable areas and not in the unprofitable areas.

Mr Toohey —Correct.

Senator HUMPHRIES —It would be interesting to see what that level of cross-subsidy actually is. When we were talking to the department in Canberra about what part of the industry was profitable and what was not, it was put to the committee that there is no significant variation in bed types—single or multibed occupancy—in the make-up of the most profitable quartile of the sector as against the bottom quartile. There was other evidence to the committee that suggested that the most profitable quartile was dominated by multibed rooms which are inherently, you would argue—with economies of scale—cheaper to run.

Mr Toohey —Yes.

Senator HUMPHRIES —But the department flatly denied that and said that the single beds were represented in the top quartile as well. Is that your understanding of the situation?

Mr Toohey —I could say, again with a very great degree of confidence, that uniformly across the sector the experience of providers that I have dealt with is that older, multibed ward facilities generate the highest returns because of economies of scale, because the areas are smaller, because residents are collocated in a single room. That is our commercial experience. That is the experience of everyone I have dealt with. In fact, as I have made the point in my submission, I believe that is what the data actually does show. The higher quartiles are dominated by older, multibed ward facilities, the lower by newer, single-bed room facilities. I think a commonsense, rational approach from anyone would consider it odd if it were otherwise, given that the funding provided per resident is the same whether they are in a large single room on their own or a multibed room with three or four other people

Senator HUMPHRIES —Professor Hogan, do you think it is the case that the multibed facilities are more likely to be profitable than the single-bed ones?

Prof. Hogan —On the basis of the evidence from the Grant Thornton survey, with which I was associated, that seems to be a firm conclusion. I do not think there is any doubt about that. The explanation on an operating level for this outcome of course refers to the fact that the questions of maintenance, cleaning and staff movements are much shorter. The cleaning and the like is much less because of the greater concentration of the residents. As a result of that you can understand why there are substantial differences in operating costs.

Senator HUMPHRIES —In Canberra, Dr Cullen said that the Bentley survey showed that in 2007-08, single bed operators made up 51 per cent of the  top quartile. Do you have any comment about whether that would be an indication that single beds are as likely to be represented in the top quartile as the bottom quartile?

Mr Toohey —I actually did not bring the transcripts or the surveys with me, but my recollection is that that in fact is not correct. There was a much greater percentage of multi-bed wards in the higher quartiles than lower, and the definition of multi-bed services is important as well, because I believe that that information was not correct. The Grant Thornton survey defined single bed facilities as those where 70 per cent of the beds or greater were single room beds. I think that there was representation that it was in fact only 49 or 50 per cent. That is not correct. My understanding from discussions with the authors of all three reports, Stewart Brown, Bentley and Grant Thornton, is that single room facilities predominate in the third and fourth quartiles, and in the first and second quartiles it is multi-bed facilities. That was clear across the board.

Senator HUMPHRIES —Yes.

Prof. Hogan —That division of the 70 per cent was the same that I used. We talked about that in my original report in 2003 and the report of April 2004. It was essential to have a significant contribution from one category or another, otherwise one was just simply looking at a whole set of mixed facilities.

Senator HUMPHRIES —Yes, sure. You mentioned that you had been associated with the Grant Thornton report, Professor Hogan. When the committee asked the department about that, the department said that Grant Thornton is the one data source that the department puts the least credence on. Do you think that that is a fair assessment of the reliability of the Grant Thornton survey?

Prof. Hogan —Well, I do not share the view expressed by the department—if that was a departmental view rather than a personal view of a departmental officer. I would find that very difficult because, indeed, the methodology was very similar to what took place under the aged care review of mine. Let me say a kindly word by saying that I find that statement remarkable.

CHAIR —We have asked this of many of our witnesses: what is the relationship between the industry and the department of ageing?

Mr Toohey —I might make a comment there if I could. It operates on two different levels, and they are quite different relationships. At a state level, where we are dealing with the state counterparts of the federal bureaucracy, from TriCare’s perspective it is very good and always has been. I find the local Queensland people we have dealt with, and indeed the people in Victoria who we dealt with during the Salvation Army exercise, very helpful, much more aware of industry developments and, generally, prepared to work with the sector. There is a vast gulf between the sector and between the bureaucrats in Canberra. That is probably as a result of the geographical and philosophical distance from an arcane policy development perspective in Woden and the people actually on the ground providing the care. I think that it is fair to say that there is a perception in the sector that the department has gone beyond simply providing advice to government and has moved into the area of advocating particular policy settlements, such as maintenance of the status quo regardless of what the statistics say. I think that that generally has put a fairly bad taste in a lot of people’s mouths.

CHAIR —And in relation to the ministers office, have you had any contact direct with the ministers office?

Mr Toohey —I have on a number of occasions. I have found the minister to be quite pleasant and open to having discussions with us. We have had disagreements with members of her staff from time to time. I think that it is important to note that the minister, as expected and as should be the case, takes a lot of advice from her department. So I have no doubt that her views are influenced heavily by what her department tells her.

CHAIR —Professor Hogan, do you want to make any comment on the relationship between the industry and the federal department of ageing?

Prof. Hogan —From my experience going back from my review right to the present time, what Jim Toohey said is very accurate. The state offices of the federal department are indeed very close to the activities in their state. In my experience I have found them to be very effective people who are amenable and open to discussion and understanding. They have a clear perception of the problems of implementation. I would certainly like to see the federal offices in the state capitals taking a stronger interest in local government, particularly issues associated with zoning, because the industry needs their support over some of the problems of zoning that arise from time to time in gaining prompt access to approvals for development. But generally I think the state offices of the federal department operate very effectively around Australia. It is very interesting to see that they are very sensitive and understanding of the needs of the operators in their state.

CHAIR —Thank you. Senator Humphries.

Senator HUMPHRIES —When we asked the department about the funding of aged-care facilities, they pointed to a number of decisions made in 2008 to increase the level of subsidy for aged care. They made reference, for example, to the 1.75 per cent and a two per cent lift in the subsidy to deal with the frailty growth among residents. I do not think that they necessarily thought that it was putting industry ahead of the game but that it was at least keeping pace with the rising costs. Do you think that the increase in the subsidy of two per cent for frailty growth is an appropriate response to the cost pressures on the industry?

Mr Toohey —I read that evidence with interest, and I attempted to break down, I guess, the components of the funding increases that were discussed. There was, I believe, a comment or an assertion made that part of the increase in funding related to the growing frailty of residents. I have no doubt that that is correct. However, to point at that as evidence of increased funding, I guess on a very simplistic plain, is correct. In terms of what is actually being provided to residents and the cost of providing it, it is not. As residents grow more frail they provide more hours of care. That is the way the ACFI instrument and the RCS before it was set up. That does not mean that the care that is provided has improved because of an increase of funding, that the wages for staff have improved or are able to be—it is simply a recognition of the growth of that frailty level. I think that it is more important to look at such things as the annual indexation amount, which must include CAP, certainly while it remains in place, and the capital funding, because they are where the critical shortfalls are occurring.

I have made a comparison in my sector of how they have translated from 2004 to June 2008. I would submit that, particularly in the area of wages, comparing average weekly overtime earnings, there has just not been sufficient increases to really keep pace with average weekly increases, much less of those that have applied in the health sector, which have been significantly more. That is probably the area of operations that providers are most feeling the pinch. It is also fair to say, certainly on TriCare’s part, that there is a great deal of sympathy for the concerns of staff in respect to remuneration—a great deal of sympathy. There is a prima facie case to be made that it is unfair that someone working in aged care should be disadvantaged to the tune of 15 or 20 per cent in comparison with someone in acute care simply because the funding mechanism does not allow that to be paid. We have heard evidence from one of the highest payers this morning as to the fact that their increases have not been funded. We have a fair degree of sympathy for that. In addition to that, if there are not sufficient surpluses generated for providers, there are two major problems. First of all you are unable to convince lenders to advance funds, and most lenders these days, in fact I think just about all of them, insist on a level of interest coverage as part of loan covenants to ensure there is that level of stability going forward, and the primary concern which is that there is insufficient incentives for a provider to invest funds if there is no return available.

Senator HUMPHRIES —The department were asked about the number of applications being made in the recent ACAR rounds. They indicated that the result was somewhat patchy, but they pointed out that for every bed available in the round there were roughly two applications to cover that bed. They suggested this was evidence that there was a fairly robust level of take-up in the sector. What is your response to that evidence?

Mr Toohey —Again, I would refer back to my previous answers—that looking at something in one period of time is not relevant. We have to look at trends. I have included data provided by the Aged Care Association Australia which has never been challenged or shown to be incorrect. It has been around for a long time. In 2001 there were 11 applications for every bed on offer. In 2004 there were four, and in 2007 there were two. In 2008 there 1.5 applications for each place and, if you remove Victoria from the calculation, it is closer to one for each one. I think there is an argument to be made both ways as to whether or not you remove Victoria from the calculation, but it certainly appeared to be an extraordinary anomaly. There is very clear—not patchy, but very clear—evidence that there is a declining interest in the take-up of applications, and I have made the point that the rules were changed this year, quite inexplicably, in respect of applications being accepted after a cut-off date. The reason that was implemented was never made clear, but it certainly would have had an impact on increasing the number of applications being able to be portrayed as having been made.

Senator HUMPHRIES —Let us assume that you do average across Australia one application for each bed, so that at least someone is taking up each bed on offer. This puts aside the fact that in places like the Northern Territory there were no applications for beds, but let us assume that you average one for each bed. There is also then the phenomenon of hand-back of beds. We have heard from Blue Care this morning that they had handed back their allocation of 200 beds near Brisbane and the mid-north coast of Queensland. I assume that there are other members of your alliance who have done the same thing?

Mr Toohey —Other members of the alliance have spoken about that. To be honest, we have not canvassed it in great detail. But, certainly, other providers have said that they are considering handing back beds and, certainly, there was a view expressed that a lot of people regretted later, having spoken the truth as forthrightly as they did, that they would not be applying in the future simply because the facilities could not be built on a commercially viable basis.

Senator HUMPHRIES —I think, to be fair to the department, that they were saying that they would not be panicking if there was that level of interest in the next round of ACAR but, if in the next round they had a similar low level of application interest in beds, they would be more concerned. I assume that you would share a concern of that kind.

Mr Toohey —To a certain extent. As I have said, I believe the trend is clear and unequivocal and it goes back seven or eight years. The other point I would make, though, which I think it is an important one, is that, up until it collapsed, share trading in ABC Learning was robust. Simply relying upon perceptions in the market as to the desirability or not of making a particular investment and ignoring the clear trend data is, I think, a mistake. Both have to be considered.

Prof. Hogan —On this point, may I add that the serious problem at the moment is funding, and the lenders, as Jim Toohey mentioned a few minutes ago, are looking very heavily at the covenants associated with loans. I think people should understand that lenders are seeking stronger evidence for interest for interest rate cover in relation to their loans and that, importantly, the loan-to-value ratios that they are employing are being reduced. Both of those factors are contributing significantly, I think, to the difficulties of funding new facilities. I stress that because there are implications there which may lead to people who had the best of intentions of taking up allocations and implementing them might find themselves in grave difficulty now in being able to go ahead with what they thought was a reasonable enterprise.

Senator HUMPHRIES —Are we looking at just a passing phase in the market? The sub-prime crisis has made banks much more conservative about their lending policies. Could we be in a position in a year or two from now where it has all changed and there is a much more robust outlook for borrowing for aged care?

Prof. Hogan —I sincerely hope so. I would certainly not like to see the present economic and financial turmoil continuing, although I think it will last through this year and into next year. Those issues explain I think why many of the central banks are taken up as much with issues on liquidity and quantitative easing as they are with interest rates, because it is the liquidity issues that bear upon the way that lenders will protect themselves—reasons why interest rate cover provisions are being tightened and loan devalue ratios are being reduced. Both of those things are very significant in this industry where margins are not strong.

Mr Toohey —I would like to add to that, if I may. I think people around the world generally fervently share the hope that we will get back to basics in terms of investment and banking. The very basics with regard to lending of this nature include that a bank needs to consider a whole range of factors, not least of which is: ‘For the money we are advancing, what income will be generated to service the debt?’ Clearly the evidence we have here, and clearly from our own experience, is that even providers achieving top-quartile, multibed ward returns—let’s say, $6,000, $7,000 or $8,000 per bed, which the old multibed ward facilities are getting—will not service a debt of $150,000 to $200,000 to construct a new purpose-built, single-room facility. It does not matter how you dress it up, it will not go. The fact is of course that providers who make such as an investment will not be making those types of top-quartile returns. As this evidence shows, they will be making much more modest returns, at the bottom end.

Senator HUMPHRIES —Going back to the Grant Thornton survey for a moment, we were discussing the issue of how it classified multibed facilities as opposed to single-bed facilities. The department made the comment that Grant Thornton was calling a facility which has many singles but a few doubles a multibed facility. Is that a flaw in the approach taken by the Grant Thornton survey?

Mr Toohey —I will make my comment and then I am sure Prof Hogan will be happy to comment also, having been involved. I contacted the author of the survey and was told categorically that that was incorrect. The rule they adopted was that single-bed facilities were those with more than 70 per cent single rooms. That was clear and, had they been asked by anyone, they would have provided that information.

Senator HUMPHRIES —Professor Hogan, you mentioned in your opening comments the idea of separating aged-care costs from accommodation costs. That is an intriguing suggestion. Can you flesh out how that might work as a strategy for dealing with the crisis in aged care, if there is one?

Prof. Hogan —It is taken up by the question with an increased emphasis on community care, or domiciliary care, as I call it. There may be better ways of being able to accommodate people. People can be looked after in the equivalent of, say, independent living units—retirement villages. In some ways they implement the suggestion you had earlier: having residential aged-care facilities within large retirement villages. Increasingly we are seeking ways in which we can accommodate a wider range of activities outside a residential nursing facility. That might well be one of the ways in which we could achieve this.

I do support the notion that we should look at accommodation costs and issues associated with things such as accommodation bonds, of course, in ways that would ensure that accommodation costs are most effectively met in ways that do not impinge upon federal funding. We should look at flexibility of charges and the like and reducing the strict regulations that we have at the moment so that the great tradition in Australia of providing nursing care for all people to the same standards is preserved, particularly where we have greater flexibility on the accommodation side. I was first spurred on to this when I saw the very small group of returns I collected in the review of mine which showed that comprehensive providers somehow or other seemed to be making much larger returns than the straightforward residential aged care places. That was a very small segment and I did not make much of it, but it was still there as a bit of a hint of the future. It certainly led me to think about these issues further.

I would suggest that if you and your colleagues would like to explore these issues further, there would be no better person to talk to than Mr Ian Hardy, the chief executive of Helping Hand Aged Care in South Australia, who last year was awarded a Churchill Fellowship. As part of that Churchill Fellowship, he conducted surveys in Europe on new approaches to aged care and some of the issues about flexibility between care and accommodation costs. I think he would be a person who would be well worth talking to on these matters and other related issues—new ways of looking at aged care.

Senator HUMPHRIES —Where was he from?

Prof. Hogan —Mr Ian Hardy is the Chief Executive Officer of Helping Hand Aged Care, which is Adelaide. It is one of the major South Australian providers. I have always found it to be very successful in the aged care area in terms of thinking through new ways of doing things.

CHAIR —You can take this on notice or provide it today: are there any models we should be looking at in Europe or anywhere else? From the evidence to date, my understanding is that, predominately, Australia probably has the best aged care regime. I was wondering whether you had any experience or want to share with us some other options we can look at.

Prof. Hogan —I do believe that Australia has a good system and, at the time of my review, we did look at a lot of them. But there are undoubtedly possibilities in the United Kingdom and across the Tasman in New Zealand where we might well look. I particularly draw your attention to the cash payments in the United Kingdom to give greater flexibility. One of the arguments by the political leadership for this action in the United Kingdom was in fact to give a greater sense of ownership and responsibility to the users of the services and their families. So I think the political leadership responsible in the United Kingdom recognised there could be difficulties but, on the other hand, they thought that this was an experiment well worth following. I certainly believe it is something that should be explored in this country—I am not saying for implementation but for finding out about it.

Mr Toohey —To some extent, I think part of the answers to the future are already staring us in the face. Senator Humphreys referred before to the growth in retirement village construction, and that is evident. The retirement village cohort are people who have been prepared to take the step forward to say, ‘I want to make decisions myself about my accommodation and services—my own location, the style of unit et cetera.’ The capital problems are solved; there are no capital problems. I think the future lies in governments better contracting with organisations to say, ‘Okay; there is a cohort of elderly people at this location who are ageing. How can we contract with you to fund, monitor and regulate the care they will need going into the future.’ The capital issues have gone at that point.

Senator HUMPHRIES —So you could have what look like retirement villages with people in their own homes, homes they own in those facilities, who are accessing care at the level you would normally expect of a nursing home model?

Mr Toohey —That is right. Someone has bought into a village and negotiated an arrangement with the provider which is regulated under state legislation—retirement villages acts. As that person ages, they will need care. I think part of the answer for the future is to say that a provider should negotiate with the federal Department of Health and Ageing and say: ‘I have 50, 70, 100, 200 or 300 people who will need care into the future. I have the facilities built. My capital costs are covered; my financial model’s right. Let’s negotiate on how we provide care to those people and how you want to regulate and monitor it’—which is the point Senator Polley made before; I think it is uncontroversial. I have not heard anyone suggest that there should be unregulated or unmonitored care.

Senator HUMPHRIES —I have one more question. We have been working on the assumption that we are looking at a sector in which all the providers of nursing home-type accommodation are provided with a government subsidy. Are there providers out there who are offering care to the high end of the market and, because of the regulatory problems, accommodation model issues and so forth, are offering high care to people at cost or on a for-profit basis and who are not seeking government subsidies.

Mr Toohey —The short answer is, at the high end, no. I only know of one provider in my 11 or 12 years in the sector who actually provided unfunded care, and he went broke and took off with accommodation bonds. I think it was being pursued—

Senator HUMPHRIES —Unfunded in the sense of government subsidies.

Mr Toohey —Unfunded in the sense of government subsidies. But in the retirement village sector there is a subsector known as serviced apartments which is a rapidly growing part of the retirement village cohort. In essence, that is unfunded low care. You will find that most serviced apartment providers—and TriCare is one of them—do not make any commercial return from the provision of those services to residents; they are funded by the residents. The return the provider makes is in terms of the rollover of the accommodation. So there is a part of that sector growing already.

Prof. Hogan —That is true.

CHAIR —I thank all of you for attending before us today. We appreciate the detail of your submissions. As usual, we have run out of time, but thank you very much.

Proceedings suspended from 10.47 am to 11.04 am