Revised Explanatory Memorandum(Circulated by authority of the Minister for Aged Care and Senior Australians, Senator the Hon Richard Colbeck)
Relevant excerpts from The Aged Care Financing Authority (ACFA) review: Consideration of the financial impact on home care providers as a result of changes in payment arrangements
The Aged Care Financing Authority (ACFA) is a statutory committee whose role is to provide independent, transparent advice to the Australian Government on financing and funding issues in the aged care industry.
The project and terms of reference
On 2 October 2019, the Minister for Aged Care and Senior Australians, Senator the Hon Richard Colbeck, asked ACFA to examine the potential financial impact on home care providers of the Australian Government's 2019-20 Budget measure to improve the way home care providers are paid Government subsidy on behalf of home care recipients, and to bring these arrangements in line with contemporary business practice.
Home care providers are currently paid a consumer's full entitlement to Government subsidy for each month, less any income-tested care fee, regardless of the services actually provided to the consumer. The subsidy is paid in advance at the start of the month. Any amount that is not spent providing care and services to a consumer in a month is held by the provider as unspent funds to be drawn upon by the consumer in the future.
The Budget measure involves a change in timing of the Government subsidy from payment in advance to payment in arrears for services actually provided. The difference between the full Government subsidy for the claim period and the cost to the consumer for the services actually provided (i.e. the unspent funds) will be held by the Government to be drawn upon by the consumer in future, through the provider. This change does not impact the amount that is available overall to the consumer.
When announcing the measure in the 2019-20 Budget, the Government said the change in payment arrangements would address stakeholder concerns regarding unspent funds and align home care payment arrangements with other Government programs - most notably the National Disability Insurance Scheme (NDIS).
The Minister for Aged Care and Senior Australians sought ACFA's advice on how the new payment arrangements would impact on providers' finances and whether the transition to the new arrangements is likely to present any significant challenges to providers in providing services to consumers and their ongoing financial arrangements. ACFA was also asked to advise on possible measures the Government could take to limit potential impacts and risk.
The review process
ACFA considered the potential financial impact on home care providers and implications for consumers through a public request for written submissions, face-to-face consultations with stakeholders, discussions with the Department of Health (Health) and the then Department of Human Services (DHS) now Services Australia, software vendors and data analysis. ACFA engaged StewartBrown to analyse the financial accounts of home care providers and provide an assessment of their current capacity to absorb the change in payment arrangements.
ACFA received 43 submissions from home care providers, aged care peak bodies, carers, carer advocacy groups, concerned individuals and payment management companies.
Face-to-face consultations were held with 79 home care providers attending forums in Brisbane, Adelaide, Perth, Melbourne and Sydney. This included a cross section of providers including small home care only providers, medium and large providers, providers that also engage in other aged care and non-aged care business, remote providers, providers servicing culturally and linguistically diverse (CALD) communities, for profit, not-for-profit and faith-based providers.
Health provided ACFA with a broad outline of the implementation arrangements the Government was considering, and this was the basis of ACFA's consultations. The arrangements were included in the Consultation Paper ACFA released when inviting submissions.
During the course of the consultations, providers raised a number of questions regarding how the new funding arrangements would operate that were not covered in the implementation outline ACFA received from Health. Some of the details providers were seeking to clarify could have a bearing on the financial impact of the change in payment arrangements, as well as implications for the provision of services to consumers. During the course of ACFA's consultations, Health was conducting a separate consultation process on the implementation arrangements for the Budget measure. ACFA has advised Health about the points of detail around the operation of the new arrangements that providers are seeking to clarify.
In ACFA's consultations, providers also raised comments on the merits of the Budget measure and the broader operation of the home care program. ACFA noted that it had not been asked to advise on the merits of the change in payment arrangements or broader reforms to home care.
The home care sector
Home care services were provided to 116,843 consumers in 2017-18, compared with 97,516 in 2016-17. The total Government expenditure on home care in 2017-18 was $2 billion dollars, an increase of $400 million from 2016-17. Consumer contributions in home care in 2017-18 were $122 million.
As at 30 July 2018, there were 873 home care providers. Over half of all providers were not-for-profit. The balance of providers was for-profit (35 per cent) and Government (12 per cent). Home care providers mainly serviced metropolitan locations (55 per cent), with 36 per cent operating regionally and 9 per cent operating in both metropolitan and regional locations.
Sixty-two per cent of home care providers also provide residential care and/or services under the Commonwealth Home Support Program (CHSP). Many home care providers also provide other services including retirement living, wellbeing and disability services, outreach community health and housing support services.
The home care sector has experienced significant growth in recent times, both in terms of Government expenditure, the number of consumers serviced and an increase in the number of providers servicing the sector.
Home care providers are still in the process of adjusting to the introduction of packages following consumers (portability of the package) rather than being allocated to providers. This reform allows consumers to direct their care package to the provider of their choice as well as to change providers. The changes have resulted in a large increase in the number of approved providers and, in turn, greater competition which has resulted in a decline in profit margins for individual providers. As noted in ACFA's 2019 Annual Report, in 2017-18 the Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) for home care providers fell by over 60 per cent. The preliminary results from the StewartBrown survey for 2018-19 suggests a further small decline in the financial performance of home care providers. The large falls in the previous two years appear to have been arrested.
Current payment arrangements in home care
Home consumers are allocated a level 1, 2, 3 or 4 home care package depending on their assessed needs, with level 1 having the lowest dollar value and level 4 the highest. Once a package becomes available, consumers enter an agreement with a home care provider to receive care and services under their package.
Government subsidy levels (current to 19 March 2020) are:
|Subsidy rate per day by package level|
Providers may also receive supplementary funding in respect of certain services and consumers, for example, a viability supplement for more remote services and dementia and cognition supplements.
Home care providers are currently paid a consumer's full entitlement to Government subsidy for each month (i.e. their package level for each day in care less the subsidy reduction which is known as an income-tested care fee), regardless of the services actually provided to the consumer. This is paid in two stages. Using the month of June as an example, the provider receives an advance payment at the start of June equivalent to the amount received for the month two months earlier, being April. Then, at the start of the subsequent month, July, the provider lodges a claim specifying the actual subsidy due for June, at which time a reconciliation takes place.
Providers also collect an income-tested care fee from consumers who have sufficient assessable income and, by agreement with the consumer, can also charge a basic daily fee, currently up to approximately $11 per day. These amounts are added to the consumer's subsidy to form their package budget and can be drawn upon to pay for care and services. The Government subsidy on average represents 96% of home care providers' income.
Any amount that is not spent providing care and services to a consumer in a month is held by the provider as available funds to be drawn upon by the consumer in future. Available funds are commonly referred to as unspent funds, noting these only become unspent funds when a person exits care.
Based on the most recent data, the current pool of unspent funds is around $750 million. This is an increase of approximately $200 million in the last 12 months. The average unspent funds per client is approximately $7,000. 
Unspent package funds are currently held by providers but should not be recognised as income by the provider until the funds have been spent or committed for the consumer's care. Some providers treat unspent funds as part of their working capital (which reduces the need to access other sources of working capital such as through borrowing), but these funds should then be recognised in the providers' accounts as a liability. It appears some providers quarantine unspent funds in an account separate from the operating account and use the funds only to pay for care and services to consumers, although they may use the interest earned on those funds for various purposes. Some providers have this money held by a third party, effectively holding it in trust for the consumers.
The average subsidy utilisation rate is 90 per cent, meaning that on average 10 per cent of Government subsidy payments are accruing as unspent funds. While the growth of an individual's unspent funds balance will largely be related to how long they are in care, providers reported that their unspent funds were concentrated on a small number of consumers with very large balances.
A range of factors are behind the growth in unspent funds, as discussed in ACFA's 2019 annual report.  The change in payment arrangements, which was the basis of the consultations, will not address the underlying issues causing unspent funds to accumulate, but will address who holds the funds- provider or Government.
During ACFA's consultations, a number of providers said that the focus should be on addressing the reasons for the build-up in unspent funds rather than changing who holds such funds. A number of suggestions were offered on how to reduce the growth in unspent funds, predominantly involving changes to the assessment process to avoid over assessment and to enable downgrading of package levels if a consumer's needs reduce.