Aged Care Legislation Amendment (Improved Home Care Payment Administration No. 2) Bill 2020

Revised Explanatory Memorandum

(Circulated by authority of the Minister for Aged Care and Senior Australians, Senator the Hon Richard Colbeck)
This memorandum takes account of amendments made by the House of Representatives to the bill as introduced.
This revised explanatory memorandum responds to concerns raised by the Senate Standing Committee for the Scrutiny of Bills in Scrutiny Digest No. 15 dated 11 November 2020 and in Scrutiny Digest No. 17 dated 2 December 2020

Issues raised in consultations

Current arrangements

Providers are currently paid the Government subsidy in advance based on a consumer's days in care and their package level. Providers retain unspent funds for future drawdown by the consumer.

Receiving the Government subsidy in advance has reduced the need for many providers to access other means to obtain working capital. Providers noted that they still need to finance the services provided to new consumers pending receipt of their Government subsidy.

Providers also advised that there can be significant reconciliation issues when they do not receive what they consider to be the correct subsidy payments for consumers. Providers said the current payment system is slow to respond to requests for payment adjustments and the reconciliation process can involve significant administrative effort and cost to providers. It was observed that gaps in the information flow between providers and DHS can be caused by such factors as providers not receiving package upgrade notifications, the absence of a mechanism to confirm the subsidy package that consumers are receiving when they transfer between providers, and no mechanism for providers to access how many days of leave remain before a package recipients subsidy is reduced. One provider reported that 40 of their consumers had 'dropped off' the DHS system, resulting in unpaid subsidies of $120,000.

It was claimed that payment adjustments can take up to six weeks to reach providers' bank accounts. Providers noted they faced the challenge of continuing to fund care and services whilst payment issues are being worked through; essentially they had to continue to deliver services for some consumers without receiving the Government subsidy payment. It was observed that under current arrangements, the impact of such financing pressures is somewhat cushioned by the subsidy payments being made in advance and providers holding the consumers' unspent package funds.

It appears that providers are concerned that the reconciliation issues and resulting administrative costs currently being experienced could be exacerbated by introducing further complexity to the payment system. Moreover, problems with the existing system contributed to providers' scepticism as to whether a change in payment arrangements would be smoothly implemented.

Phase 2 - payment for services provided

Phase 2 (as from April 2021) involves subsidy payments based on services actually provided to individual consumers. DHS will retain each consumer's unspent funds to be drawn down by providers on behalf of consumers when needed.

The main concern raised by providers did not involve the impact of Phase 2 on their cash flow. Their Phase 2 concerns focussed on the system changes that would be required, both to their systems and DHS payment systems, to accommodate the move to payment for goods and services actually provided to each of their consumers. Providers were concerned about having sufficient time for system changes to be developed, tested and implemented, as well as the costs that they would incur for such changes and for staff training, which may be passed on to the consumer.

Providers were particularly concerned about the ability of DHS to introduce a new system to support the change in payment arrangements. Their concern was based on previous negative experiences with significant system upgrades, such as those that occurred with the introduction of funding following the consumer for home care packages. They observed that if the required changes in payment systems by providers and DHS are not compatible, and there are discrepancies in the flow of information regarding each consumer, there will be reconciliation issues. These issues will pose significant additional administrative effort and costs for providers. If there continued to be sizeable delays in sorting out data discrepancies with the current payment system, it could cause significant financial problems for providers.

Providers would be particularly concerned if Phase 2 required them to manually input the data on the goods and services actually used by consumers each month. This would significantly increase their costs.

Providers said clarification was required around many aspects of the implementation of Phase 2. Some of the issues raised included:

Who will be responsible for monitoring client balances and advising the consumer of their unspent fund balance (provider or DHS or jointly)?
How will resolution occur if there is a discrepancy between providers' records and DHS?
What level of detail is required when claiming for goods and services actually provided?
Will there be a time limit on invoicing?
Who should be collecting the income tested care fee (provider or DHS)?
How would the basic daily fee be treated (would it be deducted from the subsidy payment in the same way as the income tested care fee)?
Will consumers be allowed to get into negative balance? Currently providers allow consumers to temporarily go into negative balance in times of particular need, such as following a health related event or when capital items are immediately needed. Under current arrangements, providers recoup an over spend in a few months from subsequent monthly payments. Providers noted that they bear the risk if the consumer departs care before the overspent funds are recouped.

As noted previously, these questions have been referred to Health who is consulting on the detail of the implementation of the change in payment arrangements. This detail can impact on the cost to providers of the new arrangements.

Most providers said the Government's timeframe for the implementation of Phase 2 was too short. There was a strong desire for this phase to be pushed back to allow more time for development, testing and a trial period to ensure that past issues with the payments system do not occur again.

Due to the time and cost associated with significant system change, a number of providers suggested that these changes should not be introduced ahead of the final report being delivered by the Royal Commission into Aged Care Quality and Safety.

DHS has advised ACFA that they are committed to delivering systems that are modern, adaptable and meet the requirements of their stakeholders. DHS further advised that they will continue to work with Health and engage with service providers to seek input and feedback on how payment systems are designed and operate.

Possible impact on viability of some providers

Some of the submissions suggested that the new payment arrangements would be a risk to the viability of some providers. One submission noted that a loss of liquidity for providers may result in insolvency or pose difficulties for providers to fund significant drawdowns from available funds. Some submissions suggested that smaller providers may no longer be able to operate due to an inability to pay staff or suppliers before the funds are reimbursed.

One submission provided details about the anticipated impacts on a group of providers operating in thin markets. This submission advised that Moving to a post-paid individualised finance model will impact cash flows for remote and very remote service providers in the short and long term and this could be worsened by providers who may be relying on the availability of unspent funds to provide services that otherwise are not financially viable.

Many submissions referenced small providers and those operating in rural and remote locations, suggesting that the risks to the ongoing viability of these providers would be heightened as a result of the change in payment arrangements. Submissions from smaller providers asked that they be given special consideration and receive support to ameliorate the costs to them of the change in payment arrangements.

In addition to the individual impacts, providers noted that the cumulative effect of this change needs careful consideration in the context of previous and ongoing reforms to home care.

Possible impact on consumers

A number of concerns were raised regarding the possible impact of the new payment arrangements on the delivery of goods and services to consumers. It was noted that should the new arrangements result in some providers leaving the industry, this would reduce consumer choice. The extent to which the new arrangements adversely impact on the viability of providers operating in very thin markets in rural and remote locations may have a significant impact on consumers if there are no other providers operating in those markets.

Some providers said that as a result of the cash flow pressures arising from the changes, they may be reluctant to take on new consumers during the transition period. Others observed that if this was the case, they saw an opportunity to increase market share. A related concern raised by a number of smaller providers was that larger providers would have greater capacity to absorb the costs associated with the changes, and this would distort the competitive market.

Many providers suggested that with unspent package funds being held by DHS, there would be significant delays before consumers could access these funds to finance the provision of large capital items. It was noted that larger providers may have the capacity to finance such purchasers before getting reimbursement from DHS, but smaller providers would not have the same capacity to finance such outlays. This was seen as another consequence impeding the competitiveness of smaller providers.

It was also noted in the consultations that, to the extent that the new payment arrangements increase administrative costs for providers, these costs would be passed on to consumers which in turn would reduce the level of goods and services available to a consumer under a package.

It was also highlighted that consumers would be adversely impacted if the arrangements involving DHS paying the subsidy for actual services delivered in the past month reduced the flexibility under current arrangements whereby a provider could overspend on a consumer in one month, and recoup from subsidy payments in subsequent months.

Data analysis

The accounting firm StewartBrown was engaged to provide an assessment of the likely financial impact of the proposed changes based on an examination of the financial accounts of home care providers. In undertaking this analysis, StewartBrown used the information available from the 2018-19 Aged Care Financial Reports (ACFR) submitted by providers, data from the most recent StewartBrown Aged Care Financial Performance Survey, and other relevant financial data.

StewartBrown's report is attached. The key findings from the report are:

Financial impact on providers

The overall financial performance of approved providers, other than the potential additional interest expense and possible foregone interest revenue on unspent funds, will not be materially impacted by the cash flow impact of the proposed changes to funding arrangements.

On average, and across the cohort of approved providers examined by StewartBrown, there are sufficient liquid assets held by at least 89 per cent (477 in number) of approved providers. They have sufficient cash flows to meet normal operating expenses for one month while the arrangements transition from payment in advance to payment in arrears.

The potential financial impacts to approved providers are likely to be amplified for smaller providers who do not have other major sources of revenue other than that generated from the delivery of home care packages.

Significant risk

StewartBrown noted that if the Government, through DHS, required approved providers to submit each claim at the individual consumer level, this would result in additional administrative effort for providers, not only in making claims but also in reconciling the reimbursed funding receipt to the claim on a consumer by consumer basis.

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