Survival of the Small to Medium Sized In-Home Aged Care Operator

In the wake of the Royal Commission into Quality and Safety in Aged Care, the Recommendations the Federal Government and Department of Health have chosen to implement with gusto are those which impose additional layers of regulation and compliance, and those that add to the financial complexity and risk of being an Approved Provider of Home Care. Extra resources in the form personnel, expertise, software, governance etc., are required for Providers to meet the obligations these changes impose. There is no meaningful additional funding. 

On top of this, there is of course the challenge of operating in the COVID-19 environment. The fact that there has been a looming staff crisis in Aged Care well before the advent of COVID-19 has been completely disregarded by Government - and now that crisis is in full swing. All signs point to things getting much worse from here if radical change isn’t made to attract more people/workers to the industry.

Perhaps Government didn’t foresee the potential cash-flow implications of moving rapidly to “payment in arrears” funding for Home Care Providers – perhaps they did. Nonetheless, the diminished cash liquidity in the Home Care Sector will become more and more apparent as greater and greater numbers of staff become unavailable to work due to COVID-19 infection. There will not be the staff to replace them, client services will be rationalised (reduced) to provision of essential services only. Provider revenue will reduce accordingly, but they will still have to pay staff entitlements (sick leave etc). For providers that don’t have exceptional finance, operating and reporting systems, who are not 100% on top of revenue collection, billings etc., the cash-flow crunch may be sudden and profound.

Broadly speaking, approximately 68% of the sector are “Pure Home Care Providers” with the other 32% tending to be the larger operators with multiple service/revenue streams (Home Care, Residential Ages Care Facilities, Retirement Villages etc.). 

For purpose of this discussion, I am focused only on the 68% “Pure Home Care Providers”.

Acknowledging that some providers will have additional funding/service streams to varying degrees (e.g.: CHSP, NDIS, DVA, VHC). However, for demonstration, let’s consider just the Home Care Package (HCP) subsidy scheme – the bulk of the revenue for many providers. 

• 69% = providers with annual HCP revenue less than $1million
• 25% = providers with annual HCP revenue between $1million and $5million  
• 6% = providers with annual HCP revenue greater than $5million
• 2% = providers with annual HCP revenue greater than $15million             

(for those compelled to do the math - this doesn’t total to 100% because the 2% is also counted in the 6%)     

Now these are not the most recent figures, but any changes are unlikely to substantially alter what is a compelling picture. The point is that many hundreds, a significant majority of Home Care Providers, operate on an HCP revenue base of less than $5million a year, in many cases substantially less than that figure. 

Done well and to the standard anticipated be the Royal Commissioners, the administrative requirements of Home Care will not/do not come cheaply – a suggested starting base being $1.5M to $2.0M annually.

The obvious question is, how are many of these operators going to survive the increased financial burden of additional regulatory, risk and governance compliance on top of the need for stringent cash-flow monitoring and management? There are of course those who suggest Government would be happy to see significant rationalisation (way fewer providers) in the sector, and if that results in widespread provider failure, so be it.  That may well be true.

What are the standard options if you are a small provider, dedicated to the sector and want to stay in it: 

• Gain revenue scale through organic growth – there are more HCP’s coming online
• Gain revenue scale through diversification - NDIS, DVA, CHSP, Private Services (these will all add skills and compliance cost)
• Gain revenue scale through merger with another provider
• Gain revenue scale via acquisition of other providers (this will likely mean either significant debt or the inclusion of an equity partner)
• Take on a debt facility (if you can get it) as cover for cash-flow pressures
• Sell to private equity or another provider and become an employee (or retire)

There is another option: 

• Retain operational control of your Home Care Business and partner with another operator for provision of the overhead functionality. Or indeed negotiate a more suitable arrangement/agreement with a partner operator that best suits the aspirations of both parties.

There is absolutely no doubt whatsoever that there WILL BE significant consolidation of the Australian Home Care Market in coming years. You can choose to be “done to” or take control and map your own path. 

If you’re interested in starting a discussion, exploring potential options, feel free to message me.