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Meet the men cashing in on Australia’s aged care crisis

As the nation ages, developers are cashing in. After the stunning market debut of Japara Healthcare last week, Crikey investigates the government schemes making many rich.

Take two vulnerable groups of people: toddlers and the aged. Throw in large amounts of government funding, a handful of extreme capitalists with pre-GFC form, and sharemarket investors looking for constant profit growth. Stir.

It’s a recipe for disaster. Two recent raisings — the $450 million float of nursing home operator Japara and a $100 million capital raising by the G8 childcare group, still underway — are another sign we have failed to learn the lessons of the financial crisis, and that irrational exuberance may be returning to the sharemarket.

Soft business coverage is one dead giveaway. Japara Healthcare, the first pure aged care company on the ASX, which made a stunning debut last Thursday, got a dream run in the media, with underwriter Macquarie apparently “inundated with calls” ahead of the float at $2 a share. After Japara shares jumped 35% on day one, to close at $2.70, The Sydney Morning Herald quoted analysts from (who else but) Macquarie! The Japara float was so successful, it is expected to lead to copy-cats, with private equity-backed Allity lining up for some easy money.

It is easy to be bullish on aged care. We all know about the ageing population. The government forecasts we need another 74,000 nursing home places (on top of the existing 186,000) by 2022. That will cost $25 billion, so private investment is necessary. The previous Labor government’s “Living Longer, Living Better” reform package, enacted last year and coming into force from July 1, will abolish the distinction between high-care and low-care beds in nursing homes and make it possible to charge all residents an accommodation bonds.

Accommodation bonds are the key to investing in nursing homes, and provide just the kind of complexity and opacity that financial engineers like Macquarie love to exploit. The policy framework was set up in 1997 under then-prime minister John Howard with close involvement from the private sector, particularly the late Doug Moran. It is a fairly one-sided arrangement: the aged care provider gets the interest generated by the bond, for working capital or any other purpose (sometimes including cross-subsidising parts of the operator’s business, outside aged care) and can deduct a regulated amount each year (currently almost $4000 annually).

It is effectively free money; providers can charge whatever bond they think the market will bear, relative to local house prices given most residents sell their homes to raise the bond. Bonds were not expected to exceed $100,000 originally, but are averaging about $275,000. There are fears they may go higher.

Japara’s prospectus explains that bonds of existing nursing home residents are generally paid out — on average, after a 29-month stay that ends either in death or relocation to acute hospital care — with bond money deposited by new residents, which have generally risen in the meantime in line with property prices. At the risk of being alarmist, paying out earlier entrants with money deposited by later investors is one of the defining characteristics of a pyramid scheme.

Indeed, although the bonds are backed by a government guarantee — which has been called on to cover $25 million in bond repayments to date, out of a national pool north of $12 billion — Japara’s own prospectus canvasses the risk that “a major issue at a facility … could require Japara to repay a large number of bonds that cannot be replaced immediately”.

From July, residents will be able to choose between paying an accommodation bond or an equivalent daily rate, or any combination of the two. When the reforms were introduced, the industry warned many residents would choose either not to pay a bond, or to pay a much smaller bond. This could cause a one-off outflow of capital, threatening the balance sheet of smaller operators, as old high bonds were repaid and replaced with smaller bonds. Japara chief Andrew Sudholz told the Senate inquiry into aged care last May this was a “massive, serious risk for the industry”.

Where Sudholz sounded bearish a year ago, however, Japara’s April prospectus was upbeat, declaring it was poised to benefit and sees “significant latent cash flow potential” as it will be able to charge bonds for its high-care beds. Japara is forecasting cash inflows from bonds will rise from $9 million in 2012-13 to $25 million in 2013-14 and triple to $77 million the year after. Japara expects its accommodation bonds to rise from $236,000 on average to $264,000 this year alone.

Where do rising bonds leave the aged? It is hard to predict how the reforms will unfold. Charmaine Crowe, senior adviser for the Combined Pensioners and Superannuants Association, believes many residents will still choose to pay higher accommodation bonds to keep their assets down so they can hang onto their pension, soon subject to tighter means testing. Crowe says there is an inherent conflict of interest between for-profit companies, with obligations to shareholders, and care for the aged.

We believe the current regulation around care quality is failing and doesn’t ensure resident health and welfare is upheld.”

Making a profit is always going to trump quality of care,” she told Crikey. “We believe the current regulation around care quality is failing and doesn’t ensure resident health and welfare is upheld.” She also warns against providing excessive public funding to provision of nursing home places, when a better and cheaper alternative would be to fund home care, given the overwhelming preference of the elderly is to stay in their own homes. “Nobody wants to move into a nursing home unless they absolutely have to,” she said.

Certainly, quality can not afford to decline. Lateline’s groundbreaking “aged care crisis” investigation by Margot O’Neill last year exposed woefully inadequate standards of care across the industry. Japara is no exception. Operating arm Aged Care Services Australia Group was criticised by Victoria’s coroner after an 89-year-old dementia sufferer at its Central Park nursing home in Melbourne died in 2007, four days after she was assaulted by another patient, who also had dementia and was prone to violence.

In 2008 the federal government ordered checks of all 32 nursing homes operated by ACSAG after finding malnourished residents — two weighed less than 25 kilograms — and dangerous understaffing at its Kiralee nursing home in Ballarat. Then-federal ageing minister Justine Elliott said practices at Kiralee were “just unacceptable”.

Japara appears to have cleaned up its act since then, although it made the news again after a carer accidentally gave 10 times the required dose of morphine to a patient, who subsequently died, at the Tamar Park nursing home near Launceston in 2010, which was later closed.

Japara was also subject to serious allegations in the Victorian Supreme Court in 2010 by former chief executive Arnan Rouse, including that Japara’s property trust held on to $8 million in residents’ accommodation bonds. The case was only settled in 2012 when the rest of Japara’s shareholders bought out Rouse’s 20% stake in the company for $21.5 million, with money borrowed from the company and declared a dividend in last week’s float.

Before the float, Japara’s two major shareholders were Sudholz and Julius Colman, who each held 31.4% of Japara Holdings, which was sold into the float at $233 million. They have retained stakes of 6% and 4%, worth $39 million and $34 million at yesterday’s price of $2.57 and have shared in tens of millions of dollars in cash. Sudholz also got a tasty float bonus of $1.5 million, paid.

Sudholz has a long background in the property industry, including as a partner of collapsed auditors Arthur Andersen, merged locally with Ernst & Young, where in 2004 he helped promote an unregistered managed investment scheme, Business Australia Capital Finance, run by lender Ian Lazar, subject of Four Corners investigations that year and — astoundingly — again this month. In 2004 Sudholz was also embroiled in litigation over a joint venture to develop a 98-unit retirement village in Melbourne’s Kew with Primelife, founded by entrepreneur and former bankrupt Ted Sent.

Colman, now described as a professional poker player and philanthropist, is a lawyer who pioneered the unlisted property syndicate in Australia, founding the MCS business, which paid high commissions to financial planners who flogged hundreds of millions of dollars’ worth of property to investors. Colman sold MCS to shopping centre owner Centro in 2003 for a stunning $194 million, and thousands of syndicate investors subsequently got caught up in the collapse of Centro when the GFC struck in late 2007.

Years later, the former MCS property syndicates are still being wound up — often at heavy losses.

*Monday: part two of Crikey’s series on developers cashing in — this time in childcare

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  • 1
    Tom Jones
    Posted Thursday, 24 April 2014 at 1:21 pm | Permalink

    The costs of bonds is fraught and while people may prefer to stay in their own home it is easier for family members to manage a good placement if it isn’t left to a crisis situation when poor homes offer places because the good ones are full. The bonds are often far more than the suggested figure. The float sounds like ABC in childcare which turned out so well at first as children were placed in plastic environments, toys were cycled around centres to arrive just before inspection and good was not adequate for growing children.

  • 2
    tonyfunnywalker
    Posted Thursday, 24 April 2014 at 1:51 pm | Permalink

    The Retirement Home “Spivs Charter” continues it would seem.

  • 3
    Drew Missly
    Posted Thursday, 24 April 2014 at 1:51 pm | Permalink

    My family paid a bond of $450,000.00 and a monthly payment of $2,500.00 to get our mother into aged care. There is no greater rort in this country than aged care.

  • 4
    Tinatoerat
    Posted Thursday, 24 April 2014 at 3:55 pm | Permalink

    I think the bond for the newest aged care home in my area is closer to $750,000 than the $250,000 mentioned in the article.
    (Western Australia, Metro area)

  • 5
    AR
    Posted Thursday, 24 April 2014 at 4:59 pm | Permalink

    As a general principle I am of the “spend the kid’s inheritance” tendency.
    Approaching this Last Frontier, I am appalled that some thrusting entrepreneur has not yet started providing rock’n’roll retirement homes, for those of us with no intention of going quietly into that dark maw.
    Coz, even if the body is failing, the will remains and suitably lubricious and/or virile attendants cojuld give many a new interest in life.
    Oh, I see the problem, the preference for a quick turnover.

  • 6
    Carol Bayer
    Posted Thursday, 24 April 2014 at 5:01 pm | Permalink

    Why did n’t you take her into your own home and give back to her some of what she sacrificed for you all those years?

    If so many siblings were not so selfish and wrapped up in their own life-style cocoons then maybe it would n’t be such an age care financial drain.

  • 7
    PDGFD1
    Posted Thursday, 24 April 2014 at 5:18 pm | Permalink

    Thanks Paddy. Look forward to follow-ups by Crikey!

    Meanwhile - anyone game to raise the issue of home care for the aged, and at the last, euthanasia?

    An entirely FOR-profit company where (to be fair) attempts are made to assist the aged and their relatives, but whose purpose is ultimately FOR profit Vs Quality of life at home until a humane and peaceful death.
    Anyone want to venture which will triumph?

    I for one would rather ‘step off calmly’ than endure months or years in any such establishment.

  • 8
    CML
    Posted Thursday, 24 April 2014 at 6:02 pm | Permalink

    Absolutely appalling! High time the aged care sector was properly regulated to stop the aged, and their families, from being ripped off.
    Why can’t we look at how aged care is managed completely by government, as in the Scandinavian countries? Surely a higher rate of taxation is preferable to this abomination!

  • 9
    AR
    Posted Friday, 25 April 2014 at 11:41 am | Permalink

    CarolB - PING! At both ends of life.
    It is often said that a society can be evaluated by its attitude to.. animals, children, woen ,,and other minorities.
    That the two lowest paid, lowest esteemed (by $ociety)are the start & end of life, is strange given that we will all taste the ‘arrangements’ at the bottom end of the scale.

  • 10
    Suziekue
    Posted Friday, 25 April 2014 at 2:55 pm | Permalink

    @ Carol Bayer. You have no idea do you, of the reality of caring for the aged. Simplistic solutions smack of ignorance. I can speak from experience. My mother was bedridden, incontinent, diabetic and with a range of other medical problems when she was in aged care. Tell me how even the most devoted family member might cope with that in the family home. As it was, I shifted from full-time to part-time work so that I could ensure her needs were met within the aged care facility which was woefully understaffed. Despite having a Health Care directive stating that she wanted a quality of life death, and despite my attempted advocacy, she had a shitty death, dying in pain and discomfort because the medical staff were overwhelmed. This was in 2013. I’m in my mid 60s now, and terrified of ageing and ending up in a similar situation.

    And on that note, if we aren’t as a society willing to fund humane aged care, and provide appropriate regulation of the sector, then at least let us have access to euthanasia options.

  • 11
    Pamela
    Posted Monday, 28 April 2014 at 1:14 pm | Permalink

    Ah Australia- you sweetie darling of a country- throwing the most vulnerable and least articulate to the mercy of the market. The youngest and the oldest- little ability to complain- grist for the mill.
    Governments and regulatory instruments can avert their gaze as the dollars roll in.
    Ah Australia what promise you had with your simple mantra- fair go for all.
    Pity…

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