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

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”.

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Categories: Australia, Companies, Players

11 Responses

Comments page: 1 |
  1. 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.

    by Tom Jones on Apr 24, 2014 at 1:21 pm

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

    by tonyfunnywalker on Apr 24, 2014 at 1:51 pm

  3. 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.

    by Drew Missly on Apr 24, 2014 at 1:51 pm

  4. 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)

    by Tinatoerat on Apr 24, 2014 at 3:55 pm

  5. 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.

    by AR on Apr 24, 2014 at 4:59 pm

  6. 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.

    by Carol Bayer on Apr 24, 2014 at 5:01 pm

  7. 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.

    by PDGFD1 on Apr 24, 2014 at 5:18 pm

  8. 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!

    by CML on Apr 24, 2014 at 6:02 pm

  9. 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.

    by AR on Apr 25, 2014 at 11:41 am

  10. @ 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.

    by Suziekue on Apr 25, 2014 at 2:55 pm

  11. 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.

    by Pamela on Apr 28, 2014 at 1:14 pm

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