RSM Australia

Aged care and the relative metrics of managing revenue as opposed to managing costs

Some providers subscribe to the view that as most income is set by the government, the best way to manage operating performance in residential aged care is to actively manage operating costs, so for many this means managing the roster.

In the recent study undertaken for the Aged Care Financing Authority titled The Factors Influencing the Financial Performance of Residential Aged Care Providers, RSM sought to develop some evidence-based insights into this question.

So what did we discover?

  1. Average operating earnings before interest taxation depreciation and amortisation (OEBITDA) varies between -$2K and $26K between the top and bottom groups - a range of $28K
  2. Average revenue varies between $94K and $77K – a range of $17K
  3. Average costs vary between $79K and $68K – a range of $9K

Based on the above, differing levels of operating income account for over 60% of the variances in OEBITDA, while differing cost structures account for 40% of the variance in OEBITDA. This suggests correctly claiming entitlement to government subsidies and managing resident income opportunities will produce 50% more improvement in OEBITDA than managing costs.

As we looked a little deeper into this, we were able to discover that unless you are in the bottom performance group, there is very little opportunity to improve operating performance by focusing on costs alone. Indeed the evidence is that focusing on revenue will be much more rewarding.

The full report by ACFA to the minister can be found here.

Further details on the findings in the RSM report can be found in chapters 2 and 5 of the RSM report

An example of alternative strategies that providers can adopt relates to the closing of the complex care supplement, the removal of the payroll tax, and FBT concessions.

Strategy 1 - Looks to reduce other costs to recover the value of the lost benefits, and this might include rescheduling the roster. But consider, if there was 4% excess staffing wouldn’t this have already been identified? This raises the question of whether cuts that provide short-term cost recovery may lead to increased risk of adverse events that could prove more costly in the long run.

Strategy 2 – If you haven’t already considered undertaking a significant refurbishment, it provides an opportunity to increase accommodation income by up to $7,300 per resident per annum. A client took this approach and has reported that income is now back to the levels before the above concessions were removed. Clearly there are no increased risks in the second approach.

Has managing costs or revenue had the greatest impact on achieving higher financial performance within your facility? We’re interested in hearing from you.