Aged care faces $72B funding gap to meet demand

A new report by Grant Thornton underscores the need for a $72 billion investment in the aged care sector over the next seven years to address the growing demand for ageing and calls for innovative capital models to attract investors.

This is in response to the Aged Care Taskforce’s pending interim report to the Government to sustain the demand that Australia’s ageing population will require.

On Thursday 26 October 2023, Grant Thornton will release its report, “Key considerations for a capital model to support sustainability in the aged care sector”, outlining the capital needs of the sector and ways to make it an attractive investment sector, particularly in comparison to other industries.

The Royal Commission into Aged Care Quality and Safety found the number of older people will increase from 3.9m in 2019 (15.3 per cent of the population) to 8.8m in 2058 (22.3 per cent of the population), and those aged 85 years and over will increase from 515,700 in 2018-2019 to more than 1.5m by 2058 – significantly increasing the demand and requirements for aged care, including residential and home care, and home support providers.

“According to our review, $72.3b will be required over the next seven years to adequately fund the development and refurbishment of residential care facilities in Australia,” said Darrell Price, National Head of Heath & Aged Care at Grant Thornton.

“In order to fund this estimated $72b, capital will primarily have to found by the for-profit and private sectors, which is a shift from the current not-for-profit sector majority funding.”

The current investment model consists of 33 per cent for-profit providers, while 56 per cent are not-for-profit providers with no access to traditional investment sources. Government funded providers equate to 11 per cent.

Under the current investment model, there will be a 50 per cent increase in demand by 2031, however, the Aged Care Financing Authority (ACFA) estimates $40.25b will be required from FY2024 to FY2030 to support the provision of aged care facilities, not including $15.0b of investment ACFA expected to be made in 2020-21 through to 2022-23.

Further, a construction cost report published in May 2023 indicated that construction costs surged by 30 per cent since 2021, increasing the required investment to $52.32b (equivalent to an additional 115,000 beds), coupled with the investment required to maintain and upgrade residential stock of approximately $20.1b (or 60,000 replacements beds) based on Grant Thornton assumptions. The total investment required will be $72.34b over seven years.

Darrel Price continued, “The modelling relied on by ACFA to develop the forecasts was prepared in 2018, therefore did not account for the softening of residential care occupancy, the Royal Commission into Aged Care Quality and Safety recommendations, the response from governments on the recommendations or the impacts of COVID-19.

When compared to the growth of listed industries on the ASX, the healthcare sector (including listed aged care providers) has underperformed against all other sectors in the 12 months to September 2023 with -6.09 per cent growth. The sector is neither retaining capital nor attracting it.

In addition, with demand for aged care services increasing due to Australia’s ageing population, the sector is competing against more lucrative industries for labour and investment while it experiences low returns, high and variable regulation, regulated revenues and access to the workforce.

According to Darrell Price, the entire capital model for the sector needs a rethink, “The aged care capital model needs to be structured in such a way that it is actually attractive to investors.”

“A fresh look at the model of investment for the sector is required to ensure the rapidly rising demand can be met, and there is sufficient incentive for investors to invest in providers and for providers to invest in  replenishment and replacement of older stock.

In other words, the optimal capital required to be deployed across the sector to improve services for consumers is optimised,” he continued.

Ritchelle Drilon

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Ritchelle is a Content Producer for Healthcare Channel, Australia’s premier resource of information for healthcare.

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