Strong competition in vulnerable markets often has little to do with care and even less to do with competitive pricing. It is all about having an income stream so that you can grow and become bigger, more powerful, more credible and more influential. On the way you will want to list on the sharemarket as that will give you access to far more money to grow with. 

In a consolidating market you are either on a winning streak with your share price rising or your share price sliding because your profit prospects are not as good as they were expected to be. If you are winning you are  acquiring others  or negotiating beneficial mergers.

If your share price is sliding, then you are struggling not to be acquired by a predatory company that sees you as a tasty morsel. When you are sliding its the share market and not the owners that decide whether you are tasty enough to swallow. 

If it's in the financial interests of the other shareholders management must advise shareholders  to sell.  I'ts all high pressure stuff.  If you cut prices and improve care, your income falls and you are going to be at greater risk.

Providing good care is expensive. Cutting costs leads to more profit but impacts negatively on care. The pressures to provide the sort of care they can get away with are very strong - and my examination of the literature suggests that it is too strong for many to resist. To improve financial performance corporations charge what the market will bear (ie whatever customers can be induced to pay).  When the product on sale is essential and customers cannot do without it the corporations can make a killing.  Aged care is therefore a very attractive market.

I am sure everyone starts with the best of intentions and wants to provide good care, but we have a human failing. We have an enormous capacity to find ways of justifying the things we do and so persuade ourselves, especially if our successful survival depends on doing that. Once one group does something that makes it more competitive the pressure on others to do the same increases enormously. I will return to these issues later.  

On this page I am going to look at the business of being successful in a competitive and consolidating marketplace in health and aged care.

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To be a competitor you need a growing income

Getting money: The money for this marketplace activity comes from loans from the banks, from private equity groups (big investors with lots of money), and from investors in the stock market who are offered bundles of shares, on which the company pays a percentage return. The value of shares depends on actual returns, promised returns or on growth or promised growth.

Loans: To get money from the bank you need to build up some capital of your own and you also need a big enough income stream to be able to pay the interest and reduce the loan. The stronger your regular income is, the more you can borrow. Interest on loans varies from time to time and a company needs to plan its strategies so that it borrows when lenders are lending at a good interest.

Ambitious not-for-profit groups, anxious to be big players in this sector and compete, need to display the same business skills if they are to build the capital and have the income stream needed to get loans. If they don't compete, they will become irrelevant.

Listing on the stock market: To list on the stock market you need to convince investors that you are safe so you need some capital, and you also need to persuade them that they are going to make plenty of money from what you do. You need to have a strong income stream, a track record for maintaining it, and be able to show that it will grow. Once listed you can raise more money by 'floating' more shares and showing that you will use that money to generate even more income for your shareholders.

Example: FPCompanyG

Companies plan their growth years ahead, harbouring their resources, and waiting for the right moment. FPCompanyG had been preparing. Its long term focus was to grow. It merged with wealthy XXXXbank-backed FPCompanyK to give it size and capital. Later it raised a loan to buy all of FPCompanyK from the bak.   It would have been paying a steady interest on this since. By floating at the right moment (October 2014), it could pay off its loan and still be in a position to double its size. And the two founders who had planned and focused their efforts on growth for years found they had an extra $734 million between them. It was all about strategy and success.

... We've built a platform that will allow us to double our size if we get the opportunity. We invested in it to be able to grow," Mr Dxxxxx said on Tuesday.

"... We realised there was only two mechanisms to grow, to take on new partners or to IPO," he added.

"... We were limited by what capital we had. We thought it was time to take the big adventure."

Source: FPCompanyG Healthcare float finds favour - Financial Review, 7 Oct 2014 (Paywall)

It seems there are many more interested in listing but they probably don't have enough capital or a big enough income stream to attract investors. They may need to generate more profit from the services provided.

Apparently, equity capital ­markets advisers at the smaller end of town have had numerous ­approaches from aged-care ­operators and manufactured housing park operators hoping for a listing.


Two of the groups said to be considering a potential listing of new aged-care roll-up businesses are Next Capital and private equity firm Advent Private Capital.

Source: IPOs fancy their luck The Australian, 29 Jun 2015 (Paywall)

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Market analysts

Market analysts play an important role in ramping up pressures on the companies. Based on the, sometimes optimistic, information the companies provide, analysts give projections for earnings and/or growth.

... (FPCompanyI)- - acquisition of over 1,300 places via bolt-on acquisitions - - well positioned to make more - - - opportunity to grow as the number of players in the sector further contracts - - - - was on track to meet prospectus targets for full year 2015


(FPCompanyG) - - well positioned to benefit from the government's new funding regime - - group's extensive development pipeline to support strong free cash flow growth underpinning our DCF (discounted cash flow) based price target,


... analysts remain cautious about FPCompanyH Healthcare that has faced a number of challenges since listing - - - .

Source: Aged care the place to be, says Deutsche Bank - The Australian, 28 Jan 2015 (Paywall)

Analysts' analyses and projections influence the large institutional, as well as other buyers and lenders and so drive the share price and the enthusiasm. These projections become a target that the company must meet if they are to continue to get positive reviews. If the reviews are negative, the company will make every effort to generate more profit from what they do to reverse that.

Positive reviews by analysts, like those below, praising a company’s success in meeting financial targets bring in the Mum and Dad investors as well as the managed funds. When its "compelling" that means almost irresistable. Mum and Dad's might borrow against their houses to buy shares.  Share prices rise. The company's value is greater.  It can borrow more money, sell more shares and grow more rapidly. That is what the competitive game is about.

FPCompanyG Healthcare Ltd (ASX: xxx) listed its shares on the Australian Securities Exchange in October last year and has generated fantastic returns for initial shareholders in the time since.


FPCompanyG is well positioned to benefit from Australia’s growing and ageing population – a trend that could result in strong growth for the healthcare sector in the years and even decades ahead.


In addition, FPCompanyG is on track to beat its prospectus forecast for revenue and earnings


FPCompanyH and FPCompanyI both maintain strong balance sheets as well, with FPCompanyH looking particularly compelling with a price-earnings multiple of 23.1x forecast earnings.

Source: Why FPCompanyH Healthcare Ltd should be on your watch list. The Motley Fool July 10, 2015

Motivated analysts and particularly banks drive the market and they are a long way from the bedside in the nursing homes.  They have no idea what is happening there. The analysts by their expectations set the amount of profit that needs to be taken from the business, and only what is left is used to pay for care.

What is important for analysts

So how do analysts assess aged care businesses.  What do they look for.  Notice in the quotes below that the only interest the analyst has in the residents is the capacity to squeeze more of them into the same nursing home so that they get more money for that investment and the potential to sell them more extra services and get more money out of them.  Who assesses whether crowding in more residents impacts on the lives of others and if the extra services are of any value to the residents as contrasted with their profitability?  Well no one that I know of.  All the government wants is for there to be more choices.

Fact: the proportion of people in retirement relative to the rest of the population will grow substantially over the next decade.


Aged care operators are among the most stable way to get exposure to this generational change, and the three on this list are strongly positioned.


- - - - not a “pure play” retirement accommodation provider.

- - - - allows Axxx to sell more value-added services such as care and support services for residents in its facilities.

- - - - around $75 million profit, and the share price has proved volatile over the last year.

- - - - a strong performer since its IPO. Its recent half year results did little to hurt its reputation, with earnings growing 15% on a revenue rise of 12%.

- - - - expanding its portfolio of beds in a capital-light manner, by making better use of existing space in its facilities (nursing homes).

- - - - has no debt on its balance sheet, which means it can commit to large greenfield spending

- - - - has a “lazy” balance sheet that is not taking advantage of growth opportunities.

- - - - trading below its IPO price, before recovering strongly in recent times.

Source: 3 ways to profit from the ageing population The Motley Fool 9 March 2016

Note from the quotes that the analysts consider that this is a game and use the term 'players'. But there is much more at stake than a game for residents.

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Investors: The bulldozers that build the market

It is no longer the mum and dad investors that the companies listed on the sharemarket depend on - the people with consciences who might feel guilty at the way the company they invest in behaves. It is the big managed funds such as institutional managed or pension funds. They invest others money and these investors seldom know where the money is invested and where the dividends they are paid come from. These companies have millions to invest in other companies and their decisions can be life or death for those companies. They listen to the analysts but also do their own analysis.

Managed funds: The managed funds themselves are only interested in the returns they will get on their investment.  Their employees' bonuses are linked to the profits they make for those customers who trust them to get the highest possible yield. It is their interest that ultimately drives the market.  This is why values, norms and the public good struggle and why the market has become so impersonal and ruthless. Their employees don’t know what happens at the coalface and their only interest is in the sort of profitability that will give the company the maximum return on its investment and contribute to the size of their bonusses. 

I previously quoted JohnRalston Saul's criticism of the corporatist's "desire to buy and sell as effectively as possible eliminating other considerations”?  Have the staff and residents become "other considerations' that have to be eliminated to serve the interest of this market?  What is the impact of this on the staff and residents in the facilities?

The bulldozers: Aged care providers that don’t perform economically and meet their expectations are doomed. If other sectors are more profitable then the aged care companies have to find some way to match that if they want to survive. Those that do, by whatever means they can find, will prosper.  If not the dozer will push them onto the scrap heap without noticing the staff and the residents that are part of the now worthless package.  A more profitable company that can squeeze more profit by selling biscuits that make us fat or cure all potions that don't work will replace it.

AXXX for example is a listed investment company. People invest in them and rely on their expertise to make money for them.  Aged care is only one of its investments. It invests in FPCompanyH, which has to make at least as much profit as the others that AXXX invests in if it does not want to be dumped.  There is nothing wrong with AXXX.  I am simply using its existance as an example.

AXXX is raising as much as $10 million from investors to tap upcoming initial public offerings and boost the listed investment company's holdings amid some of the most volatile investment markets on record.


"In a portfolio that has an investment approach that can scan for the best opportunities in the market, irrespective of company size, it is important to have the flexibility to take advantage of market conditions and other opportunities such as IPOs," AXXX said in a statement.


- - - we're adding to positions in healthcare and related companies," he said

AXXX holds positions in aged care group FPCompanyH and Lxxxxx Communities. (a retirement village operator)


AXXX, which invests in companies across the broad spectrum of the Australian Securities Exchange, posted $5.1 million in profits for the half year to December, which represents an 80 per cent hike from 2014's $2.8 million gains.

Source: AXXX seeks $10 million from shareholders Sydney Morning Herald 19 Jan 201

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The market game

One of the great mistakes that angry critics make is to think that this is greed. Businessmen are highly motivated and dedicated. They are arrogantly sure that they are delivering on care. Success and status is seen as confirmation of this. Neither greed nor empathy are what drives most of them. Market-speak frequently refers to participants as 'players' in the 'game'. It's the excitement and the satisfaction of winning - of being successful when others are failing.

The more you read what they say, the clearer this becomes. One of the FPCompanyG founders said that "we get more out of the doing side. Were both creators." Even Christopher Pyne, when minister for Aged Care, talked about 'players' in the sector.

Its a complex and exciting game full of risks and opportunities, creating strategies, planning and harbouring your resources. Its the excitement of the game that many find so exhilarating - success - watch your children at it. They are preparing for this life.

The question that worries me, is whether our frail elderly citizens, at the end of their lives, should unwittingly become part of this game, with all its risks and pressures.

Impression management: In the period leading up to an Initial Public Offering (IPO) it is critically important in inducing investors to buy your shares, that you create a good impression.

Not only do you want to impress the investors with glossy photos and illustrations, but you also need to persuade yourself that you are not selling them a pup. The players are not deliberate fraudsters. They need to believe themselves.

Many critics, including an academic doing research, have complained that providers focus on impressive-looking facilities at the expense of care for those who actually need it. It's what everyone will see. A letter from the daughter of a resident in a FPCompanyG home published in The Age said it again. It states it so well that I am taking the liberty of reproducing it here in full, but am omitting the name.

These are the people who actually see what is happening, but they are never heard:

More staff would help: Congratulations to FPCompanyG Healthcare on making a profit on their first day of trading (''IPOs look good for aged-care providers'', 8/10/2014). Let's hope it spends some of the huge profits on the care of their residents. Perhaps it could increase staff numbers or even introduce a better ratio of carers to clients in all their facilities?

In the facility my mother resides in, residents would benefit from the employment of more registered nurses and more training for carers. The lovely private dining rooms (never used) and many elaborate flower arrangements are of little benefit to residents who are immobile and cannot leave their rooms.

Source: Letter to The Age, 9 Oct 2014

One wonders what was happened in this nursing home since the float. Has it improved - and are those huge profits going to improve care.  On 20th February 2015 "newly listed FPCompanyG" is reported in The Age to be on track for its IPO targets "more than half way to meeting its full-year net profit targets" of $29.6 million.

It attributes this to more money from government because it has "a larger number of residents needing high or acute care". It also "reduced its staff costs as a percentage of revenue to 60.5 per cent, from 63.5 per cent in the prior half - - - ."

Is it reasonable to conclude that FPCompanyG is doing better because it has sicker patients for which government is paying them more, but it needs less staff to care for them so is able to save money and make more profit?

Its like reading "Alice Through The Looking Glass". In this new "logical world" everything is the other way around to what we are used to - but do the residents see it that way too?

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Profitability

In late 2014, Crikey obtained a copy of an internal annual survey of nursing home profitability carried out by Bentleys Chartered Accountants. They wrote an article about it. This illuminates and explains what is happening, and why people see the system failing them.

Nursing homes increased their profitability by 159% in the previous year by cutting down on hours of care and other costs per resident. This, as I have explained, is the only way that these groups can generate the income stream to compete successfully in the market game. If they fail to do so, they become losers.

Reforms to the aged-care industry have made running those businesses more profitable. But at what cost to the people they're supposed to be caring for?


The survey covers 179 nursing homes around the country, breaking down average income and expenses line-by-line, and shows that net profits jumped 159% last year, from $4.14 to $10.71 per resident per day.

The rising profitability came as major aged-care players like FPCompanyH, FPCompanyG and FPCompanyI listed successfully on the stock exchange last year - - - - - . The investment boom comes amid widespread concerns about the standard of care being provided to the vulnerable residents of nursing homes- - - -


A chart showed the long-term decline in the time spent on care by registered nurses, which fell from 5.9 hours per patient per fortnight in 2004, comprising 17% of total care staff hours, to 5.2 hours or 13% of total hours in 2014, while the amount of time spent by Personal Care Assistants (PCAs) jumped from 11.4 hours in 2004 comprising 31% of total care staff hours, to 16.8 hours or 39% of total hours in 2014.

Source: Profits rise, quality called into question in aged-care industry - Crikey, 15 Jan 2015

In the same article, a comment by Charmaine Crowe, Senior Policy Adviser for the Combined Pensioners and Superannuants Association, summed it up:

... The clear modus operandi for the industry is to boost profits by cutting skilled staff. Registered nurses are being replaced by lower-skilled care workers at a time when older people are entering nursing homes sicker and frailer.

Not only does this threaten the health and safety of residents, it risks increasing the burden on state health systems as more residents are shipped off to emergency departments because the nursing home doesn't have appropriately skilled staff to look after them ..."

Staffing levels: That Crikey report is the first report we have had that actually gives staffing ratios and these come from the industry itself.  As I read the figures, they tell us that in 2014 residents were getting on average 5.2 hours of registered nurse care and per fortnight and 16.8 hours of PCA care.  That adds up to 22 hours of nursing care which works out at 1.6 hours per resident per day. 

If that is all the care the residents are getting, then we can compare it with a recommended figure of 4.5 hours of nursing care per day advised in the USA.  Below 4.1 hours there is a risk of failures in care. Below 2.9 hours per day most residents needlessly suffer harm. In the USA, the average figure is about 3.5 hours per day.  But the article does not mention enrolled nurses so that is probably a bit lower than it really is -- so we are still in the dark

The Crikey article says this is 13% (nurses) and 39% (PCAs) of total care staff hours.  So what do they do for the rest of their time? Is the rest of the time spent on non-care activities?  But we can't be sure because we don't have the original documents and can't be sure exactly what is being reported. Are staff being diverted from care to do more administrative work because this would cost more?

The 2015 Bentleys report

A year later another Bentley report was obtained by the Sydney Morning Herald.  Fairfax journalist Tom Allard obtained a copy of the 2015 Bentleys report. Because it is confidential, we only know what he tells us. This includes an additional 40% rise in profits with a 7% drop in the time spent on care.

It seems that Crikey did not report all of the time spent nursing (eg. enrolled nurses) in their review of the 2014 Bentley report.  The 2015 report gives the total time spent by care staff during 2014 as 42.71 hours per fortnight (3 hours per day).  This fell to 39.8 hours (2.8 hours per day) in the 2015 report. This is still below the 2.9 hours below which US reports indicate most residents needlessly suffer harm.

Allard also described the allegations of rorting that were being made. A Bentley spokesperson responding to the concerns expressed felt that the reforms were working well claiming "They can do more with less. This is absolutely efficiency.”

It is a pity we can’t see and assess these reports ourselves and have to be content with crumbs and sometimes misleading conclusions.

The profits of aged care homes surged 40 per cent in the past year as operators cut hours of nursing care while claiming higher payments from the federal government for servicing more of the most frail patients.


The earnings boom in the sector comes after the government introduced widespread reforms of aged care in 2014, including deregulating fees and lifting restrictions on the accommodation bond that nursing homes can levy on residents

Yet while nursing homes report they are looking after more needy residents, the time spent caring for them declined by 7 per cent over the past year.

In 2015, hours by care staff (nurses, care assistants and therapists) fell from 42.71 hours per fortnight to 39.80 hours per fortnight.

Source: Nursing home profits soar as patient care declines Sydney Morning Herald 1 Jan 2016

A very different view: Those businesses that worked with the industry were quick to respond. Provider Assist explained why the claims of profiteering were being made and why they were wrong. They acknowledged the value of the Bentley report and the accuracy of its figures. They justified the additional profitability. on the basis that residents were being expected to pay accommodation costs themselves. They blame the decreasing time on care on the difficulties in recruiting staff. They deny the rorting.

We’re here to help you cut through the hysteria the media has caused by providing a more informed analysis of the data. So let’s take a look at the facts and some alternative views and explanations than what has been published.

Source: Aged Care Profiteering? A Detailed Analysis Provider Assist 13 Jan 2016.

On the same day a senior partner from Stewart Brown who claim they are "the market leaders in benchmarking the financial performance of the aged & community care sector" wrote a similar article in Australian Ageing Agenda which stimulated some comment mostly supportive of the criticisms.

The Bentleys National Report 365 collecting data for the year ending 30 June 2015 was released on 1st October 2015.  On 15 December, 2.5 months later, Stewart Brown released a public report with a much larger numbers of responders. It examined the previous 6 months data. It came up with very different figures from the 6 months subsequent to the Bentley report and rebutted it.

Based on the survey results, the six months to December 2015 can be described as business as usual with respect to the overall financial performance of the residential aged care sector.


It is certainly a myth to suggest that the sector is reaping huge rewards and is riding on a wave of government largess. What we see is a sector that is sustainable at best, but only if the sector continues to strive for efficiency. We certainly still see potential for improvement.


Generally it means that the additional income received as a result of higher subsidy rates is being expended on care costs ‐ including on staff wages.

Source: Stewart Brown ACFPS Report Dec 2015 - Summary of Survey Outcomes

How do we cope with this uncertainty: Bentleys has been making these reports for 20 years and should be very experienced at it. It is a National partner of ACSA, the body representing not-for-profit providers.  Presumably it tries to get a representative sample. Stewart Brown is the industry leader in aged care benchmarking.  Why would the two get such very different samples and come up with such contradictory results.

The issue I see here is that like so much in aged care, the information that we get publicly wherever it comes from is generally supportive of what the industry claims and it is released by the industry. But when we get access to information that is confidential or that we are not supposed to see then a very different picture emerges. What should we think?

Are the critics correct?:  That strong critic of our corporatist society, John Ralston Saul, suggested in 2001 that we are "obsessively trying to regulate society through trade" (On Equilibrium p58).  He and others argued that increassingly our society was being driven by "interest" as contrasted with the "disinterest" that is needed to act responsibly for the good of society. That other critic Robert Kuttner observed around the same time that we no longer recognise and develop our "social selves".  Saul quotes Adam Smith "The wise and virtuous man is at all times willing that his private interest should be sacrificed to the public interest - - - (p66)". 

Have we reached a stage where our society is so entirely interest driven that even the content of the data and the logic we use are molded by the particular interests of those involved. Is this why there is such an enormous difference in the way aged care is understood by government and providers on the one hand and by staff and residents on the other.  Is it true that we no longer have "wise and virtuous men" to turn to?

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The pressure cooker

The drive to persuade investors and list on the market is a high-pressure enterprise and managers must be very focused. They can't allow themselves to be distracted by side issues.

FPCompanyH has informed the market that it made a $5 million payroll error in the months before it floated. They claim that "The review has shown that in some instances loading on overtime was not identified and paid to some employees". The inference is that this was a genuine mistake and may not have been deliberate. It may even have been genuinely unexpected.

Another recent article on 8 May 2015 reports that $4.8 million was underpaid to a company Aged Care Services Australia Group's (ACSAG) workers during the previous 6 years and that Fair Work Ombudsman believed the underpayments were not deliberate. 

Ironically, a search for ACSAG comes up with a link urging readers to “Benefit from the latest and most advanced developments in aged care with Aged Care Services Australia Group. Visit us to find out more”.  The impressive web page itself no longer says that.  It also reveals that ACSAG is a subsidiary of FPCompanyH with a link to an even more impressive FPCompanyH website directed at the elderly market.  It is not clear to me whether this $4.8 million is part of the $5 million payroll error described earlier or an additional disclosure of further underpayments to workers.

I am willing to accept that this was not deliberate but in my experience, management's attention in these high pressure situations is usually much too focused elsewhere to listen to unwelcome news that would derail their plans. They choose not to hear. Situations like this need to be tightly scrutinised and penalties imposed to help others focus on what they are doing and disclose fully when informing investors. Hopefully ASIC will investigate this as it is unacceptable.

... HEDGE funds have battered property-heavy aged-care group FPCompanyH Healthcare's share price down a further 5 per cent as it deals with the fallout of payroll underpayments.

The group earlier this week suffered a 6.3 per cent share price drop after it revealed a review of its manual payroll system had shown about $5 million in missed pay ..."

Source: Letter Payroll botch hits FPCompanyH - The Australian, 5 Dec 2014 (Paywall)

Too often employees in the business who try to draw management's attention to something like this are ignored. While the exact sum may have been unclear to them, it is difficult for an outsider to accept that no one working in the payroll section realised that anything was wrong, when there was as much as $5 million missing.

Asking us to believe that employees who are not paid $5 million of overtime don't make enquiries and complain to their nursing home managers stretches our credibility. We can only draw our own conclusions. Surely, someone realised something was amiss and spoke to their superiors or even to management.

Too often this is how we humans behave in response to high stress situations. We cannot deal with so many issues at once. Unwelcome news whether its financial, or information showing that care is deteriorating because of staff shortages and alienation, is far too often put on the back burner and stays there until changing circumstances force it into the open. The circumstance here is likely to be action by the employees or their union. They would have suffered because they have not been paid large sums they are owed.

But the market’s memory is short and as soon as it is clear that whatever was done has actually increased profits - or at least not affected them then all is forgiven.  Regardless of its reason for collapsing, a company whose share price has collapsed and is now recovering offers a bigger opportunity for profit than one that is steady.  Its picking these opportunities that adds to the excitement of the market game for investors.  Company's who make big proifits by exploiting the vulnerable suffer temporary setbacks but are soon rewarded again.

- - - aged care facilities operator FPCompanyH Healthcare Ltd (ASX: JHC) posted a sharp turnaround with a net profit of $28.8 million for 2014-15 compared to a net loss of $2.9 million in the previous year.

Source: Morning market movers: 13 stocks to watch The Motley Fool Aug 24, 2015

The Daily Reckoning on 14 Sep 2015 has an impressive graph showing the steady growth of FPCompanyH’s share price. It indicates “If the stock should run further and make a significant break over the May high of $2.89, then it is strongly suggesting positive news is coming.

Aged care facilities operator FPCompanyH Healthcare Ltd (ASX: JHC) is also expanding through acquisitions with its $79.5 million buyout of the Profke residential aged care portfolio, which will add 587 beds in Queensland and New South Wales.

We will bring you details and analysis on what the deal means later today.

Source: Morning market movers: 7 stocks to watch The Motley Fool Oct 2, 2015

Overselling themselves: The pressures  to oversell their offerings are very strong and tempting for those planning an IPO. They may be tempted to overstep the limits. Some claim that PECompanyO did just that in order to capitalise on the enthusiasm of investors following the successful floats of FPCompanyG and FPCompanyH.

Gullible investors may lose money, but ultimately, it is the residents who will feel the pressures when things come unstuck financially and there is a scramble to extract more profit from their care.

... Veteran investment banker and private investor David Kingston has slammed PECompanyO Private Equity's float of aged care operator FPCompanyI Health, calling it over-priced and opportunistic, and casting doubt on its profit forecasts.

Mr Kingston, the founder of K Capital and former Rothschild managing director, said PECompanyO cynically exploited investor interest in aged care.

The $1 billion initial public offering on Friday was the third aged care operator to float this year after FPCompanyH Healthcare and FPCompanyG Healthcare, but it failed to live up to the hype. The stock fell 17.6 per cent on debut, making it the worst large float of the year ..."

Source: FPCompanyI Health IPO was overpriced, opportunistic, says former banker David Kingston - Central Western Daily, 10 Dec 2014


As an example, while FPCompanyG owns almost 30% more beds, it has forecast an EBITDA margin of 20.3% for 2015-16, compared to FPCompanyI's higher forecast EBITDA margin of 23.7%

Although FPCompanyI's shares are trading at a slight discount compared to FPCompanyG and FPCompanyH, investors should remain wary of the stock's actual worth and may wait until the release of FPCompanyI's first-half profit results (which are likely to be released in February) before buying the stock up again.

Source: Here is why the FPCompanyI Health LTD IPO was overpriced - The Motley Fool, 10 Dec 2014

So, private equity group PECompanyO has walked off with its big profits leaving FPCompanyI's management under strong pressure from the market to increase its profits by February. Where will that profit come from, and what will the consequences be for the care of residents in these nursing homes?

FPCompanyI’s determination to rise to the occasion and its strong commitment to growth and expansion is illustrated by their paying big money to poach an expert in acquisitions from a world bank:

 Bxxxxx, who was a managing director at Barclays, will be head of strategy


He advised PECompanyO Private Equity on its $175 million acquisition of FPCompanyI Health and subsequent bolt-on purchase of Cook Care; Ramsay Health Care on its acquisition of Générale de Santé; and Archer Capital on its investments in Health Care and aged-care business FPCompanyJ.

Source: Former Barclays MD Bxxxxx poached by FPCompanyI Health Australian Financial Review, 21 April 2015 (Paywall)

It seems there were plenty of perks to encourage him.  He was able to buy two properties from FPCompanyI for over one third less than the just over $600,000 it had paid for them only three months earlier.  If we look at what was happening to the company and the revelations about its operations in 2016 when this information was disclosed we can question whether the high flying businessmen that this largesse attracts are the sort of people that are suited to aged care. What do they actually know about caring?

FPCompanyI has also recruited the recently retired manager of Ramsay Healthcare the most successful hospital provider in Australia, Pxxx Gxxx to be its chairman. He is very upbeat about the prospects for big companies in aged care.

In the full article Gxxx attributes these improved prospects on the considerable amount of money that the Abbott government made available to aged care and its requirement that the residents pay far more for their care and if need be sell their homes to do so.

Critics ask how much of that increased funding has gone to care and how much has simply made it more profitable for the big companies. As there is no accountability no one knows where the money goes. What is clear from the Crikey reoport and from some company’s own reports is that it has not gone to staffing.

Numerous studies show that the quality and number of nursing staff is the most important determinant of care in nursing homes. International studies show that larger companies and the larger facilities they build generally have fewer nurses and poorer care. But Gxx claims that like Ramsay these market changes will result in better care.

- - - - former Ramsay Health Care boss Pxx Gxxx is working on his next great vision for Australia’s healthcare sector.


Gxxx, best known for helping to guide Ramsay from a small company to one with annual revenues of more than $4 billion, has set his sights on the aged-care ­sector and, as chairman of FPCompanyI Health, is in the box seat to ride the new healthcare wave.

He says he can see the aged-care sector following the same path as private hospitals, which, with the right government reforms, consolidated and grew to become significant businesses in corporate Australia.

“I can see it happening in aged care quicker than the transition with private hospitals,” he tells The Weekend Australian.


- - transform the industry from one that is perceived as not a good industry for consumers to one people can be proud of.”

Source: Former Ramsay boss in box seat to draw up revolution in aged care The Australian July 25. 2015 (link blocked by pay wall)


FPCompanyI Health chairman Pxxx Gxxx has told investors the company intends to become one of the largest and most respected aged-care organisations in Australia, and that the ageing population will underpin its growth. - - - the government aged-care reforms would build a better aged-care system, adding that FPCompanyI was ideally positioned to benefit from favourable industry conditions.


The company, which listed in December last year, has 4273 places and will soon have 4441. Mr Gxxx said that is 550 places more than forecast in FPCompanyI’s prospectus for 2015 and 921 places above prospectus in total.


FPCompanyI is committed to growing to 10,000 places by 2020, which it has said would be a combination of acquisition and organic growth. FPCompanyI had restructured its debt facility through the year, adding an extra $150 million, and boosted its board to position the company for growth.


- - - outlined to shareholders at the AGM that the number of people aged over 85 years was expected to double by 2032 and double again by 2046

Source: FPCompanyI’s Pxx Gxxx says ageing population will drive growth The Australian Sept 23, 2015 (link blocked by pay wall)

Ramsay Healthcare's influence: The Australian newspaper’s praise of Pxxx Gxxx’s marketplace skills need to be taken with a pinch of salt. It was his mentor and predecessor Paul Ramsey, who had the insight not to push cost cutting too far, that brought Ramsay its success. Ramsay was a ruthless businessman but he had insight. At the time of the psychiatric scandals in the USA, Ramsay was operating in this sector in the USA. It was the only for-profit operator that, as far as I know, escaped the 1991 to 1994 psychiatric scandals and did not exploit the vulnerable.  It sold out quickly when the scandal broke and the sector collapsed.

In Australia Ramsay Healthcare was a more modest player building its empire by owning hospitals in Niche markets where there was little competition and it could charge more. Ramsay also recognised that the real customers for private hospitals were the doctors, particularly the surgeons.

When Australia biggest hospital operator Mayne Health was put out of business by the doctors Ramsay was waiting. It soon bought almost all of Mayne’s hospitals. That is why Ramsay is now in such a dominant position and has done so well. It is still constrained in how much cost cutting it can do because there are still plenty of not-for-profit operators that doctors can take their patients to.  Ramsay Healthcare's story is described here.  Ramsay did buy some aged care facilities earlier but the sector was not profitable at that time and it sold the business.  The Abbott government's largesse with taxpayers' money and with the life savings of senior Australians has changed all that.  Will it desert the sector and walk away again, if and when, it becomes less profitable?

If Pxxx Gxxx has learned enough from his mentor, Paul Ramsay, then he may be better at responding to new situations. He might move quickly to work with the proposed community aged care hub and use that to outsmart his corporate competitors. But that may only happen when he realises that this can't be stopped.

FPCompanyI growing rapidly: FPCompanyI has pushed up its profitability and has embarked on a buying spree. With so much effort directed to meeting its income targets and growth, one wonders just how much of their focus is on care and how much money is being spent on the resident’s needs.

- - - have 49 facilities and says it is on track to reach its target of 10,000 beds by the end of FY2020.

- - - well placed to speed up its growth ambitions after posting strong half year results, meeting occupancy targets and outperforming on a cash flow.

Source: FPCompanyI Health accelerates acquisition spree Finance News Network 5 May 2015


... acquiring four new aged care facilities

Since its IPO in December 2014, FPCompanyI has acquired a total of 549 additional beds across 5 facilities

Source: FPCompanyI Health acquiring four new aged care facilities  Proactive Investors 5 May 2015


Aged-care provider FPCompanyI Health on Wednesday beat a string of financial targets outlined at the time of its listing on the ASX, while marking a new milestone in its strategy of making acquisitions.

Source: FPCompanyI initial profit beats target  Business Spectator, 12 Aug 2015

Combined Pensioners and Superannuants (CPSA) is critical of the way FPCompanyI has developed a “productivity index” which measures its efficiency in squeezing more profit from the money provided to it by government to care for residents. CPSA is not accusing the company of fraud but it questions the way it gets its figures and where it gets its profits.

CPSA looked at the figures that are available in its reports and listed FPCompanyI’s figures. It also claimed to have looked at two other market listed companies. If found that there were large sums in the “leftover” basket and wondered how much had gone into the bottom line rather than services to residents. While they do not say it in so many words they are clearly concerned that money that should be going to care is going to profits.

It’s impossible to say from FPCompanyI’s annual report and investor presentation if all of the $37.9 million in ‘left-over’ basic daily fee revenue has gone straight to the bottom line. But ask yourself, if you were a betting man or woman, what would your money be on?

And it’s not just FPCompanyI that’s managed to end up with large amounts in ‘left-over’ basic daily fee revenue. We estimate that the two other listed residential aged care companies, FPCompanyH and FPCompanyG, had 52% and 67% ‘left-over’ basic daily fee revenue respectively. Many tens of millions of dollars.

Source: Nursing homes hungry for profits CPSA, 1 Dec 2015

FPCompany NewnameC Aged Care (previously FPCompanyA) is also on the march intent on catching up with its rivals and putting pressure on them.

In further signs of industry consolidation, FPCompany NewnameC has bought the residential aged care business of Aquarius Aged Care, involving nine facilities covering 551 beds stretching from Queensland’s Southport down to prime Sydney suburbs such as Mona Vale, Wahroonga and North Manly.

The purchase follows FPCompany NewnameC’s buyout of Stockland’s four aged care facilities, with a total of 366 beds in Sydney and Melbourne, for about $25.6m.

Source: FPCompany NewnameC builds aged-care portfolio with $50m purchase  The Australian, 19 Decr 2014 (Paywall)


A 91-BED aged-care centre is proposed for Mona Vale, which the proponent said would help address a shortfall in accommodation.

FPCompany NewnameC Aged Care this year acquired Aquarius Aged Care’s 49-bed centre at Mona Vale and centres at North Manly and Narraweena, and is seeking approval for the $23 million project.

Source: FPCompany NewnameC Aged Care plans bigger residential care centre at Mona Vale Daily Telegraph, 20 Aug 2015

A new nursing system: FPCompany NewnameC has apparently introduced a new nursing roster system which it claims is to benefit residents. In this it may be following other companies who have been able to reduce staff costs by restructuring nursing services.

On 2nd July Nine News published a statement about a FPCompany Newname C nursing home from an anonymous whistle blower

"They're missing out on their basic human rights," the anonymous whistleblower said.

"It's becoming increasingly worse with the staff shortage. They're totally understaffed overnights - one person responsible for about 40 people, anything can happen," they said.

"Because there's so little amount of staff there in the afternoon, we have to start bringing them to bed at 3.30pm."

"Then they don't get taken out of bed until 9, 10 o'clock the next day."

Worse than being forced to spend most of their time in bed is the level of hygiene these elderly people are forced to live with.

"They get away without having a shower for a week, or longer," the whistleblower said.

"It's just inhumane."

Source: Victorian retiree sets up hidden camera to catch thieving aged care worker Channel 9 News, 2 Jul 2015

FPCompany NewnameCs response to the accusation can be found here

Consequences of the 'game': My argument is that if we have no choice but to be part of this game, then, if the ultimate object of the game is to provide good care and quality of life, the rules of the game should ensure that that objective is met.

I think it is very clear that the rules of the game often do the very opposite. Not-for-profits are now trapped into playing this same game, but as they play this distracting game many still have their eyes slightly more focussed on the intended objective.

This may explain why a recent study shows that for-profit operators are sanctioned for poor care in Australia more than twice as often as not-for-profit operators. If the game was to provide good care, then not-for-profits should be flourishing and winning - but many of them are struggling and being eaten up by for-profit competitors.

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TISA global agreement: Adding fuel to the Pressure Cooker

If you agree that the pressure cooker is already causing major problems then consider what is likely to happen as aged care services are included in international free trade agreements. The negotiations are all about maximising trade opportunities so that Australian companies can get wealthier and bring more money into Australia - a laudable objective. It is also a high pressure game and it is economists and businessmen who are at the table. Civil society is not there and its all done in secret.

A core philosophical position for free market negotiations is the liberalisation (removal) of local regulations that restrict the operation of this free market. One of those regulations was the probity requirements for the owners and providers of aged care. These clearly set out the requirements for this vulnerable sector. Owners and providers had to be fit and proper persons - i.e. they could be trusted to put the interests of vulnerable seniors ahead of their own.

The repeal of the probity regulations by the Howard government in 1997 radically altered the expectations for prospective owners and providers. Aged care became a free market and, no matter how tarnished an owners reputation, there is now a way for that company and its owners to enter our aged care marketplace. The aged care sector now operates under exactly the same rules as any other market. One of the major reasons why aged care is broken today is because of what happened in 1997. 

In spite of many protestations, the likely consequences of these changes for the welfare of seniors were ignored, have not been confronted since, and are not a consideration in current negotiations.  Our welfare as we get old has been sacrificed at the alter of economic prosperity through free markets.

The China-Australia Free Trade Agreement (ChAFTA): One wonders at how much else protecting the vulnerable was traded away in the recent trade agreement with China. The whole article below is worth reading. It explains how Andrew Robb sweet-talked the Chinese into agreeing. In this article the manner in which the whole agreement was negotiated and how aged care was included is revealed. Its all about commercial opportunities. One wonders at the morality of selling our broken aged care system to the Chinese?

He'd (Trade Minister Andrew Robb) come to the view that the big opportunities for Australia's future lay in selling services to the world. Three quarters of Australia's economic output is services, not goods.


Then Robb had a bit of a brainwave. "I saw Gao over a meal in September, and I said to him, 'I've been impressed with China's Special Economic Zones'," areas of the country where the usual regulations are suspended to allow greater freedom to foreign trade.


"I said to him, 'You ought to think of Australia as a special economic zone for services. We've got a population of 23 million – that's smaller than some of China's special economic zones.


"I put the idea to both of them. Then I sat down with Gao to negotiate 10 days later and the doors just opened on services." Beijing offered unlimited access for Australia to build private hospitals, aged care homes, hotels and restaurants, with 100 per cent Australian ownership.


"We got enormous opportunities that aren't there for others," says Robb.


"The liberalisation of protection for goods and services was an important driver of broader economic reform - - "

Source: Profiting from the trading post Sydney Morning Herald June 26, 2015

Trade in Services Agreement (TiSA): But there is more to come.   Consider what might happen after the much broader Trade in Services Agreement (TiSA) is finalised.  Services means health and aged care as well as things like financial advice.  Australia is one of the countries most enthusiastically driving the negotiations and it is keeping it all confidential so we will not know what is done in our name until after they have signed it and we are trapped.  The information we do have comes from leaked documents published on Wikileaks. The information being leaked is worrying.

The days when we could take action to protect ourselves from multinationals like Tenet/NME, Columbia/HCA and Sun Healthcare and see them off will be gone if what Australia is pushing other countries to do is accepted. There will be an international court higher than our own with little transparency and no appeal process -  a court run by industry that will make the decisions for us.  So if we  thought we would not be like the USA and have the same sort of health and aged care system then we need to think again.  We have already had large multinationals and private equity in health and aged care.  Care franchise Home Care Assistance, a profitable US company with a  strong focus on profit is already looking for franchisees to provide Consumer Directed Care in Australia.

Leaked negotiations from a key trade deal show radical plans to deregulate services in Australia, including aged care and childcare

Highly sensitive details of the little-known but extremely important Trade in Services Agreement (TiSA) agreement, published tonight by WikiLeaks, reveal that the Australian government is at the forefront of a push for extensive international financial deregulation.


Dr Patricia Ranald, co-ordinator of the Australian Fair Trade and Investment Network, said WikiLeaks' publication of the most recent negotiation texts confirmed the Australian government supports proposals that will “further encourage more commercialisation and foreign investment in all services, including human services such as aged care and childcare, and will limit the ability of future governments to regulate these services in the public interest. This will encourage the domination of giant global services companies in areas like childcare and aged care at the expense of public, local and not-for-profit services.”

The latest documents show Australian support for stronger limits on government regulation of licensing, qualifications and technical standards in all services, including human services such as childcare and aged care.

“This could limit future government regulation to improve staff qualifications, staffing levels and quality of care in those services,” Dr Ranald said.


Questioned by Australian Greens senator Peter Whish-Wilson in a senate estimates committee hearing in early June, the Department of Foreign Affairs and Trade (DFAT) denied the TiSA negotiations involved “a deregulation and privatisation agenda” but refused to be drawn on any details of the talks as “draft positioning negotiating texts … are kept confidential amongst negotiating parties by tradition”.

Source: WikiLeaks Exclusive: Secret core text from Trade in Services Agreement negotiations  The Saturday paper 1 July 2015

The Undercurrent on the Guardian website has a video explaining some of the problems with this agreement.

With a series of murky international trade agreements like the TPP being negotiated, will a secret court give corporations the power to erode the rights of nation states? The TPP includes an Investor State Dispute Settlement clause that allows a secret court (ICSID; International Centre for Settlement of Investment Disputes) with global reach to arbitrate disputes between multinationals and the countries they operate in, potentially forcing governments to change sovereign laws or pay compensation to companies if they lose a case. The Undercurrent shines a light on the issue and asks – is the TPP the end of democracy? The Undercurrent is an online news show billing itself as an antidote to the five-second soundbite.

Source: The Undercurrent: Forget the TPP, does a secret global court spell the end of democracy? The Guardian Australian edition

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Adding two and two makes twenty two

Is it possible that there is a link between:

  1. the additional funding provided by government and extracted from consumers of aged care under the Living Longer Living Better program and the government’s strong support of consolidation in the industry and
  2.  our economic deficits and the attempt to solve them by entering international trade agreements in services where we will profit from serving the sick and frail elderly in foreign countries?

Could there be deeper and more worrying policy issues that we are not being told about?

A look at the information we have:

  1. Clearly Australia will need large well structured and competitive companies with deep pockets if we are to enter the global aged care services market where we will have to compete successfully with US, European and Asian companies. If we don’t consolidate we won’t be able to compete successfully.
  2. Recent papers in Australia (see Policy and Evidence) have confirmed that aged care facilities operated by for-profit companies are sanctioned for poor care more than twice as commonly as not-for-profit companies. This fits with studies in the USA. These show that large market listed chains and private equity groups that form as the market consolidates have fewer staff and provide inferior care. Because we don’t measure care or staffing numbers we can’t confirm that this is why our system performs so poorly and why this has increased as the market has consolidated. It  seems likely.
  3. The suggestion in confidential leaked reports that profitability is soaring and the marketplace reports indicating that the market in aged care is booming. Consolidation reliies on large profit streams to negotiate the loans required for takeovers, mergers and floats. Consolidation becomes a feverish activity in booming markets. It can reasonably be concluded that the Living Longer, Living Better money is driving this process very successfully.
  4. Contradicting this impression of a booming sector are claims from the industry that it is battling financially. These claims are supported by a publicly available report that was performed soon after the leaked confidential one. The difference is difficult to understand or explain.
  5. The increasing unhappiness about aged care, about staffing, about elder abuse and about failures in care is reflected in media reports and in the unhappiness of staff who see what is happening but have no choice but to be part of it. This is documented in the previous section "19 years of care". All this suggests a failing system that is harming and not helping.
  6. Also confronting any misgivings we have are the promises that were made by politicians about the benefits of the Living longer Living Better program for the elderly.

Fearing the worst: Should we be worried?  Have economic considerations been put ahead of the care needs of Australians?  Is all this support for John Ralston Saul’s concerns that I quoted on the previous web page including

  1. “our desire to buy and sell as effectively as possible eliminating other considerations”? 
  2. Instead of being “subsidiary activities” have economic activities been allowed “to lead the way” and in doing so have they “deformed every aspect of our society”?
  3. Have our politicians not had the “commonsensical energy to maintain the public good above private interests”.and
  4. Has “such a perpetually virginal domain as economics got control of the public agenda”?

A dystopian thought: Its a horrendous thought to even cross our minds.  Were both the political parties that we have to choose from willing to deliberately deceive us by telling us that their policies were for our benefit when they were really intended to support a process, market consolidation, that leads to our aged care being provided by provider companies that evidence clearly indicates provide poorer standards of care and are at risk of exploiting our vulnerability.

These companies in both health care and aged care have exploited and harmed the vulnerable as exhibited by multiple scandals in other countries. In Australia scandals in other sectors have ruthlessly exploited the vulnerable.  It is possible that this is already happening in aged care but we don't know because we don't look?

The suggestion that our politicians are willingly and deliberately sacrificing the seniors, who have made Australia what it is today in order to make Australia a wealthier country for the next generation is of course blatant scaremongering and, if they were not politicians, libellous.  If they are deliberately and knowingly doing this then the ethics of selling something that provides inferiour care and might exploit their vulnerable citizens to our neighbours is confronting.

But of course not: There is nothing malicious or dishonest about this because our politicians and the businessmen they cooperate with and support  believe in what they are doing. They are not lying - at least not deliberately.

As Saul and many others have documented true believers don’t consider for a moment that what they believe in can be harmful. He describes this as an “unconscious civilisation” and it is our civilisation he is talking about. They are not conscious of what they are doing. They have no doubts and are so committed that they don’t see what is in front of them.

They don’t see what we see when we look at what is happening here. True believers believe so implicitly that what they are doing is to benefit us that they have no hesitation in keeping us in the dark and hiding what they are doing with platitudes - just in case we are stupid enough to object.

Historically common behaviour:  Look at what has happened when other true believers imposed their ideas on society in the belief that this was what was best for them. As Adam Smith said over two hundred years ago it is not villains but the virtuous believers that are most difficult to deal with. They believe totally and cannot be persuaded. Hitler, Stalin, Mao, apartheid, Syria are extreme examples where people who could not be persuaded. Look what they did in pursuit of their goals.  By then Adam Smith was long dead and forgotten. 

Incredibility: We never consider that our leaders would do anything like this.  Its incredible.  But sadly they are as human as the rest of us and as human as the other true believers l used to illustrate the process. I am not suggesting that the outcome has or will be as devastating but that the processes at work and the unwillingness to look at evidence and logical contrary opinion is a similar human failing - a trap we all risk falling into. 

Democracies are intended to prevent this but if you look at what critics are saying about our democracy and how our politicians harp on about the economy at election time and ignore our society and its needs you realise that our democracy is very sick. There is more about our broken political system here.

So it is quite wrong to blame politicians for what is happening if in fact there is some truth in these dystopian ideas. While they may try to deny that this is happening, the evidence of what is happening is there.  It is the intention and explanation for it and their refusal to openly confront the evidence that we don't understand.  

Our politicians and businessmen are human too and like multiple other humans they escape the uncertainty of doubt by believing in what they are doing. To be absolutely sure they need to persuade us to agree with them. That is how we all “realise” ourselves and establish our position in society and ultimately in history. To be whom they want to be they have to persuade you.  They can’t use evidence or logic because its not there. Listen to them during the election.

Be kind and remain doubtful: Instead of useless anger and trying to blame them we need to keep an open mind.  We need to understand and be sympathetic becuase we have probably all behaved similarly. But as citizens we need to decide how we can deal with this situation. As Adam Smith indicated, that these people are genuine makes it a much more difficult problem for us.

We need accurate information:  But whatever you think about this explanation we simply don’t have the information we need to confirm or refute it. It is certainly worrying enough for us to start collecting accurate and reliable information about the way companies are spending our money and about staffing and failures in care. In light of the possibility that this might be happening. it must be totally independently done. This is what the proposed community aged care hub is intended to do.

China in top five trends for 2016

While our own aged care system is beset by failures in care and accused on "maximising" the funding opportunirties at home business leaders have their eyes on the opportunities in China.

Corrs Chambers Westgarth claim to be “the most globally connected law firm based in Australia” and to stand for “THE COMPETITIVENESS OF AUSTRALIA AND OF OUR CLIENTS AND THE SUCCESS OF OUR PEOPLE – EVERYWHERE.” They are looking for custom in these new markets.

On its web site an article identifies trends for 2016. These include improved product offerings, More consolidation and IPO activity, separtaion of aged care and retirement villages, growth in home care, and opportunities in China and cross border activity. In referring to China they say:

China potentially represents the biggest opportunity and the recently announced Free Trade Agreement between China and Australia was a huge positive for Australian aged care service providers. Previously, Australian operators were only permitted to work in partnership with domestic operators, but under the new FTA, Australian wholly-owned aged care providers can be established in China.

We expect more Australian aged care operators partnering with Chinese parties to develop aged care facilities or provide home care services.

Source: Five aged care trends to watch Corrs Chambers Westgarth Accessed 20 June 2016

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Changing the rules

Under the present rules of the game the customer is what you pull out of the treasure chest - the prize that you can use, until it runs out, to recharge your power pack with money, so making you stronger than your competitors, strong enough to open another treasure chest.

I hope that the hub will change the culture so that instead of a risky game with the frail elderly as pawns, one in which their wellbeing is put under pressure, aged care would be understood as a social responsibility and a humanitarian endeavour rather than a game.

But if we have to play this game, then the hub would change the rules so that the care and wellbeing of seniors comes to the heart of the game. Those who play well will find a helpful angel in the treasure chest. She will give them the magic care formula that, if used correctly for the benefit of the vulnerable consumer, will outsmart their competitors and take them to the next level. Any players who deviate from the objective of care will encounter an angry giant customer who will wound and weaken them, or if the customer is sufficiently angered by the conduct he will resort to his liquidator to vaporise them. Game over!

Private equity

This form of profit making is slightly different. While private equity companies will be attracted by the solid nature of a business as displayed by its capital and income stream, more often they look for short term profits.

They look for situations where they can rapidly increase the profit stream and so make the company more profitable. This enables them to float the company on the share market and get much more from the sale than they paid for it. The quickest way to increase profits is to reduce the major costs - staff and good care.

Not surprisingly, a recent study shows that private equity on average  give the worst care and the longer they own the facilities, the worse the care gets. Sometimes their money-making strategies in aged care can leave a trail of trouble after they have gone. Everyone forgets that there are real people caught up in the buying and selling and in the corporate collapses. They don't get the public attention that those who are harmed by an earthquake or tsunami get! No one looks to see what can be done to prevent this from happening to them.

Example:

Private equity firm Blackstone purchased Britain's largest aged care chain Southern Cross and restructured it to meet its short-term profit objectives. But Blackstone is alleged to have stripped Southern Cross of assets and left it tied into long term lease contracts that enabled Blackstone to take a huge profit when Southern Cross was floated on the share market.

This rendered Southern Cross financially vulnerable to changes in the market. It was soon in trouble and tied into paying those leases, which were driving it into bankruptcy. It was unable to do so and the owners renting to Southern Cross found themselves managing all these homes when Southern Cross went bankrupt.  The residents who had no role in all this were trapped in the mess. The financial problems impacted their care. By then Blackstone had taken its profit and run. Information is here.

This YouTube video is a tongue-in-cheek take on the impact of private equity ownership of one such group:

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Market cycles

But the market goes in cycles. Much of the time it is flat, but there are times when people have money to invest and when it is booming. This is the opportunity ambitious companies have been waiting and saving up for. That's when companies float on the share market, and when mergers and takeovers occur. There is a frenzy of activity, and people who have prepared for the moment walk off with huge profits.

Where are we now (2014/15): The world has been in recession for several years with the global economic downturn. Analysts have been waiting for it to bounce back and telling the market it was coming soon. Good businessmen have been building 'war chests' and doing everything to increase their income stream so that they are ready to seize the opportunity when it arrives.

The press reports documenting many failures in care starting in 2010 that were referred to on a previous page, '19 years of care', are revealing of the consequences of the pressures to increase profitability.

In September/October 2014: Analysts were telling the companies that the time was now. The global market had recovered. They are diving in and the private equity firms were there too.

... The re-entry of private equity firms, new foreign investors and the continued expansion of existing operators are three factors driving the biggest wave of investment activity and consolidation in the aged care sector's history, according to a financial expert"

Source: Investor appetite builds in aged care - The Australian, 3 Oct 2014 (Paywall)


... It is not a business you can just jump into and say hey, people are prepared to pay lots of money, the demographics are great and you can make a fortune.

"You have got to have management who know what they are doing."

FPCompany NewnameC is Australia's second-largest aged-care provider and Mr Bxxxx is positioning the group for growth.

The company has not ruled out joining its private equity rivals Archer Capital and PECompanyO Private Equity in plans for a sharemarket listing ..."


... PECompanyO has plans to list its aged-care vehicle, FPCompanyI, by the end of the year, and recently struck a $100m-plus deal to buy Padman Healthcare.

Archer Capital purchased Lend Lease's aged-care business for $270m in February last year, renaming it FPCompanyJ , and it is being groomed for a listing, sources say ..."

Source: Guilt, grief and profits in the aged-care sector The Australian, 6 Jun 2014 (Paywall)


... A strong sharemarket debut from FPCompanyG Healthcare and FPCompanyH Healthcare's resilient start to public ownership will lure more aged-care providers down the initial public offering route, analysts and experts have said ..."

Source: FPCompanyG Healthcare and FPCompanyH Healthcare give confidence for future aged-care provider IPOs Sydney Morning Herald, 8 Oct 2014


FPCompanyG chairman Mxxx Bxxxx told investors the company had experienced significant earnings growth over the past five years.


Aged-care operators are being tipped on to the public market after the success of the float of FPCompanyH Healthcare, which added 35 per cent to its $2 offer price on the first day on market this year and yesterday closed at $2.61.


"The aged-care industry remains highly fragmented and is set to consolidate, creating four or five national dominant groups," he (analyst) said


"But the present industry structure is delivering a positive medium-term outlook for IPO participants seeking capital growth and income".


Acute care has a clear public-private balance, while aged care is close to total privatisation. Vestiges of public ownership diminish monthly with the Victorian government's slow sell-off of government-owned homes. The provider classification conceals the fact that not-for-profit providers are invariably private and may vigorously pursue an operating surplus.

Sources: Taken from multiple different press reports in the past two months (Nov 2014)

In summary, FPCompanyG has been building up its income stream and has just floated, making its owners very wealthy. FPCompanyH had also floated recently and initially did very well. FPCompanyA/FPCompany NewnameC is buying, advertising the fact that it is building impressive looking facilities and thinking about floating. Consultant businesses are also out there seizing the moment and advising not-for-profit companies to 'partner' (a euphemism for a type of merger, often with a for-profit) if they want to survive, suggesting they bring in new managers, and that they need a consultant from the market to make it work.

The pressure and the context force smaller companies out:  Private for-profit companies are often founded by individuals or families who are strongly motivated by an ethic of care. In a 1994 analysis in the USA some companies like this performed very poorly but others were found to provide the best care of all, better than most not-for-profits. This was perhaps because this structure gave them greater freedom in choosing whether to provide good care or whether to maximise profits - an illustration of the importance of motivation.

These companies which often own 2 to 10 facilities can struggle. Their mission of care comes under pressure and they will be tempted to sell themselves and get out. So they will watch the cycle and choose the right moment to sell themselves.  A number of sizeable family businesses are being acquired.

The privately owned Kxxxxxx Health Care nursing home portfolio is being shopped around by Macquarie Capital with the sale likely to be the next blockbuster deal in the aged care market.


The offering comes at a time when large retirement and aged care players including FPCompanyH Healthcare and FPCompany NewnameC Healthcare have shown an increasing appetite for acquisitions, while private operators are showing more willingness to sell or consolidate.

FPCompanyH paid almost $80m for the family-run Profke aged care portfolio of four facilities with more than 580 beds last month and FPCompanyI Health paid more than $80m for three villages owned by the Hutchinson family in coastal NSW.

Source: Kxxxxxx portfolio has $250m sale hopes The Australian 10 November 2015 (Paywall)


Listed aged-care provider FPCompanyH Healthcare is believed to be circling its smaller rival Kxxxxxx Health Care.

Kxxxxxx is being sold by Macquarie Capital with expectations of about $250 million.

Source: FPCompanyH eyes Kxxxxxx Business Spectator 16 November 2015 (Paywall)

Large family businesses can decide they have had enough and when they sell at the right moment it is the big companies that will encourage them to vacate the sector by making them very wealthy very quickly. The Cxxx family saw the opportunities in aged care in the 1980s. They started their nursing home business in 1986.

By 2012, when company's were consolidating and INTFPCompanyB came knocking they were ready. They sold off their 10 nursing homes and walked away with a $250 million bonanza. It was the money and the owners who made the decision and decided who would care for the elderly. The residents in the nursing homes and the community where they operated had little choice. These were the people who had supported these businesses for 25 years and made the family wealthy.

The aftermath (2016)

To get the capital needed these companies have to demonstrate a steady profit, and in their enthusiasm quite often make overly optimistic assessments of their potential. They now have to pay interest and reduce their loans.

They have to meet shareholders' expectations, or else their share price will fall and they will not be able to raise more money from the share market. Those who can keep the income stream up are going to raise more money and take over those who haven't been strategic enough to do so and whose share price falls.

This is how the market works. It rewards those who are the most efficient at making money and rids the system of those who can't match them. Care and money come from the same income stream and the pressure to make a profit is far stronger than the pressure to excel in providing care.  That is what the proposed Hub is intended to change.

Preparing for the next cycle: As the market flattens astute businessmen will start thinking ahead preparing for the next time a boom comes around. Those who become large enough can establish a monopoly of sorts, and cash in further.

They will conserve their funds and keep their capital in reserve. Instead of maintaining funding to residents they will try try to continue growing and keep costs down with greater “efficiencies”. With staff by far the largest costs any efficiencies must address staffing and that has consequences for care. Efficiencies always impress investors and when the cycle come around again the company will be ready and waiting to list. In 2016 the government reduced funding for aged care and the market went off the boil. Some analysts have “downgraded the sector”.

Analysts are tipping a shake-up in the local aged-care sector following- - - a $1.2 billion reduction in funding over four years.


FPCompany Newname C is continuing on a strategy to build scale through development both on greenfields sites and redevelopment of existing assets, all in a bid to achieve higher efficiency through scale.


- - - it has - - deep-pocketed backers,- - - - the group is well capitalised to grow, - -

Source: FPCompany Newname C sees need to be more efficient The Australian 19 May 2016 (Paywall)

For most a downturn is a warning. For others it is an opportunity to buy shares cheaply. It probably depends on what you are prepared to risk.  Companies with spare cash and lost of money will go looking for bargains and accept the risk that government will be as obdurate about increasing funding as they hace been in the UK leaving them with loss making assets they can't sell.

Almost $250 million was eradicated from the valuations of big names FPCompany H, FPCompany I and FPCompany G on Thursday as analysts at Bank of America Merrill Lynch (BAML), UBS and Morgan Stanley warned on the outlook for the sector


The most dire warnings came from BAML — which tipped zero earnings growth for the key players in the back-half of this decade


However, analysts at CLSA have taken a different tack, claiming the stunning retreat in stock valuations offered an opportunity for investors.

Source: Analysts split on aged care as CLSA flags buying opportunities The Australian 3 June 2016 (Paywall)

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What happens in a downturn (2016)

Government steps in

The government has finally despaired of having its funding rorted by the marketplace. It has stopped it and as happened in the USA in the late 1990s and in the UK, where private equity has been a major problem share prices have fallen, some up to 20%. I look at the consequences in the USA and UK and the insights from that for Australia on other pages. We need to look at the the way this is now playing out in Australia.

The political response

The first response of the industry has been to mount a massive public relations exercise about billions of dollars in “funding cuts” during an election campaign.  This is an attempt to get one of the major parties to promise to “restore funding”. They have attempted to harness the mounting community's criticism and anger, which they have up to now downplayed and discounted, to their cause. Minor parties like the Greens, Xenophon, Lambie and Wilkie that will not be saddled with the problem have already promised to support this and to block the cuts in the senate if they are elected.  Aged and Community Services (ACSA) is pressing the issue stressing the problems created for the industry.

What had happened

There have been many allegations that funding that should have gone to care has been redirected to profit and growth and at the same time that government funding has been systematically rorted to feed the market frenzy. As share prices tumble the explanations mount up. Not surprisingly it seems that the industry’s enthusiasm for the excitement of the game got the better of them.

The collapse in the share price of Australia's biggest aged care provider, FPCompanyI Health, over the past fortnight has raised serious questions about how profitable and realistic growth prospects are for a sector so reliant on the country's aging population and government funding.


So, with all these incredible statistics pointing to so much growth, why have the big players been hit?

It's a combination of overly-optimistic growth and earnings forecasts which have taken a hit from the federal government's tightening and increased scrutiny of funding.


Stories are starting to emerge from the industry about how unrealistic some forecasts are in a sector facing substantial systemic reform

Source: Aged Care in Australia: someone’s going to pay Australian Financial Reviews 11 Jun 2016 (Paywall)

Industry explanations

The same article describes the justifications offered by the industry. The CEO of the industry group, LASA, claimed that the “emphasis on funding home care is hurting the residential aged-care providers”. One industry expert claimed “We are awash with home care. Some 5995 additional high-care home care places were awarded on March 18, 2016”. There are claims by industry that there are large numbers of empty beds and that occupancy has dropped from 96% to 92.3%. They coorectly assert that there are more sicker people in nursing homes and they need more costly care, but they fail to acknowledge the evidence that this has not been accompanied by an increase in staffing to care for them and the suggestion that the money that should have gone to care went to profit.

But the NACA family have not got their act together. COTA which is mounting a strong campaign pressing the government to restore the funding it has cut claims that instead of occupancy falling there are long waiting periods - the very opposite.

For people in South Australia needing a high level of aged care, 33 per cent wait more than three months.

COTA Australia chief executive Ixxx Yxxx said a system that assesses an older person as needing care but then makes them wait months before they receive it is a system ‘that is failing senior Australians and their families.’

Source: Blow out in waiting list for seniors residential aged care in SA Adelaide Now 19 June 2016 (Note Paywall)

An industry spokesman who made similar claims on ABC radio and asserted that we had a world class system, got plenty of robust criticism.

  • Aged care ABC Radio National Saturday Extra 11 June 2016

Justifying charging the elderly more

The industry body LASA’s CEO suggested that the poor nursing homes would have to start charging residents more.  As I will show on subsequent web pages (see Competition on price) rather than reduce the profits they have promised their shareholders the big providers had already responded to the downturn by charging residents extra for accommodation and for some services.

The economist's view

The economists in looking at this acknowledge the impact on vulnerable residents but see financial regulation as the priority here. This focusses on financial decisions but ignores what is happening at the bedside.

- - - - there is an accumulation of evidence which points to the need for the Federal Government to acknowledge that while aged care may primarily be a health issue, it is also a wealth management/estate planning issue, and should be treated as such.


In short, aged care has become too big and too complex to be overseen by health department bureaucrats.


- - - on the face of it, consumer best interests are currently running a poor second to the financial interests of those who own and run aged care facilities.

When an elderly person, arguably at their most vulnerable, faces decisions around selling the family home to enable them to end their lives in an aged care facility, they should be owed a duty of care vastly higher than that which the current regime provides.

The same regulatory oversight and duty to best interests, which has been imposed on the financial planning industry, needs to be applied to the aged care sector.

Source: Time to better regulate aged care Money management 17 July 2016

The impact for those receiving care

Probably the best review of what has happened was by Michael Pascoe writing in the Sydney Morning Herald. He addresses the issues surrounding “exploiting a flawed funding model – a model that encourages exaggerating care needs and discourages improving the health and independence of individuals.” . He suggests that “aged care clients and staff that are likely to pay for the tightening up, not the private sector's profitability” and that “additional services revenue, scale benefits and management of some costs will partially offset the lower government Aged Care Funding Instruments to largely maintain margins."

The obvious conclusion is that if the vulnerability of the funding system is addressed the industry will have to turn to the vulnerability of the residents and get the profits they have been promising there. In short, the governments crackdown is going to cost the elderly more money and they are likely to get even worse care.

The Community Aged Care Hub

The proposed aged care community hub offers government a means of ensuring that government funding goes to where it is needed, that those who get care are protected and receive the care they need, and that those companies that best meet the community’s expectations will be able to make a reasonable profit. If the market is suitably adjusted so that ownership and management are separated, the fallout for residents from market failures can be minimised.  The focus must be on designing and implementing a marketpllace that works for the community and for elderly citizens, and not one that serves an ideology that replaces all of the lessons of the past with a set of illusionary beliefs.

Ultimately the claims that the corporate marketplace can provide care better and more cheaply (ie efficiently) than the community and government will be tested. This claim has never been tested anywhere because the absence of an effective customer and the oversight of a reflective civil society has meant that we have never had a level playing field. Could this be another of the many illusions on which economic ideology is based?

I am not an economist but I have a sneaking suspicion that the additional costs involved in the highly competitive corporate marketplace might just be shown to be less efficient.  A marketplace that is designed to serve the vulnerable sections of our community and be less aggressively competitive (the more traditional model) might have many advantages in cost and quality that the big profit focussed corporations cannot match.

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Roadmap for the future

In spite of all the evidence that the system they are committed to has failed in what it is intended to achieve both of our major political parties are pursuing a policy of freeing up the sector to market forces. They are refusing to address consumer and community issues and the consequences for them. They are making the system ever more hierarchical and centralised with less and less flexibility.

The newly appointed Aged Care Sector Committee has developed a roadmap for the future. It is a mixture of a process driven hierarchical central management structure and a deregulated market. Providers would increasingly be expected to regulate themselves.

The creation of a “single aged care system” would see the distinction between home care and residential care removed,- - .

- - aged care places and prices would be deregulated, while the number of services providing aged care would increase under a streamlined process in which a broader category of “registered providers” would replace approved providers.


- - allocation of residential aged care places via the Aged Care Approvals Round would cease within five years, while the supply of places would be uncapped within seven years.


- - - it would not regulate the actual prices providers charge or what consumers choose to pay


- - - “co-regulation” and “earned autonomy” for providers would be fully developed and implemented.


- - - a single assessment framework covering eligibility and care needs

Source: Prices and places deregulated under sector committee’s shake-up Australian Ageing Agenda 20 April 2016

 For more information:

To free up the market further the approval process for entry to this market is to be changed to a registered one. This will make it easier for a broad range of businesses to provide aged care. The competitive market will then work its magic but it is increasingly clear for whose benefit this will be?

Independent member, Andrew Wilkie, asked the minister about the excessive fees being charged in parliament. He was not persuaded by her response indicating that the minister was “dismissive of my finding that the problem is systemic and was unrealistically optimistic that any planned changes would remedy the situation”.

Objectives not attainable: The stated objectives of the roadmap are commendable and might be accomplished if it was managed flexibly by the local community and provided they were able to control this market and make it work for them. What they are proposing is based on the illusion that those in a competitive market can be trusted to behave as responsible citizens. A steadily growing body of evidence indicates that this is not so and that the objectives of this roadmap cannot be attained this way. Government and industry seem blind and unable to confront evidence and logic.

We should not assume that this behaviour is all part of some malign plot.  It would be more sensible to see the marriage of market and politics as built on a form of religious fundamentalism.  The consequences of this are addressed in the subsection Aged Care in the dark.  The psychological and social processes that cause people to ignore the obvious in this strange way are explored in the section on Cultural perspectives.   On the web page Culturopathy: A for-profit example in that section I look at some explanations that have been given to explain why this happens.

On the web page Aged Care Roadmap in the Introduction section there is a table comparing the system we currently have and this roadmap for the future with the sort of system the Community Aged Care Hub that we are proposing is intended to create.

We live in a society that is build on scientific advances but our understanding of ourselves and of our society lags a long way behind these advances. We have not learned to use what we already know about ourselves when we address problems and formulate policy. We don't understand the extent to which we are trapped and blinded by our strong beliefs. The way out of this is by gaining insight but that can be resisted because it is a painful process. The aggressive confrontation and the blame game that characterises our political process inhibits insight.

The final word

Carol Bennett, the new CEO of Alzheimer has been very critical of where these market policies are taking us as well as the lack of data on which the policies are based and which vulnerable seniors can use to make informed choices. She deserves the last word on this here.

Appropriate safeguards for people from special needs groups and access to comparative measures of quality must be in place as community aged care is opened up to market forces, the chief executive of Alzheimer’s Australia has said.

- - - the peak body was concerned about how a more market-based system would operate in practice.

- - - It doesn’t necessarily follow that giving consumers choice means they will have choice,

- - -(referring to the lack of information about care) - This was a “huge limitation” of the current aged care service system.

Source: Call to protect vulnerable in shift to aged care market Community Care Review 17 November 2016

The proposed Aged Care Community Hub is intended to provide all of this as well as the support that is needed to wring the intended benefits from this marketplace by making it work for citizens ahead of shareholders.

 

Appendix: Profits are Golden

... the processes and strategy behind its business model are as fresh and dynamic as those found anywhere in business.


Its average weekly client billings are nearly four times higher than the industry average, meaning it takes fewer clients and a smaller organization to build a lucrative business.


"Our focus on clients requiring live-in care is one of the reasons why it typically takes only 18 clients to generate $1 million in revenues."


When prospective franchisees lift the hood on the Hxxx Cxxx Axxxxxxxxxe engine, they find the most cutting-edge business model in senior care with its focus on consumer marketing and branding.


- - - -all forms of targeted consumer marketing are a cornerstone of our business,- - most successfully search-engine optimized, advertising-intensive franchise in North America - ."

Source:  "Profits Are Golden - Small Business Opportunities" : Small Business Opportunities. sbomag.com. dated 9 Jan 2012 - (in archive)

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Please note: The first four sections of Aged Care Analysis are published and the remaining sections will be made available as soon as possible.

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