This web page looks at the nature of the pressures and patterns of thinking that develop in the marketplace by focusing on private equity and its impact on the other providers of care in a marketplace which makes its profits by trading in people's misfortune and vulnerability.
It ends by contrasting this with the worthwhile objectives and innovations that many highly motivated people are making to address the very real problems for the elderly in our aged care institutions and communities. It speculates on the limited prospects that these innovations have for widespread success in this marketplace. It looks at how the proposed aged care community hub could bring about the sort of changes in this marketplace that would make this possible.
The legacy of Southern Cross' collapse
Private equity companies are privately owned so are not listed on the sharemarket. Their shares are not traded and they do not have to report publicly to shareholders. There is consequently less transparency and less accountability.
Private equity was of intense interest in the UK in 2011 because of the collapse of Southern Cross which I described on the previous page. There is a high risk of failure in private equity, but it is not the failures that attract investors and usually engage the press. The excitement and the enormous profits get media attention, the failures and their consequences get less attention.
The failure of Southern Cross was different because the private equity partners themselves did not fail and instead made vast profits leaving a mess behind them. Southern Cross' failure thrust the responsibility of caring for vast numbers of people into the limelight. This is perhaps what stimulated the researchers, Julie Froud, Sarah Green and Karel Williams, from Manchester Business School at the University of Manchester to study it. As they indicated in the paper, this was not a study of outsiders looking in. The study was based on what the leaders of private equity in the UK were saying themselves. The researchers compared the sort of trust that is essential in this high risk market to that which is equally important in the operation of the Mafia. It helps us understand what follows from an insiders as well as an outsiders perspective.
While business practices may have a local flavour, we now live in a global marketplace and practices are not contained by boundaries. What happens in one country is taken up by others and big businesses, particularly private equity operate globally. Because private equity makes large profits, their financial strategies, conduct and practices are adopted by others in the marketplace and this is an opportunity to look at some of this.
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Private equity and the concept of brittle trust
Private equity and the concept of brittle trust was an interesting paper published in The Sociological Review, 60:1 (2012). It was a sociological study of trust in private equity. Southern Cross was very much in their minds.
Such failure and all the social and political implications associated with that has been put in stark relief by disclosures of the gains made by former directors of the (Southern Cross) company or by the Blackstone private equity group which bought Southern Cross in 2004, combined it with other care home groups and floated it back on the stock market in 2006.
The authors interview five very successful Private Equity entrepreneurs in the UK. Interestingly, they find that trust in the high pressure, highly risky private equity business is similar to that in the Mafia. Like the Mafia, it is a high risk business and failures are accepted. But the partners at the top have to trust each other implicitly. Any breach in trust is ruthlessly dealt with, in the Mafia by death and in private equity by ruthless exclusion - hence the description of 'brittle trust'. This is brittle because trust breaks down very easily.
This trust and acceptance of failure did not extend to employees or to the managers who operated the businesses they purchased. If there was any failure in economic performance they were fired and replaced. It was a tough high risk game. The study describes the sort of people who succeed in Private Equity.
The importance of context: My interest in private equity is in the suitability of the system and of the people who operate there for vulnerable sectors like health and aged care. What are the consequences of the way it operates and the way its leaders think for the way it care's for vulnerable people?
The authors stress the importance of context in determining how the sector operates and who succeeds there. The idea of context and the way it influences people is central to the community aged care hub proposal for our broken aged care system. It aims to change the context for aged care so that it works for citizens.
The authors contrast this trust in private equity with what has happened in the rest of the market, where trust was eroded after the 1980's "reforms". Please note that the extracts below are not in order but are grouped to illustrate the arguments made in the paper.
The concept of deep, yet brittle, mutual trust amongst senior PE partners reflects a different, more context-specific, approach from those studies suggesting that there is a cumulative and generalized breakdown of trust in Western social contexts;
So while research on trust has demonstrated that the nature of trust relations and the ways in which trustworthiness is assessed and acted upon strongly depend on context, there is still work to be done on the relation between trust as a concept and these diverse (market) contexts.
New Capitalism: The paper first reviews the changes that occurred in the 1980s, the period when the economic theories of the Chicago school of economics were adopted as government policy by Margaret Thatcher, who was advised by Milton Friedman from Chicago.
This "New Capitalism" replaced the older traditional male dominated congenial businesses in the city where "a man's word was his bond". One of the consequences was that this trust broke down. Australia was under pressure from this New Capitalism during the 1980s but it only became policy for health and aged care in the mid-1990s.
Because seniors are so much more vulnerable, aged care more than any other sector depends on trust. We can ask our first question about this here.
Whose interests were being served when the decision was made to take aged care out of its protected not-for-profit context and instead place it in one where trust had broken down? Is the broken aged care system in the US, in the UK and in Australia a consequence of this? How do you provide care to vulnerable people in a system where trust has broken dow?
Trust and trustworthiness have been core operating concepts in the traditional health and aged care systems. The context within which it was provided was structured to support it by placing the interests of the person served ahead of self-interest. That has not only been challenged. It has been shredded. Any attempt to fix the problems in aged care must address the issue of trust.
The idealized story was that a London gentleman’s club was based on shared social background and elite public school training, this established high levels of mutual trust through exclusion and surveillance: ‘decent behaviour’ was (ideally) guaranteed by strongly socially monitored and controlled codes of conduct, and a system of exclusion that ensured everyone was broadly similar in background and attitudes
- - - many of which argue that there has been an epochal change (with New Capitalism) towards more transactional relations. This implies the decline of a sense of enduring or close social relations: within this view, each encounter with others is treated as an isolated transaction, rather than as part of an ongoing social relationship that involves mutual obligations.
Many argue that deregulation in the 1980s had social consequences which made social relations less personal and more ‘transactional’ in the new City.
- - characterized by a new seriousness and competitive money making as the US investment banks swept away the old style merchant banks, and an ‘aggressive’ ‘trader-based culture’ replaced the ‘age of deference’
- - the demise of British-owned firms on the failings of the class-bound, amateurish British merchant banks as much as the quite different culture of what were regarded as the US ‘interlopers’
There is a strong moral story that accompanies these accounts: commentators are split between whether the changes are leading to greater moral decay and social fragmentation on the one hand, or greater personal freedom and opportunity on the other.
The nature of private equity: The authors describe the nature of private equity as their interviewees see it. It is a high pressure, high risk uncertain business. While trust is now central that trust is between partners only. The pressures for profit and the risks are dramatically increased.
Should our frail elderly be caught up in this? What choice do they actually have when they are only parcels packaged in nursing homes and then traded to whoever can make the most money out of them?
In simple terms, the business of private equity involves raising a fund from private and institutional investors which is then re-invested by buying several operating (portfolio) companies with a view to selling them on profitably within five to seven years, after which the fund is closed and investors receive their returns
Unlike venture capital, private equity funds specialize in buying established businesses, not funding start-ups, and much of their profit over the holding period depends on the trend of stock market prices which set the benchmark for what companies are worth.
Up-scaling did not, however, change three key elements of private equity: first, it requires commitment by partners over the long term; second, deals are infrequent, always different and the contribution of individuals can be easily identified; and third, making money on deals depends partly on judgement but also on timing, luck and a favourable trend of asset prices.
no partner can avoid losses because of the inherent uncertainty and all recognized that most of the fund profits would come from a minority of the deals, they also agreed that a string of bad deals could end an individual’s career.
Anyone who aspired to such wealth had to first raise a fund and manage multiple re-financing, while buying and selling companies over more than five years, in conditions where the outcome was unpredictable because it was both dependent upon stock market conditions and, crucially, on the reliability of a small number of people.
In sum, PE appears to be a particularly uncertain business.
Collectively, these accounts painted an image of an exciting, tough, risky business that attracted highly intelligent and competitive men who had to rely on one another to collectively succeed. The image obviously includes an inherent ambivalence: simultaneously strong self-interest and a requirement of long-term collective commitment.
- - - ideals of repeatedly demonstrable intellectual and personal skill and repeatedly proven trustworthiness and integrity: every act was monitored, and any fall in standards instantly and permanently punished
-- - the stakes were high in the sense that gains or losses could be very large.
The five interviewees were all from the UK and what they are discussing is what happened in the UK. It is clear that you could increase the stakes and the pressures when you were talking about US private equity.
- - - conduct in the UK were, it seems, somehow different from those more common within the US private equity sector. This points to our interviewees’ understanding that they were describing how the principles they followed helped to actually shape the particularities of the practice of PE in the UK;
Trust between whom?: The ascendency of private equity in about 2007 brought back trust but only between private equity partners because the success of the business depended on trust.
This trust does not extend to others and social responsibility or an ethic of service does not feature noticeably if at all. There is a similarity in context with the Mafia whose loyalty enables them to prey on weaker citizens - but of course the paper did not say that!. In both trust between partners is total but fragile and any breach is terminal.
This (breakdown in trust in New Capitalism) was not borne out by our (Private Equity)interviews: all interviewees emphasized the need for long-term relations that demonstrate enduring integrity in interactions with their fellow senior PE partners, even while they simultaneously emphasized that such relations could be destroyed in an instant.
The two key points of comparison for us are: first, the Mafiosi’s emphasis on absolute trust combined with dire consequences for breaches of trust as the key defining feature of the Mafia business; and second, the conditions of insecurity and uncertainty in which the Mafia business developed.
Together, these elements helped to establish the context in which the activity of private equity developed, the emphasis private equity practitioners placed on trust and the kinds of individuals who were attracted by, and succeeded in, the business.
In short, these interviewees described the PE sector as depending upon relatively long-term relations between a small group of people who had to trust one another sufficiently to place extremely large quantities of money, and the chances of success or failure, in one another’s hands.
The principle being described here was what we refer to as brittle trust: strong and based on long-term commitment and mutual knowledge (as well as group monitoring), yet easily broken.
'We fire partners. Lots of partners. Not one every three years, more than that.’ The tendency to shed staff, even at the highest levels, was thus depicted as an inherent and key characteristic of the PE business:
- - - the principles were followed because the context required them – -
Juniors and managers: Failure was part of the business and it was accepted. It did not impact on the trust between partners. But for more junior staff, for managers and presumably for anyone else, performance was king and not trust. But it was equally ruthless.
When private equity bought companies they put in managers to turn them around and increase profits so that they could be sold for much more than was paid for them. Managers careers depended on performing.
We need to consider what the pressures on these managers would be when operating a nursing home business. Would their drive for profits and the consequences for them if they faileds cause them to underfund care and so harm citizens? Should society be putting our senior citizens in situations like this? What does that reveal about the morality of our nation and the politicians we elect?
- - relations with more junior colleagues and those hired to manage the portfolio companies bought by the fund; in these cases the form of trust is described quite differently, yet there is the same impression of harshness when things do not work out.
- - -the UK’s PE sector would not tolerate underperformance in the name of loyalty, and could not afford to give anyone a second chance if they broke the rules of integrity.
Chris described how trust in juniors was built on performance alone; an echo of the underlying principle of harsh consequences for failure to perform at the highest level was present, but there was no hint of the deep level of mutual trust described for senior members of the firm
Thomas remarked that managers would never be trained; they would simply be replaced:
Chris concurred, adding that while it was often necessary to woo managers and offer them attractive financial rewards before they were hired, ‘afterwards the relationship changes . . . because then these guys have to deliver’. For Arthur, if someone does not deliver, ‘the preferred routine is to take them out and replace them with somebody better’.
a manager might be rather unfairly (but expediently) branded as ‘under-performing’ because ‘it is probably easier to say that the manager can’t do his job than say, well actually, my whole research in this company is flawed, and the whole concept is daft’. In such circumstances a portfolio manager takes the blame in order that the investment committee can continue to believe that their original decision was correct.
Here again, the echo of ‘necessary ruthlessness’ that was used to describe all other levels of PE dealing was the one common factor in discussing managers of portfolio companies.
In all cases, any breach, either in performance or integrity, would be instantly and harshly dealt with. That was the common thread, the main defining principle, of the business.
Moral good: The interviewees did not feel any obligation to the "moral good" of the community. Loyalty was directed to the group and to "making a success of the business". Is this an appropriate attitude for a provider of aged care, something that is, by any definition you choose to use, a "moral good".
Interestingly, interviewees described these principles and the strong monitoring of them as being instrumental (ie for the practical and material benefit of the group, including themselves) rather than as adhering to any general moral good. In this sense interviewees echoed what Hardin refers to as ‘encapsulated self-interest’ (2001: 19): representing themselves as acting in a calculated and rational way to maximize the chances of success. All interviewees emphasized that these values worked in making a success of the business of private equity.
The PE Partners: So who are these people that our society is now trustingly delegating care of the elderly to? What are they like and how do they think? Are they the sort of people, we as a society would have chosen to look after our parents and grandparents as they aged and their mental capacities declined.? What does it say about the sort of society we have become?
They are not villians but what drives them? Once again it seems to be the high stakes game, the excitement, the high stake risks they take and the exhilaration of financial success. Is there any empathy here? Do they give any thought to the consequences for others of their activities?
So who were these people who had survived, and indeed thrived, in a world where great fortunes could be made but where there were few rules or guarantees?
They all trained as accountants, trained as lawyers, did a bit of work in a firm, fell into private equity by mistake.’
In short, these were men who wanted to run their own businesses, not work for somebody else; subsequently, of course, several built large firms not so dissimilar from the ones they had rejected in earlier years.
All interviewees described working in private equity as being ‘fun’, whether it involved building up a large firm with fellow partners or running smaller operations with fewer principals and with more hands-on involvement.
- - private equity had been, ‘such enormous fun’; the combination of intellectual challenge, the range of businesses and the people meant that for him, ‘it’s the best job I’ve had in my life’.
Most interviewees expressed a great sense of achievement about how they had been part of the development of PE in the UK. They presented themselves as mavericks with non-standard career paths, and all said they were intensely competitive. Chris noted that ‘many of the people in our industry are driven, enormously competitive, alpha type people’,
---- - expressed this emphasis on competitiveness, stating explicitly that he wanted to succeed in everything he does, including private equity, sport and, more recently, philanthropy.
At the heart of these interviewees’ definition of success was the assertion that making money is the key measure of outcomes. The fee structure of private equity, which combines a management fee (around 1.5 to 2 per cent per annum) on the fund and a 20 per cent share of profits at the close of the fund, has always been designed so that successful deal making and execution would make the seniors in the PE firm extremely wealthy.
Justifications: Except for sociopaths all of us have to live with ourselves and what we do and have done. To do so we must develop patterns of thinking that makes what we do legitimate to ourselves if not to others. We get a few clues to this in what the partners say. One wonders how they rationalise private equity in health and aged care?
Our interviewees justified the new harshness by suggesting that they were both mavericks who up-ended an old world in the City, and that what they chose to do was the most rational solution to the business conditions that confronted them. They represented themselves as creating an opportunity that presented itself in the 1980s: over two decades, they forged a new part of the financial sector that was incredibly financially rewarding and intellectually stimulating, but also uncertain and highly risky.
PE practitioners did not wantonly abandon ideals of close social relations, long-term commitment and principles of integrity and trustworthiness, at the same time, in extolling the need for harsh and uncompromising punishment for any failure, they were also thumbing their noses at other aspects of ‘tradition’. Private equity in the UK as we see it today is the result.
Summary: We have a high risk, high pressure system striving to extract as large an income stream as humanly possible from anything they buy so that they can sell it again and make a killing. It is managed and driven by people who are participants in a high risk, high stakes game and whose reward is the excitement of achievement in that game. They have little if any concept of "moral good". Is it reasonable to expect people like this to have any sense of commitment to the elderly and will they provide anything more in the way of care than they can get away with?
Australian politicians were warned in 2007
Two dissenting submissions were made to The Senate Standing Committee on Economics inquiry into private equity in 2007. These warned them of the consequences of private equity for health and aged care. The Inquiry discounted these concerns on the basis that there was no evidence and it was unconvincing. Family First issued a dissenting report. I made one of those submissions. There is some information on a web page I wrote in 2010 but the links to the original documents on the senate website are now broken. The committee's report and the dissenting report are here.
Private equity players have transformed and are transforming the aged care sector. They have turfed out traditional non-profit players. The non-for profits are competing against financial behemoths to survive in the current environment. The outlook for them in the sector is stark – relegated to the edges, their former benevolent role, reduced or vanquished. Figure 1 below shows how the polarity of these two groups from one end of the profit spectrum to the other.
The reason for entry by private equity managers into the sector is motivated by pure and simple profit, underwritten by a bottomless pit of government subsidies. The non-for profit players had/have a benevolent role in the operation of their aged care facilities.
Source: Submission 5 205.55 KB - Senate Economics Committee 2007 by Marie dela Rama
This submission asserts that the explosion in private equity will potentate and exacerbate serious problems existing in vulnerable sectors of Australian society. It also addresses deeper problems across Australian society and the consequences for these.
It urges that the threat posed by the private equity phenomenon be the trigger for a change in strategy and a re-evaluation of the direction in which we are going. It uses developments in health and aged care to illustrate the problems that already exist and the likely consequences of these new developments.
Anxiety is expressed about the narrow economic terms of reference which fail to specifically invite comments about critical issues for society and its members.
Source: Submission 3658.61 KB - Senate Economics Committee, 2007 by J M Wynne
Private equity and US nursing homes
Problems in nursing homes
Within weeks of the Senate committee's report in Australia, the New York Times wrote the first expose of the consequences of private equity for nursing homes. I quote one of the examples they gave below.
Habana Health Care Center, a 150-bed nursing home in Tampa, Fla., was struggling when a group of large private investment firms purchased it and 48 other nursing homes in 2002.
The facility’s managers quickly cut costs. Within months, the number of clinical registered nurses at the home was half what it had been a year earlier, records collected by the Centers for Medicare and Medicaid Services indicate. Budgets for nursing supplies, resident activities and other services also fell, according to Florida’s Agency for Health Care Administration.
The investors and operators were soon earning millions of dollars a year from their 49 homes.
When regulators visited, they found malfunctioning fire doors, unhygienic kitchens and a resident using a leg brace that was broken.
“They’ve created a hellhole,” said Vivian Hewitt, who sued Habana in 2004 when her mother died after a large bedsore became infected by feces.
But by many regulatory benchmarks, residents at those nursing homes are worse off, on average, than they were under previous owners, according to an analysis by The New York Times of data collected by government agencies from 2000 to 2006.
The Times analysis shows that, as at Habana, managers at many other nursing homes acquired by large private investors have cut expenses and staff, sometimes below minimum legal requirements.
Source: More Profit and Less Nursing at Many Homes The New York Times, 23 Sep 2007
For profit care: Large numbers of international studies have shown that since "New Capitalism" started in the 1980s for-profit corporations in the USA have been characterised by fewer staff and more failures in care. On these web pages I will look at studies in Australia by a group at UTS in 2014 and at a smaller study by Aged Care Crisis in 2008. Both indicated a poorer performance by for-profit corporations. I will write about both elsewhere on these pages. There is insufficient information to assess the consequences of private equity in Australia.
Study in Florida: A recent 2014 report from Florida in the USA is based on an article in the Journal of Health Care Finance. It compares private equity ownership with the big for-profit corporations. Unsurprisingly staffing levels were lower and care was worse in the private equity group - and the longer they owned the nursing homes the worse it became.
A recent study in the Journal of Health Care Finance finds that Florida nursing facilities owned by private equity firms have fewer registered nurses and more deficiencies than chain-owned for-profit facilities and that the longer the facilities are owned by private equity firms, the fewer registered nurses they employ and the more deficiencies they have. The researchers found that changing ownership patterns underscore the need for better, more explicit nurse staffing standards and stronger, more effective enforcement.
Specifically, the researchers report 5% lower pressure sore prevention than the rate for for-profit, chain-owned control group.
Facilities owned by private equity firms had 21% higher deficiencies than for-profit chain-owned facilities and "there was a positive association of deficiencies with progressive years of equity ownership."
- - - pointing to "the deliberately complex organizational structures constructed by private equity [that] not only hinder the ability of regulators to monitor quality but also limit legal remedies available to aggrieved residents."
However, other research over the years has clearly documented that for-profit facilities in general, especially those that are chain-operated, employ fewer nurses and have more deficiencies than not-for-profit and publicly-owned facilities.
Source:Nursing Facilities Owned by Private Equity Firms: Fewer Nurses, More Deficiencies Centre for Medicare Advocacy, 20 Aug 2014
Complex corporate structures
In the USA the deterrent strategy adopted to deal with nursing home failures has been to sue the nursing homes and get massive punitive damages. Intense lobbying by the industry has resulted in many states capping the amount in damages that the disgusted courts can impose.
Unlike market listed companies private companies and private equity are not required to disclose corporate structure. The complex structures created by private equity protect the companies. The company ultimately found to be responsible may not be the one that has any money in it so the litigant gets nothing.
But private investment companies have made it very difficult for plaintiffs to succeed in court and for regulators to levy chainwide fines by creating complex corporate structures that obscure who controls their nursing homes.
The Byzantine structures established at homes owned by private investment firms also make it harder for regulators to know if one company is responsible for multiple centers. And the structures help managers bypass rules that require them to report when they, in effect, pay themselves from programs like Medicare and Medicaid.
Source: More Profit and Less Nursing at Many Homes The New York Times, 23 Sep 2007
These complex structures are not restricted to private equity. They have been adopted by many US private companies. The Sacromento Bee did an extensive analysis of the way these companies operated in a 3 part series which can be accessed from the quote below.
Some companies doing business in California go to great lengths to create complex business structures, building layers of limited liability companies and partnerships with curious relationships to one another. The tangled corporate webs make it difficult for consumers and government regulators to identify who’s running the operations – and who should be held responsible when things go wrong.
Source: Unmasked: How California’s largest nursing home chains perform Part 1 of 3. The Sacromento Bee 8 Nov 2014
Private Equity and the consequences of the complex structures have been explored in greater depth in the UK and I will analyse it there in a subsequent slider.
More problems with private equity in the United Kingdom
The political world: Lets start with the way the politicians who preside over what is described below in the UK think. As you you examine the next two sliders consider how out of touch the Secretary of State for Health, the politician in charge of managing the health and aged care sector is. Is it any wonder he has become the most unpopular frontline politician in the UK. It must be pretty obvious to everyone. The possibility of markets not working is something that just isn’t possible. If there is a problem then the market will fix it. That is an article of faith and its not challengeable. Then consider whether Australian politicians think the same way - look at what they do and listen to some of the things they say. I am not looking at the headline of the article which might legitimately be argued with qualifications now that the opportunity to provide some sort of insured protection has been lost.
The top Tory made the eyebrow-raising remarks - and suggested more people could be saving for their own care
Britain's care time bomb is "one of the biggest commercial opportunities" for private firms, Jeremy Hunt has said.
- - - - although it was a "very concerning situation", he expected "many" private firms would be willing to fill in - because they see the potential for profit.
- - - many of these organisations are private businesses, are looking at the ageing population as one of the biggest commercial opportunities.
Source: Teickenham and Richmond Lib Dems web siteThe mirror 9 may 2016
Back to Southern Cross
Southern Cross's collapse was not the end of the story. The company that took over the management of Southern Cross's homes, Life Style Care, is now also in administration so putting more pressure on the care of those residents.
Following the notorious collapse of Southern Cross in 2011, Life Style Care (2011) PLC, the private care company which took over day-to-day operations in local Southern Cross homes, has now also been taken into administration.
Life Style Care (2011) plc took over the day-to-day operations of a number of Southern Cross homes, with the homes remaining in the ownership of Jersey-based Regency Investments. Now Life Style Care (2011) PLC has also been taken into administration.
"Just four years after the collapse of Southern Cross, residents, their families and staff find themselves yet again in a position of great anxiety and uncertainty. This is intolerable. As yet we are all in the dark with regards to detail, but this is clearly a deeply unsettling time for everybody involved.
Source: Southern Cross saga continues as successor care home firm collapse hits Richmond residents Liberal Democrats, 6 March 2015 (Note: The o0riginal articlke is no longer available on the Teickenham and Richmond Lib Dems web site))
Another example in the UK
In spite of the lessons from Southern Cross private equity still owns the now largest nursing home group Four Seasons and it seems to be going the same way. This time the private equity group is Terra Firma.
Britain's care homes are facing a crisis. Dramatic cuts to social care funding have led the country's largest operators to join the GMB union in warning of potentially large scale closures.
Cracks are already starting to appear.
Four Seasons, the UK's biggest care provider housing 20,000 elderly patients across 450 homes, last week reported that 2014 earnings fell 32% to £64.1m (£97.6m, €87m).
A reduction in fees paid by councils to care providers has played a large part in the poor performance, having fallen by more than 5% in real terms since 2010-11, according to figures from the healthcare analyst Laing Buisson. Costs have risen by about 2%, leaving a significant shortfall.
Martin Green, chief executive of Care England, a representative body for independent social care providers, is damning.
"The population who live in care homes are extremely vulnerable yet the government is funding this vital service to the tune of about £2.50 an hour [per resident]. This is not sustainable and we will see some providers in severe financial difficulties in the coming years unless this issue is addressed," he said.
Labour MP John Spellar, a vocal critic of private equity involvement in the care sector, said: "There are similarities with Southern Cross in the business model. Four Seasons has been loaded up with debt and the profits are going into repaying that debt and dividends, rather than going into care. The people who suffer are the patients."
But it does have big debts and a history of financial problems. Formerly owned by Qatar Investment Authority, in 2009 it was seized by creditors to whom it owed £1.3bn before being picked up by Terra Firma three years later.
(Terra Firma financier) Hands, a Guernsey-based tax exile, paid £825m for it. Despite saddling the company with £525m of debt, the deal was hailed a success as it reduced Four Seasons' overall borrowings.
However, income has dropped sharply over the past twelve months and, if the trend continues, questions will inevitably be raised about its ability to continue coughing up £50m in annual debt interest payments.
An analysis by corporate health specialists Company Watch shows that Four Seasons, in common with many private equity-owned firms, has a byzantine corporate structure. It is split into nearly 200 corporate entities, including some based in the Channel and Cayman Islands, making it almost impossible to thoroughly examine its finances.
The structural turmoil was coupled with falling standards across its portfolio.
In 2013-14, the CQC deemed a number of Four Seasons homes "non-compliant" with its standards. In some cases, it has been barred from admitting new residents into homes until improvements are made. These embargoes have contributed to a fall in occupancy which has in turn hit revenue.
What is needed is an entirely different business model, according to Nick Hood of Company Watch.
"There are no operational answers to the business model issues at Four Seasons, which are endemic right across the residential healthcare sector. What is needed is less debt and a different ownership model, based on property investment returns and an acceptance of marginal income from the underlying core business of healthcare," he said.;
Source: In the spotlight: Four Seasons Health Care and Britain's social care crisis International Business Times, 6 May 2015
Three months later and the situation was still deteriorating.
Elderly residents at nursing homes run by Britain's largest care provider could have to be rehoused unless the firm's funding crisis is resolved soon, it has emerged.
Four Seasons Health Care is understood to have begun an emergency review after losing £25 million in the three months to June.
The company looks after 20,000 patients at 450 nursing homes. According to reports, loss-making residences could be closed unless Four Season can obtain more funds from investors or the Government.
Source: Four Seasons funding crisis: thousands of elderly care home residents face uncertainty The Telegraph, 30 Aug 2015
There are consequences for the residents as is illustrated by a report from the UK about a Four Season’s operated nursing home. It describes bosses who “failed to deploy sufficient numbers” of workers, with no one to help people who fell out of bed, bad odours, dirty kitchens and equipment, overflowing refuse bins, out of date "do not resuscitate" provisions etc.
A resident allegedly went nine months without a bath and bins were left to overflow at an under-staffed and smelly care home in Birkenhead.
Park House, on Park Road South, was placed in special measures by the care watchdog after inspectors discovered a catalogue of failings.
Source: Resident 'not bathed for nine months' and bins left to overflow at short-staffed Birkenhead care home The Liverpool Echo, 21 Sep 2015
Two months later and Four Seasons is closing 7 money losing nursing homes in Ireland because it is not able to pay off its debts. Hundreds of residents will lose their homes and 393 staff will be unemployed.
- - - the homes were “operating at a loss and no longer viable”. “We have [in effect] been paying a subsidy for them to continue to provide care. We regret that we cannot continue to sustain this position,” a spokesman said.
Source: UK's biggest care home provider shuts loss-making homes The Guardian 25 Nov 2015
It is also selling off assetts.
The UK’s biggest care-home operator has sold £20m worth of properties to an aggressive US investment fund as it reportedly struggles with a debt burden and diving profits.
Monarch says on its website that it specialises in swooping on “distressed and bankrupt” companies
Source: UK's biggest care home operator sells £20m of assets to US hedge fund The Independent 28 Dec 2015
A senior executive in Four Seasons continues to claim that the company is doing well:
“The business is perfectly equipped to pay debt and the rent bill. I think we can now point to a long list of things moving in the right direction. We are investing a lot in this business today and this [the care home] is evidence of that.”
Source: Care home crisis won’t be solved by just paying more, says Justin King The Guardian 10 April 2016
But the experts say that its financial position is not sustainable. Everyone else is expecting the worst:
Britain’s biggest care home operator, Four Seasons Health Care, is running out of cash and is likely to be taken over by its creditors, the credit rating agency Moody’s has warned.
Four Seasons has 440 care homes with 18,500 residents, but Moody’s said its financial position was unsustainable.
Four Seasons is also struggling under the weight of more than £500m of debt, making interest payments of £52.1m last year.
Source: Four Seasons Health Care 'likely to be taken over by creditors' The Guardian 6 May 2016
An article on activist site Your Voice Matters analyses what has happened in the UK care sector since the Thatcher changes in the 1980s. The Author shows how this eventually led on to the private equity debacle that the UK now faces.
In effect Southern Cross had created a subprime situation exactly similar to that which brought down Lehman Brothers in the United States and signalled the start of the great depression. They owed money they could not pay back. These were warning signs that the care industry was becoming ever increasingly unstable. The wrong type of people were now involved in the funding and running of it. People who had no good intent; no interest in the care and life quality of its service users; no interest in those it employed; nothing other than the making of more and more excess profit, and buying more and more properties that couldn’t be sustained, when the down turn set in and the other dominant factors such as cut backs by local authorities started to really kick in.
From detailed research that I have undertaken, one can see definite patterns of this change in the owners of care homes. From around 2004 more and more venture capitalists became involved buying up smaller companies involving between one and six care homes. Amongst these buyers there were some who clearly set out to milk the businesses then dissolve them and start up again repeating the same pattern over and over again. I have found many examples of just this, amongst these an alarming number of Indian and Pakistani care home providers.
Source: Money, power and fear rule our care sector. Profit v care. Who wins? Ian Cresswell on Your Voice matters web site 1 Sept 2015
Poor care endemic in the UK
It is not only private equity in the UK. Poor care is endemic. its Quality Care Commission is being even more heavily criticised as an inadequate model of oversight than our Quality Agency. Ian Cresswell in the same article offers an explanation explaining why INTFPCompanyB also has problems in its nursing homes. He is suggesting it goes where the profits are and not where the need is. It operates in Australia.
All of the big care providers with the exception of INTFPCompanyB are caught in the trap of Southern Cross.
INTFPCompanyB is different and while it does have a high current liability figure, it also has a very high level of current assets. It also doesn’t have to please shareholders because it isn’t a limited company. In theory this should be good because all profits can be put back into the company and improve the quality of the services therefore provided. Alas this isn’t what’s happening at INTFPCompanyB. The money is being filtered away from its care homes and is being put into other areas of INTFPCompanyB’s ever increasing worldwide expansion of markets. Since around 1997 INTFPCompanyB have operated a deliberate policy of underfunding its care homes with the result it currently has around 100 care homes currently failing.
Source: Money, power and fear rule our care sector. Profit v care. Who wins? Ian Cresswell on Your Voice matters web site 1 Sept 2015
Here is an example - another of INTFPCompanyB's nursing homes.
A group of employees at a Croxteth nursing home were suspended ahead of a watchdog probe into alleged poor care practices.
The exact nature of the allegations against the staff has not been revealed, but the Care Quality Commission (CQC) said the investigation was sparked by "concerns about poor care practices".
Healthcare firm INTFPCompanyB, which owns the home, would not confirm how many staff were on suspension, but the number is thought to be in single figures.
INTFPCompanyB said the concerns were raised by a whistle-blower. It is also understood a relative made a complaint to the CQC.
A spokesman for the home said: "A staff member used our whistle blowing system to raise concerns with us about one unit at the home. We acted immediately, notifying the adult safeguarding team and CQC, and suspending some staff from that unit while we investigate".
Source: EXCLUSIVE: Employees, including a manager, suspended over “poor care” allegations at Croxteth nursing home Liverpool Echo 10 June 2015
While private equity has created much of the problem, governments policies, which ensure that only the poorest providers survive, have contributed.
The cash crunch facing Britain’s care homes is starting to have an impact on the quality of care being provided to the elderly, a leading figure in the sector has warned.
But Andrea Sutcliffe, the CQC’s chief inspector for adult social care, told the Telegraph that the regulator’s State of Care report has found a third of Britain’s 18,000 homes require improvement and 7% are inadequate.
The comments come after the owner of Four Seasons, Britain’s biggest care home group, warned that he would have to close or sell homes unless the government stepped in.
Source: Two-fifths of Britain's care homes below standard as budget cuts finally tell The Guardian 10 November 2015
In the face of so much unhappiness the CQC has put up a barrier and those who have been misused meet an unsympathetic brick wall. This sounds very like Australia where many who complain are very unhappy with the way their complaints are dealt with. North Devon MP Peter Heaton-Jones has been appalled at the way those who complain about care in the UK meet a brick wall. He is struggling to get government to address the issues.
Of the 700 establishments most recently inspected, a staggering four in ten have been rated as either “requires improvement” or “inadequate”
This is not about processes, systems or organisations. It’s about people.
Source: Something 'must be done now' to improve elderly care Western Morning News 8 November 2015
Financialised chains, churning and viability: Is private equity really fit to run care homes?
Private Equity is a high risk high reward investment. The people who invest in it are those with plenty of money who are prepared to risk large losses in some investments in return for even larger profits in other ventures. Private equity groups will use high risk investment strategies and will depend on a favourable market to make their profits. They will be looking for the right moment to sell. If there is an economic downturn or if, in a government funded sector, the government for whatever reason decides to reduce its funding then the private equity group either has to wait or more usually cut its losses by selling or simply closing facilities so that it can get out and move on to the next more profitable venture. They deal in billions and not millions and accept this loss so that they can go elsewhere.
In fact most of those who are now entering aged care do so in order to make a profit and not for humanitarian reasons. If they are unable to make a profit they will get out as best they can and look elsewhere for their profits. Staff residents and government can be left holding the baby. Dave Lindorff in his 1992 book Marketplace Medicine: The Rise of the For Profit Hospital Chains described an earlier situation where states were threatened with suddenly having to assume responsibility for vast numbers of frail elderly. In the late 1990s a similar situation occurred when many chains were in trouble. Fraud prosecutions were not pursued energetically and often only token fines were imposed to help companies trade out of bankruptcy.
Blackstone and Terra Firma
Blackstone made Southern Cross very profitable and sold it for three times the £162 million it paid. It did very well for its investors but left Southern Cross vulnerable to the next economic downturn. Terra Firma bought Four Seasons which was already heavily in debt. It got trapped when the government reduced funding for nursing homes so causing a downturn in this sector. It did not get out in time. It is struggling, closing and trying to sell nursing homes, and possibly facing bankruptcy. How much money will be left when it goes under is debatable because its complex structure allows it to develop strategies that move money about between the businesses companies and take profit in some other country. This slider examines this issue and its much wider consequences.
Four Seasons is at the centre of the storm in the care industry. Not only is it feeling the squeeze from rising costs and falling fees, but it has been in private equity ownership for a decade, which has left it lumbered with interest payments of more than £50m every year and debts of more than £500m.
S&P, the credit ratings agency, warned last year that Four Seasons was going to run out of cash. It begs the question – is private equity really fit to run a care home?
Source: Is private equity really fit to run care homes? The Guardian 4 May 2016
Everyone has to compete to succeed
Not-for-profit: As I have indicated in a competitive market all participants have to compete in making as much money as possible. Not-for-profits have to adopt the same business practices as the big for profits if they are to remain competitive, If not then they will not prosper and will have to sell or go into partnership with a for-profit and run their facilities in the same way. They have to do what they gotta do in this ruthless marketplace.
This is well illustrated in health care in the USA which is much further down this path than we are. Large numbers of not-for-profits have merged, consolidated and become giant competitors in the hospital health care marketplace. Those that have joined in the game and embraced its principles have taken on the for-profits. Some, like private equity, are even keeping their funding sources confidential so as not to give competitors information. Seven of the 10 most profitable hospitals in the USA are now not-for-profit. What we don’t know here is what the consequences for their services have been or what has happened to the rest of the not-for-profit sector,
- Nonprofit Hospitals Adjust to Attract Investors: Recent consolidation has created large organizations that increasingly are pressed to become more transparent Wall Street Journal 18 May 2016
- Study: Seven of the 10 most profitable hospitals are non-profits The Dallas Morning News 19 May 2016
For-profit: The market listed for-profit chains must choose the right moment to list or to raise more capital. They are competing with the higher profit private equity to do so. They are also competing with private equity when buying and merging. They will have to pay the same inflated prices and then make enough money out of their purchases to justify this. They have to compete with the profitable companies that private equity groups have floated on the share market.
They have little choice but to adopt many of the same practices, to take greater risks and get into greater debt. Private Equity have another advantage. They do not have to report publicly to their shareholders. Their companies and their complex dealings are not transparent to anyone. The internal financial dealings allow money to be shifted between companies and profits taken elsewhere, often in a tax haven.
As a consequence the other companies that have competed by using similar strategies and built up debt can be trapped in a similar way. The whole market is vulnerable and care suffers. This has happened in the UK. A study in 2012 identified the problem
Thousands of elderly Britons face a risky future after it emerged the UK’s biggest care home operators have racked up debts of £5 billion.
The size of the staggering loans, along with revelations many are linked to offshore firms based as far away as the Cayman Islands, have emerged as part of an investigation into the sector.
The study shows the scale of the loans and the web of secrecy surrounding operators which run homes for some of the country’s most vulnerable people.
Three of the largest - Four Seasons, Care UK and NHP - have had their debt rated as junk which means they are risky.
Source: Big care home operators have £5bn in debts leaving thousands of pensioners at risk Daily Mail 6 Nov 2012
A May 2016 study shows that the debts and the vulnerability extends right across the industry in the UK.
New research from the insolvency agency Opus for Wednesday’s BBC Radio 4’s You and Yours has found that 13% of care homes are “zombie operators” that pay more in interest and servicing their debt than they make in profits. And a total of 5,600 care homes are classed as “at risk”, almost a third of the roughly 18,000 in the country.
If care home operators, councils, government and the NHS don’t adapt, a crisis larger than the collapse of Southern Cross is unavoidable.
Source: Is private equity really fit to run care homes? The Guardian 4 May 2016
Ultimately private equity makes the most money and they set the goals which the opther competitors try to attain.
The nursing homes, the chains and the private equity groups in the UK have all being blaming the cuts to government funding for the problems and pressing for more money. The press the public and probably even most in the industry accept this simple explanation. But this runs “deeper than a lack of state funding, damaging though this is”. Because so much information is not available the full extent of the problem and where the money goes is not clear.
A study of the finances of private equity by CRESC, a public interest group and an article from Open democracy UK, using Terra Firma as an example to illustrate the issues in that study, explains what is happening.
A short article: The article “Britain's care homes are being turned into complex financial instruments” by the Open Democracy groups points out that aged care in the UK is in crisis. The report indicates that “1.86 million people over the age of 50 are not getting the care they need; approximately 1.5 million people perform over 50 hours unpaid care per week; and the proportion of GDP the UK spends on social care is among the lowest in the OECD, with budgets having undergone an overall reduction of over 30 per cent since 2010”.
The CREST study showed that the larger chains comprising most of the industry “are rife with dubious financial engineering, tax avoidance, and complex business models designed to shift risks and costs from care home owners on to staff, the state and private payers”.
Prior to its purchase in 2012 by Guy Hands’ Terra Firma Capital, Four Seasons passed from one private equity firm to another, as each debt-leveraged buyout was followed by a larger one, with the seller making a profit from the willingness of the buyer to pay more and cover the cost with debt. Debt levels reached an apogee in 2008 when, under the ownership of Three Delta, Four Seasons was servicing a staggering £1.5 billon debt, with the interest alone claiming £100 per week on each of its 20,000 or so beds. Hands claimed that “Terra Firma has bought stability to the company”.
But the new arrangement comprised over “185 companies in fifteen tiers, registered in numerous jurisdictions including multiple tax havens”. The main object of this “ludicrously intricate corporate structure appears to be tax avoidance”.
Only a few insiders know what this structure is so it is very difficult to see how a “cash generative business” was turned into “a loss making one” in 2 years.
The investigation by CRESC revealed that there was an additional “£300 million of internal, intra-group debt”. This was money lent from one company subsidiary to another so this was not really reducing the debt. The interest charged on this was 15%. It was pushing Four Seasons further into debt. The company was “effectively acting as a creditor to itself, with Terra Firma the ultimate beneficiary. As such, a loss isn’t what it first appears to be”.
CRESC found that the declared 1 year profit in these “financialised chains” is the “malleable result of manoeuvring over several years to reduce tax, extract cash and rearrange obligations with an eye to exit.” In these chains only the top owners know where the money is going and it “can disappear without political debate or social accountability”. The purpose of the entire exercise is “typically immediate value extraction with little thought for the public good”.
The article sums this up by saying
When we consider the long-term challenges of providing high-quality adult social care - - - - it’s increasingly clear that the unsustainable and socially irresponsible practices of private equity firms like Terra Firma should have no place in it.
The original article is here.
- Britain's care homes are being turned into complex financial instruments Open democracy UK 11 March 2016 Andrew Dolan
The in depth CRESC study: The 68 page March 2016 CRESC public interest group study “WHERE DOES THE MONEY GO? Financialised chains and the crisis in residential care” looks looks more broadly and in greater depth. The paper starts by setting out the problem that we ordinary citizens have with the complexity of economics and our consequent gullibility.
Big business and organised money have a political advantage in matters of public policy around outsourced services because the average citizen does not have the knowledge or confidence to engage critically with this kind of financial issue. A democracy where business and finance are socially accountable requires citizens with financial literacy who can engage with such issues in specific activities, like adult care, which are important to all of our welfare.
This is why nursing home and companies finances should be transparent to the proposed community aged care hub who would get its own advisers to examine anything questionable. This is public money.
The techniques of debt based financial engineering - - - suit high risk and high return activities - - - but are here being applied completely inappropriately to an activity like adult care which is low risk and should be low return. The chains bring return on capital targets of up to 12%; cash extraction tied to the opportunistic loading of subsidiaries with debt; and tax avoidance through complex multi-level corporate structures which undermine any kind of accountability for public funding.
While they are trying to “spook the state into paying a higher price”. “Their own financial engineering is a major contributor to chain fragility and care quality problems so that private gain comes at the expense of costs for residents, staff and the state”. This is accomplished using “financial engineering of the chains hidden in complex corporate structures with hundreds of connected companies registered in multiple tax jurisdictions”.
If cash extraction is hard wired in to the business model by burdensome debt and rent payments, then operating businesses become increasingly fragile and vulnerable to down turns in occupancy rates and lower than expected fee increases.
The report explains that “ownership churning creates unsustainable debt burdens whose legacy is operating problems about care quality”. They explained that this was a “pass the parcel game where each seller made a profit because the next buyer was prepared to pay more and cover the cost by issuing debt”. Under this system “care quality is undermined by both the rapid burn out and turnover of an under qualified and ill paid workforce and the lack of support for, and recognition of, the importance of good managers”.
Instead of this high risk structure the report suggested that “the state should recognise adult care is properly a low risk/ low return sector which needs not debt based financial engineering but social funding with low cost capital.”
The report stresses that these practices are not limited to the probity equity chains. It uses Mutual INTFPCompanyB which operates in Australia and which in the UK it describes as not-for-profit as an example. It indicates that the way it is structured would lead us to expect it to operate differently.
INTFPCompanyB, is a not for profit but operates in a very similar way. All of these chain providers have developed business models that rely on financialised practices which, when combined, are a matter of public concern and contribute to the unsustainability of the sector.
To read the full report:
- Where does the money go? Financialised chains and the crisis in residential care Burns D. et al, CRESC Public Interest Report March 2016
Forewarned is forearmed: The situation in the UK is now so bad that the Quality Care Commission in the UK has created a special process and section tasked with examining the finances of the companies and keeping a list of those that would cause a major disruption of services if they were to go under. Being prepared might help! Information and futher links is on the QCC web site.
We have a duty to oversee the financial health of difficult-to-replace providers of adult social care services, so that we can give an early warning if they are likely to fail.
Source: Market Oversight of adult social care Quality Care Commission 8 March 2016
Could it be in Australia too?
That a similar problem might exist or be developing in Australia and that prices have become over-inflated and not a viable investment is suggested by one of the big company’s in this marketplace. It thinks that prices have gone too high and that buying them at this price is not going to be viable financially. It is building and renovating instead.
FPCompany NewnameC 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.
While rival groups - - - - have been scouting assets on the market, against a backdrop in which some private providers have been asking as much as $150,000 a bed, FPCompany NewnameC has kept a lower profile. “We’ve noticed in the past 12 months that the prices have not in our view reflected the underlying value, and for that reason we’ve been a bit quiet on the acquisitions front,” Mr Bxxxxx said.
Source: FPCompany NewnameC sees need to be more efficient The Australian 19 May 2016 (Paywall)
One of the admired strategies used by FPCompanyI and probably others to fuel their growth has been to buy facilities from smaller companies and then to "maximise" (some call it gaming and others actually say rorting) the amount of money claimed from the ACFI funding ststem, adding extra charges for residents and also make saving on costs. It seems that the potential to make large profits by doing this has pushed up the purchase price of nursing homes in Australia and has increasing the impact of "churning". When the government stopped the rorting and share prices collapsed an analyst commented.
There’s also the incentive for the aged care providers to overpay for acquisitions in the hope of increasing the average ACFI once they have control of the home.
What is a risk is that the government further tightens its funding for aged care – affecting all operators in the sector – and potentially causing some that are over-leveraged to topple.
Source: How the power of incentives got the aged care sector into trouble The Motley Fool. 21 June 2016
Another risk: It seems that there are additional economic hazards buried in the complexity of the way we fund the aged care system using bonds - the so called “Refundable Accommodation Deposits” or RADs.
Investors also love the idea of RADs, for they provide the operator with “free” capital to fund new expansion, the earnings of which accrue to shareholders, not the RAD providers. But the question is: is this capital truly free?
Those that fail to account for RAD liabilities may well be underestimating the true enterprise values of residential aged care operators.
Source: Beware lure of ‘free’ cash flow in aged care investments Herald Sun 30 June 2016 (Paywall)
A study from the USA
There is a report of an interesting study done by the Harvard Medical School in the USA. The report documents that “Each year, between 1,200 and 2,000 nursing homes in the United States — 7% to 13% of all facilities — are involved in a corporate chain transaction”.
Many nursing homes that experienced a chain-related transaction between 1993 and 2010 had a higher number of deficiency citations than facilities that did not undergo a transaction, according to researchers from Harvard, the University of Michigan, the University of Rochester and Vanderbilt University.
In many instances, nursing homes that were the subject of a transaction were already having quality issues, which continued after the transaction. Those pre-existing quality issues led the researchers to believe that the transaction wasn't to blame for any drops in quality, but rather that corporate transactions can be an indicator of a low-quality facility.
Source: Corporate ownership changes linked to poor nursing home quality McKnight’s News 2 May 2016
The Abstract of the original article indicated that “Two defining features of the nursing home industry are the tremendous churn in chain ownership and the perception of low-quality care at many facilities”.
The study's conclusion is interesting
Using facility-level data for the period 1993–2010, we found that those nursing homes that underwent chain-related transactions had more deficiency citations in the years preceding and following a transaction than those nursing homes that maintained common ownership. Thus, we did not find that these transactions led to a decline in quality. Instead, we found that chains targeted nursing homes that were already having quality problems and that these problems persisted after the transaction.
Source: Low-Quality Nursing Homes Were More Likely Than Other Nursing Homes To Be Bought Or Sold By Chains In 1993–2010 Grabowski1 D.C. et al Health Affairs May 2016 vol. 35 no. 5 907-914 (Abstract)
Another explanation: If we look at the UK experience we might offer a different explanation for this. Its might be that the deterioration in care before a sale was an attempt to push up profits in order to sell at a better price. Each new owner would do its best to maintain profitability and if possible sell it more profitability. But this is pure speculation as I don't have the information.
What is always forgotten in the reporting of this churning is that there are staff and real vulnerable elderly people in the parcels that are passed from company to company. The stresses and the upheaval as each new owner puts in new managers and uses new strategies to improve profits impacts on staff motivation and energy as well as on the life of the residents. This would contribute to the continued poor care.
The Australian marketplace
Background 1997 to 2008: Following the 1997 aged care reforms large local and some international banking and other financial institutions entered Australia’s aged care marketplace. Private equity arrived in the early and mid -2000s. I wrote a web pages describing what was happening 10 years ago. Not much has changed!
- PRIVATE EQUITY Banks, Trusts and Financiers invest in Australian Aged Care Corporate Medicine web site 2006/8
Before looking at private equity in aged care in Australia today we might look at the way the economists, (and so most politicians) and the market place currently think.
2008 to 2015
Growing with Age: Dealtracker for the Aged Care Sector (Jan 2008 to March 2015) by GrantThornton provides a good brief insight into the way the economists, our politicians and the market think.
Because there is so little data in Australia I am going to refer to recent US articles that describe similar situations to make my criticisms of the matters in this report. The first three of the links placed here are among the articles described and quoted from in the sliders above.
GT: Grant Thornton found that (92%) of the buyers of the Aged Care beds in the last 5 years have been for-profit organisations. The two private equity (PE) buyers were behind the acquisition of approximately 43% of the beds that were acquired during the period. Investors are attracted by the high growth forecasts, underpinned by our ageing population and their increasing care requirements.
Grant Thornton see the Government’s recent Living Longer Living Better (LLLB) reforms as encouraging additional private investment into the sector, “as there are now opportunities for operators to earn additional revenue via the provision of extra services through more of a “user pays” system, and increase cash flows for further expansion through the issue of Refundable Accommodation Deposits (known as a “RADs” or bonds) to high care residents”.
Comment: The pursuit of additional profits is the carrot that government is using to entice these operators into the market and this is what they are interested in and what they will be looking for here.
GT: Grant Thornton considered that “with 89% of operators currently having 5 facilities or less, there is unlikely to be a shortage of acquisition targets”. Smaller operators who would find it difficult to compete would “become forced sellers, particularly if they struggle to remain financially viable following the impact of some of the less favourable recent industry reforms”.
The report considered that “Aged care was highly fragmented with the top five Aged Care providers accounting for only 14% of the market in terms of ownership of operational residential Aged Care beds. The large private providers are actively seeking growth through acquisition and there is expected to be no shortage of acquisition targets, with 63% of operators still running single facilities.”
Comment: This is typical top down and centralised managerial thinking. That many smaller providers if helped are closer to the community and provide more personalised care is ignored. Many are there because they are motivated by a mission of care. Many of these facilities are away from major centres and will not be wanted by the for-profits. They need to support one another, work together and get extra support rather than being forced out of business.
GT: “Some facilities have been sold at very high valuation multiples. The ones that have attracted the most acquirer interest are the larger, multi-site facilities that have assisted the buyers to quickly expand their operations, either nationally or in regions of high demand.”
Comment: Baldwin in his review of the evidence coming from the USA and Australia found that the large facilities favoured by the large commercial interests were an independent factor in impacting negatively on care. The more they pay for nursing homes, the more profit they will have to extract to cover their costs and reward the shareholders who put up the money.
GT: The report was strongly supportive of this buying and selling of facilities. It found that the two most active buyers were the two private equity businesses.
Comment: One of the problems in the USA has been the continuous buying and selling of aged care care facilities. The continuous recycling of managers and management strategies as each new company seeks ways of making the service they provide more profitable is disorientating and confusing.
A recent study in the UK has found that each time a facility is sold more borrowing and more complex financial strategies are used to enable the sale. Facilities become increasingly indebted, less able to care for the residents and at greater risk of going under when there is a market downturn. The one thing that the aged need above all else is a stable environment and this is anything but.
- WHERE DOES THE MONEY GO?: Financialised chains and the crisis in residential care CRESC Public Interest Report March 2016
- Britain's care homes are being turned into complex financial instruments Open Democracy UK 11 March 2016 (A comment on some of this).
A recent study in the USA has shown a relationship between frequent recycling of owners and the quality of the care provided. Over 7% of nursing homes change hands each year. Research has shown that these homes have a “higher number of deficiency citations than facilities that did not undergo a transaction". They also found that they had these faults before the transactions. We can speculate that the reason for this might have been the cost cutting in order to increase the income stream and get a better price from the sale. Having paid the price justified by that income stream the buyer had to maintain that degree of profit to meet the markets expectations.
- Corporate ownership changes linked to poor nursing home quality McKnight’s news 2 May 2016
One article in Australia suggests that the refundable accommodation deposit RAD, which should be safely invested can actually be used to buy nursing homes from others at inflated prices and so facilitate financial churning of facilities and increased debt. Not only does it not increase the number of nursing home beds it was intended to do but it puts the RADs which are a loan from residents at risk as soon as there is a dip in the economy.
Within this seemingly prudent framework, the critical thing to note here is that the providers are somehow allowed to use RADs to fund acquisitions of other aged care providers
Amongst the listed players, we now see Balance Sheets with huge debt balances (i.e. bank debt + RAD), far exceeding cash and PP&E combined in the case of FPCompany I and FPCompanyG:
Source: Leveraging up the aged care sector Find the Moat 17 May 2016
GT: Private equity is not seen as a threat but as an opportunity. The report states “PE firms have undertaken further bolt on acquisitions to quickly build scale and gain economies of scale. This PE investment is expected to benefit the industry, as the PE buyers plan to invest in improving systems, enhancing care models and in providing the funds needed to expand and upgrade facilities. These sophisticated investors are also expected to help the industry build potential new revenue streams to help reduce the current level of reliance on government funding”.
Comment: In 1992 Australian, Ron Williams, who had studied the US system warned that aggressive megacorps from the USA were going to be invited into Australia and both parties would follow this policy. He described the consequences
"--- a huge and depressing departure from the system as they (readers) now know it."
"I see little but doom and gloom"
" -----, compassion will give way at an increasing ratio to profit. Care for the patient will give way to care for the corporation --------"
- - - - whose primary concern will be measured in terms of the profits derived from its exploitation of the local population and its indigenous labour force"
There is not much chance that this recognition will come in time, in the next few years. (page 191)
---- will not pay over their capital unless they can run their businesses along the free enterprise lines that they think fit. (page 195)
Source: Extracts from "Remission Impossible" Ron Williams (1992)
Ron Williams was writing about the big US health care megacorps that both political parties were wanting to bring into Australia. Fortunately their conduct was soon after exposed in a series of massive scandals. Strong opposition by the Australian medical profession, who had earlier in 1992 described Williams predictions as dystopian but soon changed tack, and the use of state probity requirements by those who had researched these companies conduct held the line and kept them out. When home grown corporations supported by government followed the same path the medical profession put them out of business by not supporting them.
Williams was not to know, way back in 1992 that private equity would become such a driving force or the extent to which the Australian market and Australian companies would follow the US lead in developing aggressive businessses and aggressive competition. Sadly the state probity requirements, which had so frustrated government policy in health care were removed from aged care in 1997 and the medical profession have largely deserted the sector. There is much to suggest that Williams predictions are coming true in aged care and its not the Americans that are doing it!.
GT: The Dealtracker report indicated that “The Not for Profit operators will need to assess their strategy”. It stated “The large, Not for Profit operators have been noticeably absent from the list of buyers during the period.- - - - Rivalry for residents is likely to increase in certain regions, as residents come to expect more modern facilities and additional service offerings. Not-for-profit operators may be required to invest in upgrading their facilities to remain competitive in certain regions. Accordingly, Not for Profit operators may need to consider whether such potential additional investment aligns with their core purpose and, if not, may wish to consider selling facilities to capitalise on the high valuations currently on offer.
Comment: In other words the sector that is known to provide the best care should change their practices if they want to survive. If they are not prepared to get on board they should “get out”. Several have taken that advice.
Some international articles throw some light on these issues
The first of a three part article in the New York Times acknowledges the many problems in New York state nursing homes. Until recently NY state “has been sort of unique in keeping out a lot of national chains”. It says “recent statistics and reports suggest the state’s nursing homes are getting even worse as for-profit operators gain a larger share of the market and oversight agencies struggle to provide quality control”. It reviews national data on for-profits poor performance.
- As NY shifts to for-profit nursing homes, abuse and neglect complaints spike Part 1 City & State 27 March 2016
In the USA there is a two tiered system of care. This illustrates how the for-profit sector behaves when some residents are much more profitable than others. Medicare pays well but only for the first 100 days. After that the residents in nursing homes go onto Medicaid and this pays poorly. Since the 1990s the for profit nursing homes have battled to avoid Medicaid patients as they fight for Medicare patients. But as soon as they go onto Medicaid they try to find some way of dumping these residents even when they still need care. To attract the really wealthy and the medicare patients they are building palatial facilities like those that are being built in Australia. But they are not spending the money needed to staff and care for the residents.
As a consequence “22 percent of Medicare patients who stayed in a nursing facility for 35 days or less experienced harm as a result of their medical care. An additional 11 percent suffered temporary injury”. Medicare spent an additional $2.8 billion to pay for treatment of these patients in hospital.
- In Race for Medicare Dollars, Nursing Home Care May Lag The New York Times 14 April 2015
Australia is creating a similar situation by rapidly removing the limits on the RAD and DAP, increasing user payments and encouraging the provision of extra services and luxury choices. It is not only the private equity groups who are building palatial facilities to attract them, but the other for-profits and even some not-for-profits. They are all chasing the dollar. Nurses and residents are already complaining that the staffing and care does not match the decor.
The needs of the average and below average citizens are being neglected in the scramble to be profitable. A recent Australian examination of this issue concluded that “the reality for a majority will be ongoing dependence on the aged pension and insufficient government or non-profit places to accommodate them”.
- Old, poor and lonely: the other side of the ageing story (Australia) The Pulse 13 October 2015
Another US example of the way profitability dominates all considerations is the plight of the homeless disabled in New York as the number of for-profit facilities increases. They are shuttled from hospital to nursing home and as the nursing homes get rid of these less profitable residents they are sent back to homeless shelters that do not have the facilities to care for them.
- NYC nursing homes forcing residents into homeless shelters City & State 4 Apr 2016
As is revealed in the USA this is a ruthless market with little room for sentiment and compassion. As FPCompany NewnameC's chief executive said "it was not for the faint hearted". The families in the example that he describes in the quote would agree that there was not much human sentiment displayed when no one from the company bothered to come and support them during the inquest. "Facing the media" might be what youve got to do to "make a fortune". It might have been a lot harder and required very different qualities to deal with the relatives but there were more important public relations considerations if you wanted your company to make a fortune.
AUSTRALIA’S aged-care sector may be riding a wave of popularity, but FPCompany NewnameC Specialist Aged Care chief executive Gxxx Bxxx knows running a business in the sector is not for the faint-hearted.
- - - was forced to face the media three years ago as the boss of FPCompanyA (now renamed FPCompany NewnameC), when nine people died after a fire at the group’s Qxxxxx Hxxx nursing home in Sydney.
“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.
Source: Guilt, grief and profits in the aged-care sector THE AUSTRALIAN JUNE 06, 2014 (Paywall)
Market downturn in 2016
When the government alleged that the industry was maximising opportunities (not rorting) the system and cut the extra funding the sharemarket reacted sharply revealing where the big profits they were reporting came from. It remains to be seen how far share prices will fall and what the consequences for the care of residents will be.
Will these companies sacrifice the care residents receive in order to maintain their profitability. In this situation it is not in the companies’ interests to provide good care. A public outcry about poor standards will force the government to provide more funding. In the USA they were forced to do this. We may find out just how ruthless this market is. This sort of risk was not disclosed in the residents contracts.
Shares in the sector have fallen sharply in a delayed reaction to the cuts, but the smart money has long since exited. And with pictures of FPCompanyI founder and non-executive director Pxxxx Axxxxx splurging on a black Ferrari 458 Italia and a red Lamborghini Aventador, private operators are battling perceptions they are systematically rorting government funding to build their businesses and fatten returns.
Source: Aged care and fast money an unhealthy mix The Australian 11 June 2016 (Paywall)
International Private Equity companies in Australia
We should not wear rose tinted glasses when we talk about private equity in Australia. We should remember what happened to Southern Cross and also think of Dick Smith. He saw his company destroyed by a private equity group that he believes took control of it, dressed it up while stripping it of its worth and then sold it. This is a well recognised strategy and investors keep falling for it. For private equity, aged care is simply a business and can be treated in the same way.
The iconic electrical retailer was yesterday placed in receivership, leaving about 3,300 jobs at risk at 393 stores across the country.
"It was bought by a type of merchant bank who paid a hundred million [dollars] for it and 18 months later floated it for $500 million," Dick Smith said.
Anchorage then "dressed the company up to look good for just one thing - to persuade people to buy shares," according to analysts from Forager Funds Management.
Source: Dick Smith blames company's previous private equity owners' 'greed' for collapse; employees wait to hear fate ABC News 6 Jan 2016
A number of global private equity groups have been looking at out health and aged care system and some have bought.
CVC Asia Pacific
Citigroup's Asian Private Equity arm "CVC Asia Pacific" purchased almost all of Mayne Health, Australia's largest hospital operator at the end of 2003 and then sold it about 2 years later. During the bulk of that time its hospitals were in limbo because NSW Health was conducting a probity review of Citigroup's conduct. Licenses were only granted, but with conditions, when it was clear that CVC Asia Pacific were going to float or sell the hospitals.
Towards the end of 2006 CVC Asia Pacific bought Australia's largest private nursing home operator Amity Health. It sold it to INTFPCompanyB at a profit at the end of 2007. The approved prvider department was supplied with information in both instances but as neither CVC Asia Pacific nor INTFPCompanyB had to apply for approved provider status they could not act.
The entity that they were buying was already approved and under the new political system ownership was not thought to impact on care. There was no requirement for them to be approved themselves as the probity assessment process had been abolished in 1997. Since it had bought and sold Mayne hospitals, Citigroup had paid out another US$10 billion in fines because of its role in a number of major US sandals. Once the government which had the power to overrule the recommendations of the FIRB had given approval there was no legal mechanism in Australia to stop them owning and operating nursine homes. We do not know if their ownership impacted on care because Australia does not record failures in care or properly measure standards of care.
The only requirement from multinationals is that they get a rubber stamp as they cross the welcoming mat at the Foreign Investment and Review Board (FIRB). The particular vulnerability of aged care is not a consideration. Purchases of aged care facilities is treated no differently to the purchase of any other business.
Unless there is adverse press coverage, there is no way in which the impact of CVC Asia pacific on the care in Amity facilities can be assessed.
The giant US private equity group Blackstone that was blamed for many problems in the UK has been eyeing Australian aged care assets for some time.
Blackstone was stalking our aged care company FPCompanyH in 2011 but eventually it did not buy.
In November 2014 it invested $150 million in Western Australia-based retirement park developer Nxxxxx Lxxx Villages. I don't know if it has sold it yet.
In June 2015 Blackstone and a variety of other big private equity groups from across the world formed alliances so that they could buy a huge real estate company in Australia. We do not know whether the $9 billion Morgan Stanley subsidiary Investa Property Group owned any nursing homes and retirement villages. What is clear is that we will hear more from international private equity groups as these high risk taking companies come to dominate the marketplace. There is nothing to stop them taking control of aged care in Australia.
With less than two weeks to go until final bids for the $9 billion Investa Property Group, Blackstone, one of the two contenders currently without a partner, is set to form a joint venture with CBRE Global Investors.
Blackstone, one of the biggest investors in real estate globally, has no financial need to strike a partnership but the private equity group was weaker strategically than its competing bidders. The move will bolster its offer for the entire platform because both of the two parties are highly regarded as property managers.
Source: Two to tango for Blackstone's billion-dollar bid - Australian Financial Review, 25 Jun 2015 (Paywall)
It seems that none of the major bidders was successful but $2.5 billion was sold to a Chinese group (Paywall) in July 2015. Perhaps it sold more later.
Blackstone acquired property in Australia when it bought General Electrics Global real estate assets (Paywall). It is activiely looking for more opportunities and trying to extend its $3 billion operation in Australia (Paywall).
Carlyle and TPG
Healthscope, a company with a rather chequered past that I analysed and wrote about in 2006 became Australia's second largest health care corporation was purchased in 2010 by two big US private equity groups Carlyle and TPG. It planned to float on the share market in 2014 but it seems this did not happen as they were still selling off parts of their holding in September 2015. (Paywall)
Australian Private Equity Investors
Two Australian private equity groups have invested in aged care in Australia. They have bought up other companies and become the 4th and 5th largest for-profit companies in the sector. They are among the nine large groups that formed the Aged Care Guild. Registered in 2013, it only formally launched in October 2015. The Guild is described as a group comprising the largest builders and acquirers of beds in the industry over the past 6 to 7 years. The Guild became active in order to lobby and pressure the government to keep its nerve and maintain its free market "reforms" to aged care when it looked as if the Turnbull government was wavering in the face of rising criticism.
Its web site indicates that "The Guild’s members believe strongly that a ‘for profit’ group of the major providers focused on advocacy is essential to delivery of the Guild’s mission of sustainable quality aged care delivering consumer choice and affordability".
Axxxx Capital - a worrying story
History of FPCompanyJ
FPCompanyJ is a good illustration of the way nursing homes are bought and sold with little consideration about the instability and uncertaintuy that this causes let alone the pressures for staff and residents caused by the multiple management styles as each new owner looks for greater profits.
FPCompanyJ was formed when a subsidiary of the Australian private equity group Axxxx Capital bought Lxxx Lxxxs aged care portfolio in February 2013. Lxxx Lxxxs had bought these a few years before from Pxxxxx, a company with a rather chequered past.
In October 2013 it was reported that Axxxx Capital attempted to buy a healthcare group in New Zealand and also six nursing home in Australia owned by another company but was unsuccessful.
Axxxx Capital established a large Australian Day Care Hospital group in 2008. It sold this 6 years later (Paywall) to a management buy out which included doctors and other investors in January 2014. In March 2016 the Day Care Group was reported to be looking for a buyer (Paywall) with Axxxx Capital mentioned as possibly buying it back. It seems they were asking too much (Paywall) and no one bought.
In 2014 FPCompanyJ bought another 10 (Paywall) aged care facilities from NFPCompanyZ making it our 4th largest aged care company. Four of these had been bought from NFP Company U only two years before.
The market speculated that the company was about to list on the sharemarket in 2014 when several other aged care businesses did so successfully. It was probably too soon or it might have got cold feet when the float of its private equity owned rival FPCompanyI lost $200 million in a week.
It is now 4 years since FPCompanyJ was formed and Axxxx Capital would have been building its profitability and its income stream with a view to floating on the sharemarket and profiting from its efforts. If the behaviour of international companies is a guide then we would expect to see care in these facilities coming under pressure and problems developing.
Any new buyer might find itself in serious difficulties if it tried to reverse the staffing and other cuts and at the same time meet the expectations of the investors whose appetite was whetted by the profitability in the documentation accompanying the float. We know what happened in the UK.
When we look at the available information we find two very different sets of reports. On the one hand there are glowing reports about what the company is doing and on the other reports that suggest that there are problems and unhappiness in the facilities and most of it is recent. We find these divergent and conflicting views whenever we look at reports about our aged care system - two very different perceptions about what is happening.
The positive stuff
On its web page FPCompanyJ boasts. “Be it our relationships, the way we engage with the community, friends and relatives or our carers, we are committed to giving our all as we strive to make every day the best it can be for everyone around us" and their vision “To make every day the best it can be and in doing so change the perception of aged care".
In its March 2015 review of acquisitions “Growing with Age: Dealtracker for the Aged Care Sector” Grant Thornton lists all the recent deals of multiple companies during its “dealtracker period”. FPCompanyJ boasted of “a ‘Signature Living’ range of facilities”, “exclusive clubs” and “luxurious accommodation and access to a vast array of extra services, such as gourmet specially prepared meals” and “a philosophy of person-centred care throughout our homes”
In January 2016 ABC Central West reported on nursing home that had established an adjacent “farm” where residents could be involved with animals including dogs, chickens and gardening. This was a response to residents feedback.
In April 2016 there was a report of the opening of a “new high-end residential aged care home that offers valet service and luxury surrounds- - “ - - - “The home offers events arranged by their concierges, extras like manicures, pedicures and facial treatments as part of its beauty package and rooms are equipped with wide-screen HDTVs and 90 Foxtel channels”. The owners “will work with the Arts Health Institute to give residents services including personalised valet visits, art appreciation, craft, dance and theatre activities, creative writing and music”. The company's mission was “to change the face of aged care”. A further four upmarket nursing homes were being developed. They were also upgrading other homes.
The negative stuff suggesting unhappiness in some facilities.
At the same time there are disturbing claims by the union, reports of problems in the nursing homes and the adverse findings by the quality agency. This might lead us to suggest that FPCompanyJ is cutting costs to boost profits and is getting ready to list on the share market. The company had an explanation, denied or apologised for all the incidents.
- Claims in April 2015 that there was a report of a theft. A dying resident had “a diamond encrusted engagement ring ‘forcibly removed’ from her ring finger while she was sedated a day or two before she died. She was left with black and blue bruises on three of her fingers.”
- In January 2016 a newspaper reported that when the partner of a man who had died earlier that morning arrived at the facility the staff “presented Mr XXXX’s body for her to view on a hospital gurney in a zippered body bag, when she arrived mid-morning”. It was in “a very ugly little room”. “The lack of dignity appalled them”. There was a rapid apology.
- In April 2016 there was a report about the same nursing home expressing serious concerns about staffing. A group pf “recently resigned registered nurses” went to the newspaper because of their concerns. New management had been appointed in late 2015. The allegations included that nurses were “working double shifts for 13 days in a row”, of “unsafe staffing levels”, “often only one RN rostered to care for more than 120 patients, pain charts aren’t documented” and “the stress was overwhelming”. The nurses indicated “Now it’s all about profit over care.” “The holding room, an air-conditioned area where deceased patients are moved before families arrive” had been closed but had apparently been reopened - presumably after the previous incident.
- On 3 February 2016 there was a report of a lawsuit by a nurse against the company (Paywall) because it has not protected her from “systematic bullying and harassment” by one of the male residents in spite of “multiple reports, which were ignored”.
- In April 2016 ABC News reported the ANMF nurses union's claims that FPCompanyJ had sacked a large number of nurses.
ANMF XYZ state branch chief executive officer Exxxx Dxxxx said aged care provider FPCompanyJ had sacked about 30 enrolled nurses from its Mxxxxxxx and Wxxxxxx sites.
"Enrolled nurses are an excellent skilled-level worker who provide care to the residents and they are stripping away an entire level of worker in their residential aged care facilities," she said.
Ms Dxxxxx said she was concerned the company was planning to sack at least another 10 enrolled nurses at the Rxxxxxx site as well.
We believe that they have stripped more than 230 hours per week in each of these sites and that translates to approximately 20 minutes of care per resident per day," she said.
The (FPCompanyJ) spokesman said all staffing changes were made after careful consideration to meet the best interests of residents.
Source: Aged care provider cuts enrolled nursing jobs, puts patients' lives at risk, union says ABC News 9 Apr 2016
Failing accreditation standards: One of FPCompanyJ’s homes Cxxxx has had problems with accreditation. Its reports can be found here. In 2012 it a manager had resigned and it failed the medication standard which it soon corrected. In May 2015 the facility passed all standards and was accredited for three years until 08 July 2018. An additional audit was conducted only 8 months later in January 2016. This can only be because the agency was given information that caused concern. It met only 35 of the 44 expected outcomes in an audit done in January 2016. The documentation shows that by July 2016 it had made corrections but still had 4 standards uncorrected. In spite of this it was accredited for two years. When accessed in September 2016 the report showed that these 4 failures had not yet been corrected (Note that by May 2016 they had been "corrected" and you need to read the details of the findings).
Extracts from the assessors comments on the 9 unmet standards included these fragments.
1.1 Continuous improvement: - - quality activities and improvements have not been actively pursued ——— Monitoring of systems has not been undertaken —
1.3 Education and staff development: Staff and management do not have the appropriate knowledge and skills to perform their roles effectively. Orientation programs have not been available to new staff. - - - Some staff report challenges with their inability to work effectively due to insufficient knowledge. Care recipient and representative feedback indicates dissatisfaction with some staffs’ skills and attitudes.
1.4 Comments and complaints: - - - has a system to manage feedback and complaints, the system has not been used. - - - Care recipients and representatives said complaints are not responded to and/or resolved satisfactorily. We were told of numerous complaints made but not found in the home’s documentation system.
1.6 Human resource management: - - - not able to demonstrate there are appropriately skilled and qualified staff sufficient to ensure services are delivered - - - - - Staff training has not been provided - - - - Staff on . . . leave are not always replaced. - - - Care recipients and representatives express dissatisfaction with the skill and capacity of some staff.
3.2 Regulatory compliance: - - - management systems failed to identify and ensure compliance with all relevant legislation, regulatory requirements, professional standards and guidelines, - - - Allegations of physical and emotional abuse have not been reported, - - - Care recipient and representative feedback identifies dissatisfaction in this area.
3.3 Education and staff development: - - - Management and staff do not have appropriate knowledge and skills to perform their roles effectively - - - Some staff do not have the skills to ensure and protect care recipient personal, civic, legal and consumer rights. - - -
3.4 Emotional support: - - - cannot demonstrate there are effective systems to ensure each care recipient receives initial and ongoing emotional support. - - negative feedback is not addressed and care recipients expressed reluctance to complain for fear of retribution.
4.5 Occupational health and safety: - - has not actively worked to provide a safe working environment that meets regulatory requirements. - - - safety systems have not been functional. - - - Staff allocations and rosters do not ensure sufficient staff are available to maintain safety - - Staff and care recipients report bullying and harassment which has not been addressed - - Staff and care recipients report fear of retaliation in lodging complaints or concerns.
4.8 Catering, cleaning and laundry services: The home’s hospitality services are not provided in a way that enhances care recipients’ quality of life and the staff’s working environment. - - - Most care recipients report dissatisfaction with aspects of the food service. - - - catering issues have not been resolved. - - - Numerous missing laundry items - - -
We might surmise that we are looking at glowing claims, advertorials and grand nursing homes for the very wealthy because FPCompanyJ is creating a positive impression for future investors with photos and reports to go into its documentation. At the same time it seems to be cutting costs by reducing staff and services that are not profitable like food. There is much to suggest that it has taken its eye off the consequences for residents and uner the pressures created by the high pressure private equity process has forgotten its glowing promises to them.
It missed its chance when FPCompanyI beat it and managed to float first a year ago. Its rival was soon performing spectacularly in the marketplace. FPCompanyJ is now desperate to float but it is not as perspicuous a time. The largesse of the Living longer Living Better funding and the booming market in 2014/15 created the buying spree and the other companies listed. In the latest budget government has cut aged care funding quite savagely and the big companies are complaining. Is FPCompanyJ's plight similar to that of Terra Firma in the UK? Is it trapped and is probably in debt? In September 2016 Axxxx Capital abandoned its plans to float FPCompanyJ until at least 2019.
PECompanyO and FPCompanyI - a different story
FPCompanyI was founded in 2005 by Pxxxxx Axxxxxx. By October 2013 when it was acquired by private equity PECompanyO it owned 12 facilities. PECompany O then invested funds buying other companies. It acquired 13 nursing nomes in May 2014 and 11 in July 2014.
It did not delay or spend a long time building profitability but floated on the sharemarket in December 2014 after little more than a year. I did not find any reports of failures in care or understaffing during this period. PECompanyO’s selling point when it floated was “to lure investors for its float of aged care operator FPCompanyI Health by promoting the firm’s proactive approach to acquisitions in what is a fragmented sector of the economy”. On a roadshow in November it used its proactive record in making acquisitions in the sector as a selling point.”. It had arranged to buy another 5 facilities when it listed on 5th December making it the fourth largest nursing home group in Australia owning facilities across the eastern states.
The float goes wrong: The float was a disaster with the shares rapidly dropping to well below its opening price. PECompanyO was strongly criticised by leading analysts for being “overpriced, opportunistic”. It was “accused of exploiting investor interest in aged care after the disastrous sharemarket debut - - Its shares dropped 25% and it lost “ $200 million in the first 10 days. Questions were raised about its ability to meet its forecasts.
Strategy for success - management: FPCompanyI proved me and all of its other critics wrong. It appointed a skilled chairman Pxxx Gxxxx who had been mentored by Paul Ramsay before succeeding him at Ramsay Healthcare. Ramsay was the skilled health care businessman who successfully built his dominant hospital empire by avoiding the excesses of his competitors, maintaining reasonable standards of care, and keeping the medical profession on side. Ramsay Healthcare had entered the aged care sector in 2003 but it had not been a great success and they sold their facilities in 2006.
Gxxxx was enthusiastic and saw “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”. But Paul Ramsay was only able to do so because the US giants were kept out by our probity provisions and the medical profession put his only larger competitor out of business!
An expert in takeover strategies who had previously assisted PECompanyO was poached from Barclays Bank. The recently retired chairman of the Accreditation Agency became the company’s chief quality officer. It was claimed he would embed a “next generation quality management system” across the organisation’s 45 facilities.
Meeting its forecasts: FPCompanyI not only met all of its forecasts but exceeded them. It brought the additional five facilities soon after listing, another four in May 2015 and then another four in October 2015. It formed a partnership with Lxxxx Cxxxx to build another 500 beds in June 2015. In October 2015 it was even tipped to buy its slightly smaller private equity owned competitor FPCompanyJ but that has not hapened - yet!. I have not seen any reports of failures in care or staffing deficiencies.
In March 2016 FPCompanyI “was upgraded to outperform by Macquarie Wealth in a detailed comparison of three listed players in the sector that have floated in the past two years”. It was doing much better financially than its listed competitors.
There have been relatively few criticisms. Combined Pensioners and Superannuants Association (CPSA) examined Annual Reports on October 2015. It criticised its “productivity” index which was claimed to be a measure of overall efficiency. It did not think that the figures relating to the use of government ACFI payments made sense.
- FPCompanyI Healthcare’s dodgy index CPSA 23 Oct 2015
On 1st December CPSA used FPCompanyI’s figures to question the lack of accountability as to how the government's funding was spent and the amount of profit that was taken from this. It drew attention to the poor quality of food in the sector, one of the basic care items government paid for. It looked at the amount of government money that could not be fully accounted for in the statements. This was money that could potentially be making a major contribution to the bottom line if it was not spent in the way ACFI intended. CPSA indicated that it had studied the other two listed company’s reports. They “had 52% and 67% ‘left-over’ basic daily fee revenue respectively”
What this can lead to is neatly summed up by this little blurb on the website of an aged care catering business called Vxxx Fxxx Sxxxs: “As industry leaders in Aged Care Food Services, our gourmet aged care menu options and comprehensive aged care catering services are designed to boost meal time efficiency and improve the bottom line of your aged care facility” (our italics).
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?
Source: Nursing homes hungry for profits CPSA 1 December 2015
In the introduction to my criticisms of the aged care sector I indicated that there were many who did make the system work for residents and they did this in spite of the system and not because of it. This certainly looks like an example of that. I wonder if it was the original owner’s expertise and insight rather than PECompanyO that piloted the company through the dangerous rocks and brought in the sort of people who would help do this.
It is quite likely that despite the questions, about just how much of the money that should have been spent on residents went to profits, the company has navigated the pressures and pitfalls of the system successfully. The “next generation quality management system” has kept it at least above the level that would have created publicity and having the past chairman of the accreditation agency involved would have ensured that there was no trouble there. It may also have maintained the sort of relationship with residents and staff that kept them reasonably happy and on side.
But we really don’t know what was happening in these nursing homes. The staffing the food and the care may have been exemplary. The point is that because we don’t collect information we don’t know. Its possible that it may have heen bad but effectively contained.
- Growing with Age: Dealtracker for the Aged Care Sector Grant Thornton 2015
- Global pension funds eye local nursing home chains THE AUSTRALIAN OCTOBER 02, 2013
- DataRoom AM: InterOil intrigue Business Spectator 11 Aug 2014
- New acquisitions for major private providers Australian Ageing Agenda on August 27, 2014 in Expansions, mergers, acquisitions, Industry
- PECompanyO raises $725m ahead of FPCompanyI IPO The Australian 22 November 2014
- Here’s why the FPCompanyI Health Ltd IPO was overpriced The Motley Fool 10 Dec 2014
- Why FPCompanyI Health Ltd shares have sunk 25% since listing a week ago The Motley Fool 15 Dec 2014
- RetireAustralia merger will boost services Sydney Morning Herald 29 Dec 2014
- Aged care the place to be, says Deutsche Bank BUSINESS SPECTATOR 28 Jan 2015
- Latest sector appointments Australian Ageing Agenda 27 February 2015
- Former Barclays MD Bxxxxxx poached by FPCompanyI Health AFR 21 Apr 2015
- FPCompanyI Health accelerates acquisition spree Finance News Network May 05, 2015 09:27 AM
- FPCompanyIHealth acquiring four new aged care facilities Proactive Investors 5 May 2015
- FPCompanyI, Lxxx Cxxxx sign deal to develop facilities The Australian 26 June 2015
- FPCompanyI initial profit beats target Business Spectator 12 Aug 2015
- FPCompanyI Health on track for 20 pc earnings growth in 2016 SMH 12 Aug 2015
- FPCompanyI’s Pxxx Gxxxx says ageing population will drive growth The Australian 23 Sept 2015
- FPCompanyI Health buys four new aged care sites Sydney Morning Herald 28 Oct 2015
- FPCompanyH eyes Kxxxx Business Spectator 16 Nov 2015
- FPCompanyI ahead in aged care: analysts Australian Financial Review 22 Mar 2016 (Paywall)
Change is coming. How will they fare?
The aged care guild comprises the nine largest and most profitable companies in Australia. They include the three companies listed on the share market in 2014 including FPCompanyI previously owed by private equity PECompanyO. FPCompanyJ which is still owned by Axxxx Capital is also a member.
If these and other companies have followed similar financialising and debt loading strategies to the UK and the USA then they may be in trouble. They may have increasing diffficulty in maintaining staff levels, providing good care, meeting their interest payments and paying the profits that their shareholders expect and that will keep their share prices high - while at the same time remaining solvent.
We might draw comparisons between FPCompanyI and Southern Cross and watch to see if it is learned the lessons and is able to survive a downturn in income. We can also compare FPCompanyJ with Four Seasons which missed the boat.
Members of the guild are understandably very concerned about this. They are employing a premiere and highly credible group of consultants, Deloitte Access Economics, to do a study so that they can pressure government and persuade us, the public, to support them in demanding more money. On the next page I am going to look at the way these companies have been making their money and why the government is making changes to the “complex health care” domain. We may need to spend more money on aged care but not until we have some way of monitoring what they are doing with it.
In a statement released today, the Aged Care Guild, the peak body representing the sectors’ major private providers, said that the Federal Budget’s proposed changes to the ‘complex health care’ domain of the ACFI, designed to save $1.2 billion, as well as the cuts of $472 million announced in last December’s Mid-Year Economic and Fiscal Outlook, continue a pattern of cuts to the sector.
Source: Aged Care Guild commissions Deloitte report into ACFI changes Australian Ageing Agenda 18 May 2016
Update: 11 June 2016
When writing about FPCompanyI above I should have rememberered my own list of 12 red flags to problem companies that I set out on a web page in 2004. The first was "Large Profits particularly disproportionate profits. Strong institutional investor support. Market praise. Rapid expansion, particularly when others are struggling".
It seems that CPSA knew a thing or two because FPCompanyI’s bubble has just burst. It has been revealed that it had its finger in the governments piggy bank. According to the Australian it is one of the companies that have been “maxing out” (that is claimed to be different to rorting!) on the opportunities presented by the additional funding available in the funding body's maximum funding category. The Australian has reported that “According to company filings, an astonishing 91.3 per cent of its residents were classified high-care in June last year, attracting the highest level of funding.” Its claims already higher than the industry average increased from $139 per resident in 2012 to $170 per resident in 2015.
It has been growing rapidly and so accumulating debt. Wise investors saw the writing on the wall and deserted the ship. Private equity group PECompanyO sold all its remaining holding in FPCompanyI within a week of the May 2016 federal budget. “FPCompanyI has also attracted the attention of short-selling hedge funds, all questioning the sustainability of its aggressive roll-up acquisition strategy”. Its shares have been falling more than others in the sector and questions are being asked about its viability. Bank of America and other analysts estimate it will lose “$24 per patient per day in revenue by 2019.” following the recent cutbacks by government.
- Health Department set to audit FPCompanyI over aged-care claims The Australian 7 June 2016
- Aged care and fast money an unhealthy mix The Australian 11 June 2016
And again on 16 June
What is currently happening is fascinating. On the web page Consequences of marketplace thinking I describe the many innovative ways in which funding has been “maximised” to such an extent that the minister called it fraud. In spite of the increased funding through the Living Longer Living Better program there has been a massive blowout in aged care funding. This is because of the way the industry has maximised the claims it can make. The government have responded by abolishing the additional funding that it claims was being rorted.
The industry has responded by calling this a $3.1 billion cut in funding and threatening to mount a massive publicity campaign against the government during the current election campaign - blaming poor care on the government. So far this threat has only appeared in industry newspapers and not in the large number of free Newscorp and APN papers across the country. In the past politicians have buckled under this sort of pressure. Only a few weeks out from the election both major parties are very vulnerable now. It will be interesting to see what happens.
- Campaign against aged care funding cuts intensifies Australian Ageing Agenda 10 June 2016
- LASA campaigns to reverse aged care cuts DPS News 13 June 2016
- Old, frail and invisible, anti-aged care funding cuts campaign ramps up The Senior 11 June 2016
In the meantime the big market listed players have decided to charge large additional fees including up to $18 per day for all those who elect to pay the Refundable Accommodation Deposit rather than pay a Daily Accommodation Payment (DAP)
On June 6, FPCompanyI introduced an $18 a day charge for residents who meet the cost of their accommodation upfront, rather than paying in instalments. Rival FPCompanyG Aged Care introduced a similar fee in April, while Axxxxx xxx xxxx Group (XXXXX), part of FPCompanyH Healthcare, established a new fee last year. FPCompanyI's levy, known as an asset replacement contribution fee, is the highest of the three.
- - - - experts have also reported that more aged care facilities are forcing clients to pay for additional services, such as hairdressing, wi-fi, excursions and wine with meals.
FPCompanyI's asset replacement contribution fee amounts to an additional $6500 a year that must be paid by residents who wish to pay for any part of their accommodation via a RAD.
- - - - the difference between the pension and the room charge will need to be met by deducting money from the RAD.
Source: Aged care providers hike fees by thousands Australian Financial Review 9 June 2016 (Paywall)
Clearly this sends a strong message to prospective residents encouraging them to pay DAPs rather than RADs. It seems that they must bring in more day to day cash. Pensioners whose pension does not cover this will find that their RAD has been seriously eroded when it is eventually refunded.
What conclusions might we draw from this
1. That the industry is so confident that it has got government just where it wants it that it can do just what it wants so is pushing up charges so that its does not suffer losses.
2. That the industry is over financialised and unable to pay interest on their loans. They are so desperate that they have no choice but raise fees rapidly to increase income in the short term even though this increases long term risks..
They are going to have to repay the Refundable Accommodation Deposits (RAD’s) when residents die. They would normally depend on new RADs to replace the ones they pay out. Thismay be a desperate short term measure to halt the rot. When the crunch comes government may have to bail them out if they don’t want to follow the UK and have several large companies go under.
Government says no and the market plummets again (Update September 2016)
Government have dug their heals in. They “clarified what additional fees an operator could charge a resident” and “ruled the fees as not permissible because they do not provide a 'direct benefit' to the resident; nor are they part of the “normal operation” of an agedcare home". Issues raised in the articles quoted below included contrasting the governments expectations with the duty of listed companies to shareholders to maximise profits.
The difference between a private for profit company was contrasted with becoming a public company where “you had a conflict of running a business to produce a good return for investors”. As a private company you could run a “sustainable business”, and this was a story that “the investors would not like”
The Aged Care Guild representing the big for profits complained that the reform plan (set up by labor and then initiated under the Abbott government), which would have made the market sustainable by shifting more of the costs to the individual, has not been fully implemented. But this is where Howard failed and why his disciple Abbott was evicted. Politicians have to accept the Australian ethic of a fair go and that means some form of insurance or cross subsidising so that individuals and families are not ruined by the unpredictability of the way we end our lives. Politicians missed the boat in 1997 and we need to talk about finding another way of doing this.
Whenever I think of Howard I am reminded of Mao Tse-tung. Millions of Chinese still revere him and don’t relate the image to the consequences of what he did! We need a sensible market that is not based on ideology.
Hundreds of millions of dollars were wiped from the value of listed agedcare stocks this week as investors started to question whether these companies — which generate profits from taxpayer funds — really have a place on the stockmarket.
Market analysts, once vocal supporters of the sector because of Australia’s ageing population, have since slashed price targets and hit the sell button on the listed companies as the funding crunch loomed.
- - - - the debate about the listed players was opening up the discussion around pricing, cost and viability.
Source: Agedcare stocks FPCompanyI, FPCompanyH, FPCompanyG fall The Australian 10 Sept 2015 (Paywall)
Shares in the agedcare troika were hammered between 17 per cent and 23 per cent, although these losses were tempered as the week wore on.
The industry body is lobbying furiously - - -
The agedcare imbroglio highlights the wider dangers of listed entities that depend on the public purse, especially in the health space.
Source: FPCompanyI, FPCompanyG, FPCompanyH stocks at the mercy of health mandarins The Australian 10 September 2016 (Paywall)
The second article suggested that there may be “alternative listed exposures” and points out that other sectors like pathology and prescription drug wholesalers have learned to cope and survive in a stable way.
As interesting is that Axxxx Capital is pushing back its plans to float its agedcare operation FPCompanyJ until at least 2019. One wonders how much dept it is carrying and if it is losing money.
The Australian Financial Review published a few days earlier and may not be behind a paywall.
- FPCompanyI, FPCompanyH, FPCompanyG investors get a lesson on the impact of budget cuts AFR 6 Sept 2016
Criticism of company: The Australian Financial Reviews was very critical of FPCompanyI who they indicate is employing the same UBS banker (now moved to Credit Suisse), as “defence adviser to (the) under-siege listed aged-care operator“ This is “the bloke who IPO'd the damned thing in the first place” two years ago. The company’s shares have more than halved to $3.20.
All of these listed companies are in trouble. They were all “aggressively shorted” (selling shares with an option to buy them back later when prices are lower) by a private equity who had seized the moment and is going to make a huge profit. Mxxxx Sxxxx the article suggests is a private investor in this private equity company - which all sounds pretty fishy!
Where will Mxxxx Sxxxx loyalties lie? Will it be with the frail elderly who are trapped in this debacle or with the company he is employed to help? Will his own investment be a distractor? Who is going to be hurt most the investors or the frail elderly.?
- Credit Suisse’s Mxxxx Sxxxx advises FPCpmpanyI, invests in its short seller VGI Partners AFR 13 Sept 2016
The industry fights back: Also in the AFR, an article by a lawyer and director of the “national aged care and retirement living team” of a large legal team is very revealing of the free market thinking within the industry and within its legal and business advisers. She is clearly an advocate for the Labor and then Abbott government’s living longer living better reforms which give the industry the money it needs to consolidate and compete in China.
She writes about “a week to forget” and blames the government for interfering in the financial arrangements between the provider and the residents - “what should be private arrangements between aged care providers and residents”. “The government must not interfere when care providers and residents reach mutually agreeable arrangements - - should step back and let the market operate”.
- The dead hand of government in aged care reform Australian Financial Review 13 Sept 2016
What the writer overlooks is that these increased charges are not “mutually agreed”. Much of this has been covered by existing fees. These are not additional services. They are being applied to residents already admitted to nursing homes and already receiving most of these services. This is what they agreed to. They have no choice.
This is not about residents looking for new facilities and entering into new contracts. Even then these residents do not have the information they need to make sensible choices. She does not recognise the limits or the risks of markets in vulnerable sectors.
A critique of "crony capitalism": Judith Sloan, a business woman, academic and generally free market advocate calls these markets that depend on unpredictable governments for funding "crony capitalism". She uses childcare as an example of the way the system favours big businesses, pushes smaller ones out and how costs are pushed up.
- - - I’m not a fan. Crony capitalists develop business models on the basis of government regulation, subsidy or preferment.
- - - They employ large armies of lobbyists and promoters whose main role is to defend and, if possible, extend the degree of government support on offer. They must also manage regulatory risk.
- - - Most of these firms simply would not exist were it not for government support, certainly not in their number or size.
- - -Without these rising government subsidies, ... swallowed up in higher childcare fees ... the increasing burden of regulation ... the scene is set for investor heaven. Economies of scale and scope really help to ease the regulatory burden and the bigger players win out
- - - It was a cottage industry characterised by diverse and affordable provision. Lots of mums and dads were involved, but they have been driven out of the industry.
- - - Aged care is another area in which crony capitalists are increasing in number.
- - - The incentives are obvious: classify as many of your residents at the upper end of the scale and obtain higher subsidies. - - it is actually very difficult for the paymaster (aka taxpayers) to detect this sort of rorting. - - -
- - - But the point is that the scale, nature and profitability of some industries are seriously skewed by government action. And there are winners and losers in this game.
Source: Taxpayers lose as crony capitalism takes over childcare, hospitals Judith Sloan The Australian 10 Sept 2016 (Paywall)
SBS News had a few days early indicated that the extra fees these companies were now charging were not legal. An authority quoted indicated that the “perception that everyone operating in the aged care and retirement living sector will be successful but said 'nothing can be further from the truth'". In this “challenging situation - - they have to take a profit maximisation motive- - -“. Australian Unity claimed it had a different model.
- Aged care sector hit by govt fee changes SBS News 5 Sept 2016
Update September 23rd - falling apart
FPCompanyI lost 50% of its value, its original founder Pxxx Axxx "abruptly quit the board and dumped his $55m stake" and then both its CEO, its CFO and another member of the board fell on their swords and resigned. The company started looking for replacements but the Australian claims that the vultures are already circling. "A Chinese insurer and possibly even New York private equity group Blackstone (the one that allegedly decimated the UK's largest nursing home company) are said to be running the ruler over troubled aged-care provider FPCompanyI". Is anyone consulting the residents and their families about this?
- FPCompanyI loses CEO after guidance miss The Herald Sun 16 September 2016
- Acquirers circle troubled FPCompanyI The Australian 23 September 2016 (Paywall)
The losers: But the important final point about this game is that there are losers in this game and the elderly are unwittingly trapped in it. Whether companies are winning or losing the elderly are almost always losers. The other loser is civil society. All those independent mums and dads, members of civil society, who are pushed out and then often become corporate employees who lose their independence and have to do what they are told.
Within only a few weeks the effects are flowing on to the care given to residents. Two FPCompanyI’s nursing homes are already failing accreditation standards.
The federal health department issued a non-compliance notice when FPCompanyI failed to meet a number of standards, including how it cares for its residents, at its Txx Gxxxxxx facility on the NSW mid-coast.
It is not the first time FPCompanyI has been caught short on standards. Within that last two years it was also put on notice at its Nambour facility.
Source: FPCompanyI aged care facility on notice for compliance Australian Financial Review 31 Oct 2016
Cost cutting means cutting funding for staff and surprise surprise the two are linked
FPCompanyI a corporate aged care provider, has just announced plans to cut weekend penalty rates in order to recoup the revenue lost through the Australian Government’s $1.2B cut to aged care funding.
Source: Overworked and underpaid: who will care for our nurses? CPSA 14 Oct 2016
Why the Australian aged care market imploded (Update October 2016)
There are some very interesting analyses on “Find the Moat“, a blog by an anonymous author who seems to know what he is writing about and to be well thought of by some. I can't verify them but his figures, his graphs and the gist of his arguments make sense. He analysed the figures then predicted what was going to happen to this market and why in May 2016. He then followed through with other articles as it happened. I will refer to him (or perhaps her) as “the Moat”.
He recognises exactly how the market works. In referring to the strategy of using incentives and disincentives to drive a system he said “free market participants will always find a way to dodge the sticks and feast on the juiciest carrots”.
His first article in May 2016 was an accurate assessment of the impact that RADs (Refundable Accomodation Deposits or Bonds) have had in causing the collapse. We can see why the companies are now backing away from them and discouraging residents from selecting this option.
He indicates that “The RAD makes tremendous sense for the resident (provided they have the savings). Where else can you generate 6.28% return on your cash risk free?“
But as he indicates in this marketplace there is little transparency or accountability
- - - the providers are somehow allowed to use RADs to fund acquisitions of other aged care providers.
- - - providers can use government guaranteed RADs to play the industry consolidation roll-up game and in the process adding nothing to the actual supply of new Aged Care places.
- - - providers have minimal accountability to the ultimate owners of the RADs (from the retiree’s perspective, it’s simply a government guaranteed deposit).
(in regard to how they do their accounting)
- - - categorise their net RAD inflow / outflow as operating cashflow despite the fact that this is simply money lent to them by their customers, with a real effective interest cost and theoretically repayable at any time.
- - - Amongst the listed players, we now see Balance Sheets with huge debt balances (i.e. bank debt + RAD), far exceeding cash and PP&E combined in the case of FPCompanyI and FPCompanyG:
——— In fact, net tangible assets are negative for both FPCompanyI and FPCompanyG due to acquisitions made at valuations far exceeding the value of net assets acquired:
——— In other words, a large portion of RADs held are now backed by nothing but goodwill.
Source: LEVERAGING UP THE AGED CARE SECTOR Find the Moat 17 May 2016
So RADs (the secure loans given by residents and guaranteed by government) are being used to buy nursing homes at wildly inflated prices and fan the flames of the sort of financialising that destroyed the UK aged care system. Because they paid so much in excess of their true value there is little prospect of repaying the RADs in full if they go under.
The only way to keep this going is for new RADs to keep replacing the ones paid out - a ponzi scheme in which the government (ie taxpayer) carries all the risk. The amount of money made from the nursing homes does not generate the income needed to justify the expenditure. Investors expect a return on the money invested.
In the next two articles (below) The Moat explains how this pressure to increase the income stream led to maximising (some called it rorting) the funding system by increasing patient acuity and so getting more money from government - but not spending it on care. They also found ways of charging the residents more but the government blocked this.
- - - In fact, FPCompanyI brags about its ability to claw higher ACFI payment per resident out of the government under its ownership, charging the Australian Government 15% more per resident within 6 months after acquiring a new facility.
- - - As we’ve established in my previous article, goodwill from acquisitions make up a substantial portion of balance sheet assets for FPCompanyI, FPCompanyG and FPCompanyH. Remove goodwill, Net Assets are actually negative or close to negative.
- - - a material amount of balance sheet goodwill is deemed impaired especially in context of huge acquisition multiples having been paid for those assets in question.
Source: A STEP CLOSER TO THE END GAME Find the Moat 3 June 2016
The Moat goes on to look at the accounting strategies that were used with RADs in order to misrepresent their true nature and so present a rosy picture to investors and attract them. CPSA (Combined Pensioners and Superanuants) has also written about dodgy accounting practices.
When a company insists that you assess it using its own proprietary measures, and the picture it paints does not reconcile with what you arrive at using traditional corporate finance measures - - - - something peculiar is going on and it’s time to dig deeper.
- - - Instead of RAD funding being utilised to build out new supply of residential aged care facilities to ready Australia for the “grey tsunami” (as per government intent), it is being aggressively deployed to fund the roll-up of existing facilities.
- - - - – the value of which is a direct function of the huge valuations currently being paid in the sector.
- - (The RADs)- - failed to actually increase the new supply of aged care places but succeeded in inflating asset pricing which in turn puts pressure on owners of these assets to make ever more aggressive claims for government funding in order to meet capital market expectations. (ie to make profits in keeping with the prices paid).
Source: FPCompanyI’S MAGICAL ROCE EQUATION Find the Moat 29 July 2016
This was all a response to the Living Longer Living Better reforms, the money that we thought and were told was for better care. I disagree with The Moat in that I don’t think this money was really intended for building more facilities as it claimed. I think it more likely that the government was very happy for the industry to consolidate because it wanted companies that could take advantage of trade deals and compete in the international market and so improve Australia’s financial position. This is what it really wanted.
- - - (FPCompanies I, G and H) - - listed on the ASX in quick succession in response to the Living Longer Living Better reforms on 1st July 2014.
- - - Well out of the roughly one billion dollar that have been spent on acquisitions, $392m was directly attributable to acquisition goodwill (excess valuation paid above net asset value).
- - - - Putting all the pieces together, we can deduce that value creation to-date have not come from the trio investing into the build-out of new facilities nor has it come from organic earnings growth reinvested and compounded.
- - - It has come from financial arbitrage (financialised buying and selling) facilitated by the fact that $1.9bn of Refundable Accommodation Deposits on the trio’s respective balance sheets are not accounted for by the market as either equity or debt.
- - - So the well intentioned and seemingly clever piece of legislation to give the private sector a carrot to build out the nation’s supply of aged care places has unintentionally spawned a much juicier carrot in the form of an equity capital markets arbitrage.
Source: RESIDENTIAL AGED CARE SECTOR REVISITED Find the Moat 29 September 2016
Not well-intentioned: If this was to capitalise on trade deals then it was not well intentioned because they knew or should have known, if they were not blinded by belief, of the extensive research showing that these market driven companies provide inferior care. They were sacrificing the welfare of their own citizens to attain financial objectives.
- By pouring money into the sector and encouraging consolidation government has fuelled a massive buying frenzy where nursing homes were bought way above their market value. Because the RADs borrowed from residents was used for this the RADs are no longer protected by assets and the companies do not have the money to repay them. The RADs are no longer secure.
- The companies paid far more for assets than they were worth and cannot generate the income to support that investment. They have and will continue to try to get more money by pressuring government, maximising income from government, charging residents more and by cutting staffing and so care. They must do so to survive.
The government is in a catch 22 position.
- lets companies go under and pays the many millions of dollars in debts needed to repay the unfunded portions of the RAD loans, or
- increases funding and rescues the companies in which case the ponzi scheme will continue and the market will simply hold government to ransom. Costs will continue to rise and care to be ever more mediocre. The industry is creating strong pressure for them to do this.
In either case it will be the taxpayers who will pay for this and the residents who will bear the consequences. The second option is the more likely because this can be more easily hidden and explained away. This means that the problems will continue and the costs of care will become higher and higher in order to feed the profit needed to sustain it. The adverse impact on residents will be less obvious than with bankruptcies.
A confirmatory view: The Bull, another more mainstream internet investor advisory publication with multiple experienced journalists analysing the same situation agrees with me on this. They put it this way.
Long term trends can be powerful drivers of stock price performance and few trends can match the certainty of the upcoming flood of ageing baby boomers.
- - - there is one thing investors can count on with relative certainty. The Australian government is not going to put the senior citizens of this country out on the street.
Source: Aged Care Providers on the Ropes The Bull.com 4 Oct 2016
In other words the industry now has government over a barrel and will ultimately force it to do what the industry wants. This will also make it far more difficult for the community to press for change. The industry will be in a position to block any changes they don't like. The report by The Bull is negative for short term investors but positive for those with long term objectives.
The nature of markets
I have long argued that the provision of services like health and aged care using free markets under the guise of reducing costs and improving services using competition and efficiency have done the very opposite. Countries like the USA that have done so have provided overall inferior services to their citizens at far greater cost than in countries using any other approach to the provision of care.
Markets are about making money - as much as they can. They are not about providing services or care. These are only a means to an end. It is not competition or efficiency that ensures high quality care and keeps prices down but people. They are simply vapourware sold to the gullible public. It is effective customers and community, a strong civil society that does this and makes the market work for society.
At the present time markets are highly organised and powerful. Customers and civil society are fragmented, disorganised, conflicted and "hollowed out". How this happened is described elsewhere. The way to make markets work is to rebuild society. Politicians will only contribute to this if they are put under strong pressure to do so.
Note: My accounting skills are those of an ordinary citizen so if you have skills in accounting please read the linked articles, look at the graphs and make up your own minds. Please make a comment at the foot of this page to confirm or refute this assessment.
Private Equity: The human costs
It is so easy to forget that there are real people at the receiving end of all the pressures. Disenchanted staff leave and inappropriate staff are appointed. Staff who are there become hardened, uncaring, angry and neglectful. Orchid View was a home in the UK that was owned by Southern Cross and the events described in the quote below occurred between 2009 and 2011 when the financial pressures were biting.
The reports are dreadful but almost as bad was what happened after the home was closed by authorities in 2011. The new owner appointed the same managers back to the new home in the same building.
An inquest found all 19 people who died received "suboptimal" care and five cases involved neglect
A coroner has said she will call for a public inquiry into institutionalised abuse and neglect at a care home, which contributed to at least five deaths.
An inquest into 19 unexplained deaths at Orchid View between 2009 and 2011 found neglect contributed to five.
"It's too late for us but we are fighting for a change in the system," said Ian Jerome.
"The care system is in a pretty bad way - it is in a mess," he said.
Source: Orchid View care scandal coroner to seek public inquiry BBC News, 26 Jun 2015
There were many articles describing the saga:
- Archived: Orchid View Care Quality Commission 6 Oct 2011
- Orchid View inquest: Home riddled by 'institutional abuse' BBC News 18 Oct 2013
- Revealed: Manager of Britain's cruellest care home Orchid View was put back in charge The independent 22 October 2013
- 'Britain's worst care home': Damning report into 'harrowing neglect' at £3,000-a-month home aims to stop 'institutionalised abuse' of the elderly Daily Mail 10 June 2014
Striving for the impossible
I must stress again that there are efforts being made and good care is being provided in spite of the system. Associate Professor Lee-Fay Low is urging people to challenge their beliefs about aged care pointing out “that both residents and care staff had little power” over their daily lives and how care was provided. This led to a loss of identity and so quality of life. She indicated that there had been “a lag between the rhetoric of change and the reality of good quality care”. She wanted individuals to take responsibility and make changes. This meant "giving power, control, choice and responsibility to both staff and residents”.
- Challenge beliefs around ageing to create organisational change Australian Ageing Agenda 16 March 2016.
There were plenty of positive comments from staff on the article. My interest in this was that it failed to mention the community and it required that staff and residents be given this additional power over their lives - presumably by management and owners. What chance of this?
Life is about living it
I remember talking to a young patient in her early 20s who had incurable cancer, this was during the time when the medical professions realised that patients needed to be well informed and you needed to discuss the issue of death with them. Staff were having to confront the issue of death themselves and were being encouraged to give patients an opportunity to talk about it. The young lady was thoroughly fed up with doctors, social workers and nurses all sitting down to talk earnestly with her about dying. She told me she knew perfectly well that she was dying. She really wanted to talk about living because she was not dead yet and the most pressing issue for her was to decide what she was going to do with the rest of their life. She was happy to contribute to educating my students so we sat arround and discussed just this. That helped her.
That was one of the most helpful bits of advice that anyone has given me. I think I helped my patients most by talking about what they could do with the life that they had left than by harping on the fact that they were going to die. The elderly know they are old and will die sooner rsather than later. What matters is what they do with what is left.
We are existential beings and live by doing and being involved and this goes to the heart of the problem in much of aged care. While good care is essential to enable the elderly to live it is simply a means to an end. The end is to be able to live and become involved to the maximum extent possible. Involvement means involvement and interaction with the world around us — meaningful relationships and activities with those we come in contact with - much of it in our homes.
But in nursing homes there are two worlds and to form relationships they must be bridged. You cannot bridge gaps with processes and efficiency, nor with paternalism and condescension
An article in Australian Ageing Agenda draws attention to the problem created by these two worlds, the world of the providers carers who simply go to work to provide services, care or choices on the one hand and the world of those who live there and whose home this is.
- - - - residential aged care facilities have traditionally been dominated by the biomedical model, which emphasises “efficiency, consistency and hierarchical decision making” over and above the needs of individuals. Quality of life and care for residents can be compromised under such a model and, further, individuals can become lost in a system that prioritises routines over relationships.
Organisational changes in residential aged care facilities has been occurring in Australia, albeit slowly, but requires changes in attitudes and behaviour not just processes and procedures. However, the issue is – and will always be – the fundamental disconnect between what facilities represent for those who work there and what they represent for those who live there.
Source: Tackling elder abuse in residential care requires systemic culture change Australian Ageing Agenda 3 Feb 2016
To make life meaningful these two worlds have to be brought together and forms of engagement created where both sides are involved in activities and relationships that develop meanings that meet the existential needs of both.
There is a great deal of interest in these ideas and many come from community and staff - not from the marketplace. The co-location of aged care with schools and retirement facilities with universities are two examples. The Montessori method is showing great promise in the management of dementia where the residents and families themselves all become very much part of the organisation of the activities.
- Montessori methods for people with dementia Alzheimer’s Australia Victoria 16 Oct 2015
Lives extend back into communities, what happened there in the past, what is still happening there now and what will happen in the future. That connection is important for relationships and quality of life. Some are now placing aged care facilities in or close to community centres where families meet and interact so that the residents are included or are as far as possible a part of that.
Community: An interesting paper by two psychologists goes to the heart of our being by stressing the importance of community and relationships. It examines service cultures and characterises those cultures on the basis of the relationships they build and the personal stories that are built there. They explain how these impact identity and the quality of life of the disabled and how current practices and reforms fail because of the cultures that are formed.
The paper looks at how developing community and personal relationships leads to empowering cultures that lead to a good life. The life stories developed are critical. The article explains why personalisation has not always worked and comments that when services are provided by for-profit entities people are seen primarily as financial investments.
- The Relational Basis of Empowerment by Karl Nunkoosing and Mark Haydon-Laurelut Published in the “The Need for Roots” series. The Centre for Social Welfare.
Making this possible
The problem I have is that none of these projects will be profitable or efficient and while we may well get a number of flagship facilities to showcase what is being done the likelihood of this being adopted across the sort of strongly competitive marketplace that we have in aged care must be remote. Contrast these worthwhile endeavours with what is revealed on this web page and ask yourself how much actual impact it is likely to have. The two seem to be in direct conflict. There is no doubt where the power, the pressures and the incentives lie. It is not that many providers are not capable of expressing and engaging their humanity. It is that the system does not give them any room to do so.
I will discuss what happens in a context like this on later pages. People will adopt the ideas of the dominant and powerful. Being successful in adopting them will becomes critical for them. Some will reflect and accept the impossibility of providing a good life in this context. They will go elsewhere. Others will deceive themselves that they are being successful and the whole enterprise will become an exercise in form over substance - "all show and no go". Words will become a substitute for the real thing and all the psychological strategies needed to ensure our successful survival are brought into play to reassure those who have any doubts.
The best way to address this is to take the power away from the markets and put it into the hands of those who are interested in making these changes to aged care - give them the power to insist.
The proposed aged care hub would require providers to embrace and enlist the community if they wanted to be successful. This would give the staff and residents the support and the power to do what they are so committed to and make that the norm rather than the exception.
Those writing these articles should be talking about how to change the system and the power structures there so that they can do what they need to do. The proposed hub is directed to doing that and they should consider embracing and supporting this.
The hub brings the community, but particularly families and older citizens who will soon need care themselves, into the system and involves them directly in the management and provision of the care and the creation of worthwhile lives that they will themselves continue to be a part of as they age. It embraces many of the Montesorri principles described in the link above - empowering people to help others as well as themselves.
The proposed Community Aged Care Hub
We might consider how the proposed hub would mitigate and address the issues on this page. How it might try to turn a ruthless mechanism into a caring environment.
As customer and regulator
- Its presence in the nursing home, its control of data and its involvement with management would limit damaging cost cutting and help to maintain standards.
- Unrealistic marketing of a company's facilities in the corporate marketpllace would be difficult
- Its presence and role in the facility would support staff and also counter the disillusionment and cultural changes that occur when the focus turns from care to profits.
As part of the community
4. It would be well placed to alert the community to the problems of financialisation and churning and to press these matters with government. It would be interested in developing a stable low yield marketplace that serves the community better and does not expose the seniors in their communities to the financial risks described every time the market has a hiccup.
Access to financial data: At present the Accountability Principles 2014 require recent audited financial reports to be made available on request to a care recipient in a facility, anyone approved as a recipient considering entering a facility as well as a representative of one of these. Clearly the proposed hub should have access not only to such audited accounts but to the ACFA allocation of funds to these residents. It needs to know what money is coming in and what money is going out and be able to relate that to the service provided
Changing the market: One strategy, if other measures fail, might be to break the service up by splitting ownership and management of facilities. Local communities would then contract with Real Estate Investment Trusts (REITs) or developers to rent and develop facilities. They would contract separately with a provider of care. They could ensure a balanced selection of facility types and management to meet the needs of a particular community. This would meet the particular community's requirements and not be solely determined by potential profitability.