The crisis in aged care

Monday, 10 July 2023

Katherine Rich is a business adviser and director with experience in the public and private sectors. She was previously chief executive of the NZ Food and Grocery Council. She is interim chief executive of the NZ Aged Care Association.

OPINION: Another day, another health story about burnt out medics, strained emergency departments, patients in corridors, long waiting lists, and yet another rest home closing.

The stories are all linked to a common constraint in the healthcare supply chain, the current crisis in aged care.

“Not enough inpatient beds” is often code for Kiwis too frail to go home not having access to an aged care bed in their community. Clogged wards cripple the public health system because they block the flow of care for patients of all ages.

A sustainably funded aged care sector is critical to a strong public health system. Aged care is a core government role, but instead of being treated like a trusted partner, aged care providers are often treated like dispensable contractors.

The facts confirm a dire situation. The loss of 1260 beds last year, nurse shortages, and major providers cutting new builds by two thirds, means fewer rest home and aged care hospital beds.

By 2040 New Zealand needs 78,000 aged care beds. Based on trends we will have 33,000, not even half needed. This is disastrous timing for the over-85s predicted to triple in number.

Even Te Whatu Ora’s own online Aged Care Demand Planner predicts 188.3% occupancy for aged care hospital beds by 2040, an impossible figure unless grandparents top and tail a la Charlie and the Chocolate Factory.

Growing bed demand is clear, so why have providers closed, stalled investment, or scaled back their plans for extra care beds?

The answer is health funding pitched so low that many operators make a big fat loss on the contract.

Contracts do not cover basic business costs like depreciation, repairs and maintenance, refurbishment, or normal returns. They do not cover the full cost of care. Contracts have not kept up with inflation, particularly food and building costs. Losses sustained by some I have spoken to have been in the multi-millions.

Many aged care providers have already exited. Those remaining are treading water, scaling back plans for care beds or focusing on premium rooms. No one is building standard rooms suitable for those without means. New hospital-level bed builds are to meet the needs of village residents and premium customers, not the general public.

It’s naive for current health policy to assume that retirement village owners will continue to subsidise government core services from their accommodation businesses. Some do treat “care centres” as a de facto marketing costs as resident prospects value a “continuum of care” when choosing a village.

However, rampant cost inflation and the scale of recent hospital-level care losses has forced a new approach. New care centres planned are two thirds the size of former builds to meet the needs for village residents.

Other standalone providers, particularly charitable and not for profit organisations do not have the same option to cross-subsidise. Some have been funding losses through reserves and can’t afford this for much longer.

In economics, business and life, price signals matter.

Right now, the Te Whatu Ora contract price signals scream “get out” rather than “build more beds”. Relying on cross-subsidisation or loss-making to provide care needs is risky health policy, particularly if the aim is to preserve equity, access, and regional provision. Reasonable bed rates for rest home, hospital and dementia care would send a price signal to invest and encourage operators to build more beds.

The current funding approach does not value equity and access. Two decades of underfunding has changed the aged care market from one ensuring equity and access for those in need, to a developing two-tiered system.

Kiwis who can sell a home or other assets to fund aged care will have choices. If the current funding model prevails, those without means will have trouble finding aged care in their local community. The current policy of underfunding aged care is driving a very un-New Zealand outcome.

The mass exodus of the charities has meant fewer standard beds (no extra charges) available. Standard bed options are important for Kiwis relying solely on superannuation without a capital sum to buy into a retirement village, a serviced apartment or premium room with additional payments.

There’s a compounding problem with the stock of standard beds. Most facilities are more than 30 years old needing compliance upgrades. Health contracts do not cover depreciation, repairs, maintenance let alone new builds or refurbishment. Investing to upgrade is beyond many providers so when the asset’s useful life is over more will close.

And in case anyone thinks that this is a case of aged care providers being unreasonable, the banks add third party confirmation that the aged care market is failing.

Even if a provider ignores standard return on investment and cashflow tests and wants to build a standalone hospital-level bed facility, health contract returns are so meagre banks will not lend the money. Why lend to a venture that loses half its value based on cashflow the day it opens its doors and can’t fund repayments?

As the tsunami of need surges towards public hospitals, New Zealand is ill-prepared. Te Whatu Ora and Ministers know the issues, but seem focused on day to day, not centralised planning for the future. Their inaction risks entrenching a two-tier system where many Kiwis will struggle to get the care they deserve.

Demanding fully funded contracts to ensure quality care in old age is not unreasonable.

Care for the final years of life was exactly the core service Michael Joseph Savage had in mind when Kiwis were promised a cradle to grave welfare state in 1938. Funding of all forms of aged care for those in need is a core government role. Political leadership that looks beyond electoral cycles is required.

More bed closures, fewer builds and not enough beds guarantees greater pressure on public hospitals. Aged care beds cost less than having thousands of older Kiwis stuck in long term public hospital care.

Even if aged care bed rates were tripled today, they would still cost less than half that of a public hospital bed. Sustainable aged care in the community relieves one of the biggest healthcare system blockages.

Whether it’s for your parents, your grandparents or you, accessible aged care for all Kiwis in need is one of the core services for which we pay taxes. New Zealanders expect the cradle to grave promise to be kept.