Nursing Home Cost Pressure Survey Report

Transcription

1 Nursing Home Cost Pressure Survey Report Ken Kilmartin & Brian McEnery BDO

2 TABLE OF CONTENTS 1 THE 2012 COST PRESSURE SURVEY BACKGROUND BDO HEALTHCARE ADVISORY TEAM AND EXPERTISE NURSING HOME SECTOR IN IRELAND FUTURE TRENDS COST PRESSURE SURVEY COST PRESSURE SURVEY FINDINGS FOOD & SUPPLIES REPAIRS & MAINTENANCE LABOUR COSTS OVERALL COST MOVEMENT SUMMARY & CONCLUSIONS... 10

3 1 THE 2012 COST PRESSURE SURVEY 1.1 Background BDO Healthcare Advisory Services have been retained by Nursing Homes Ireland (NHI) to conduct an analysis, (based upon a sample of audited financial statements of nursing homes) of the movements upwards and downwards in the costs of operating nursing homes over a two year time horizon to The methodology adopted by BDO entailed securing and analysing the audited financial statements of 16 nursing homes throughout the country ranging in location, size and between single and multi-site operators. 1.2 BDO Healthcare Advisory Team and Expertise BDO Healthcare Advisory is a specialist area of practice within the firm in Ireland and internationally. Within Ireland, the practice has six partners who provide strategic advices and professional services to the public, voluntary and private sectors across: Older person care; Acute care, and Primary care The BDO analysis relates to incurred third party costs and excludes items of expenditure which could skew (if adjusted significantly from year to year at the discretion of the proprietors) the total operating expenses. Consequently, excluded costs include expense items such as: Directors salaries; Directors pension costs, and Rent payable to proprietors The BDO analysis identifies movements in the total operating costs (except for excluded items) and also identifies on a granular basis a number of significant cost movers between: 2010 and 2011; 2011 and 2012, and 2010 and 2012.

4 2 NURSING HOME SECTOR IN IRELAND The long term older person care sector made up of 441 private and voluntary homes and 122 public homes. Overall, slightly in excess of 75 per cent of the overall bed stock is supplied by the private and voluntary nursing home sector. The private and voluntary sector has grown rapidly between 2003 and In that time period, supply rose from 14,946 beds (2003) to 20,560 (2009). Since then, arising from a number of factors, growth has slowed and in 2013, the supply of beds stands at 21,475. From 2003 through to 2009, the sector experienced an annual overall increase in supply of in excess of 1,000 beds. Since the last nursing home survey in 2010 to date (a three year period) the total increase in beds has been 885. Based upon a number of different studies surrounding the assessment of needs, the level of growth in supply in the last 3 years is likely to be insufficient to meet future demand. 2.1 Future trends If one examines the medium term future, the Centre for Ageing Research and Development in Ireland (CARDI) predicts that, cumulatively an additional 2,833 persons will require either long term residential care or formalised home care per year to Beyond that point the demand is likely to be even higher as the overall number of older persons escalates markedly. In addition, they conclude that the likely level of demand for long term care, recognising the growing incidence of home care packages is likely to be of the order of 34,700 beds. The demographic movements place challenges and opportunities in our path. With the moving of time towards the ending of the derogation period after which HIQA will not allow the continuation of supply which does not meet the minimum standards, we are likely to see pressure on maintaining current supply levels to the end of 2015 and into The fall in supply has already been seen in the public sector and this is set to continue in the short term. Therefore, there is a need to stimulate the provision of supply or the development of alternative satisfactory care solutions. The use of home care packages is welcome, but in recent times the number of such packages has also reduced. Even accounting for increased home care packages, the demographics confirm an increasing requirement for residential care. The CARDI report confirms Even with greater emphasis on care at home and more resources provided to realise it, the demand for residential care is going to increase significantly in the next decade Quality long term care is expensive to deliver and the exchequer is keen to minimise the cost to individual residents such that the overall budget goes

5 further. This has been the trend in recent times and in particular in Dublin, where, despite costs increasing, rate reductions paid to nursing home operators have been sought and secured, under the Nursing Home Support Scheme (NHSS) also known as the Fair Deal.

6 3 COST PRESSURE SURVEY 2011 The last cost pressure survey was undertaken in 2011 and was based upon a comparison of operational costs between 2009 and This survey looks at the period from then to Arising from the fact that BDO only uses audited financial statements for the cost pressure survey it means that the survey results can t be completely up to date as audited accounts typically are issued some months after the year end of the business. This is why, the cost pressure survey in 2013, relates to the period 2010 to 2012, in a similar way to the 2011 cost pressure survey which analysed cost movements between 2009 and Finally, the 2011 cost pressure survey highlighted significant revenue and capital expenditure associated with the implementation of the HIQA standards. Since the publication two years ago, of the 2011 cost pressure survey, BDO has in particular observed the continuation of significant capital investment by nursing home operators in nursing homes right across the country. This capital expenditure committed to by operators is in response to the need to modernise their facilities to meet the deadline of having compliant homes in The single largest finding arising from the cost pressure survey in 2011 was that nursing home staffing costs increased by 15.3 per cent in that 12 month period. This was attributed to a combination of two factors: An overall increase in staffing levels, and To a lesser extent increases in labour rates Other significant cost movements in that 2011 cost pressure survey were: Energy costs increased substantially with the average increase being an amount of 15,800; Commercial rates increased substantially within that years and the average increase over all respondents was an amount of 14,200 per home;

7 4 COST PRESSURE SURVEY FINDINGS 2013 As outlined in the introduction, BDO has examined third party operational costs and are outlining the major cost movers within the last two years in this sector. Capital investment made by nursing home operators is not included, as this would most likely be capitalised on the balance sheet of the nursing home owner and hence is not included in annual operating costs. Arising from our analysis, BDO reports, that the significant cost movers over the time period analysed include: Food & supplies; Repairs & maintenance, and Labour costs. These are analysed individually and a summary of total overhead excluding proprietors remuneration and rent is presented separately. 4.1 Food & supplies Food & supplies is typically the second largest category of expense item after labour costs. In our survey, we found that in both years there was an annual increase in this expense item and this can be shown as follows and for the entire period of the survey in the graph below. The overall increase in the cost of food and supplies in the two year period is approximately 16 per cent, with almost 11 per cent of that increased occurring in Repairs & maintenance This is typically the next largest (or third largest) expense item in the profit and loss account when rent and proprietors remuneration are excluded. Repairs and maintenance costs have risen substantially since the introduction of HIQA and this is likely to remain a large expense item for the medium term, as nursing homes seek to ensure they are fully compliant for when the HIQA derogation period ends in July The rate of increase can be viewed as follows. In the sample chosen, the overall increase over the two years was just over 17 per cent. In fact there was a slight reduction in repairs and maintenance in 2011 when compared to 2010, but there was a large increase in repairs and maintenance expenditure when 2012 is compared to 2011 (28 per cent increase).

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9 4.3 Labour costs The largest single expense item in the operation of a nursing home is the labour cost. Movement in overall labour costs are a consequence of a combination of volume and rate adjustments. Our analysis indicates that there has been little by way of rate adjustment, but significant increases in volume adjustments and this has been an upward adjustment. This stands to reason, as the dependency levels within the private and voluntary home sector has increased year on year for the last number of years. The Department of Health & Children are purposely seeking alternatives to long term residential care and one means of ensuring dependency levels increase, is to conduct a medical needs assessment. This has resulted in the level of the over 65 population requiring residential care falling below its traditional 5 per cent, and it is now closer to 4 per cent than it is to 5 per cent. For these reasons we believe the labour cost has risen substantially in recent years and we expect it to rise in the near future as dependency levels continue to rise and the demand for a labour rate increase builds in the coming year or two. The trend in labour costs can be viewed as follows: The overall increase in labour cost over the 2 year period is 21.3 per cent which is very significant in the context that it is the single largest expense item. It is in effect a large percentage increase which translates into a large absolute value. Our analysis of the responses to the survey shows that labour rate increases were virtually non existent for nursing and caring staff. The only instances which we saw of labour rate increases related to non rostered, administrative and management functions and these were the exception rather than the rule. Consequently as referred to earlier, the reason for the labour cost rises appears to be related to the need for additional staffing resources and this in consistent with what BDO is seeing when it negotiates with the NTPF on behalf of nursing home operators.

10 4.4 Overall cost movement The overall pattern of expenses in the profit and loss accounts of the nursing homes analysed showed an upward trend. It is fair to say that revenue also showed an upward trend arising from in particular many nursing homes having an annual consumer price index (CPI) increase agreed as part of their pricing agreement with the NTPF. In addition, from our analysis we believe the occupancy of the nursing homes chosen has also increased over the time period under scrutiny. Overall we have seen margins reduce over the period of the survey, as cost increases have outstripped revenue increases.

11 5 SUMMARY & CONCLUSIONS Early signs in 2013 indicate a move from the NTPF towards reducing Fair Deal rates particularly in the greater Dublin area. Were this to happen on a large scale, we believe the margins would tighten further and profitability would reduce overall. For some nursing home operators with significant leverage, profitability is not the key determinant of financial health. Cash flow is more relevant and where there are significant debt levels (on foot of developments in the peak periods) decreases in revenue can appear manageable from the perspective of the profit and loss account, but not sustainable from a cash flow perspective. Overall, a fair and proportionate approach needs to be taken to fee negotiations in the purchase of long term care. If this does not happen, then expansion in the sector will be less than the already subdued levels of the last 3 years. of cost categories have been excluded in arriving at these figures and consequently analysts are not in a position to truly compare the cost delivery of care in the public sector versus the private sector. This needs to happen if there is an honest and true focus on securing value for money. Scientific analysis conducted by independent commentators, reveals that the older person long term care sector needs to expand to meet demand in the short, medium and longer terms. The factors and environment required to ensure this expansion occurs need to exist and they currently do not. For instance giving new nursing home developments the average rate (less 3 per cent) that applies in that county to new nursing home operators is crude and illogical. Many new and existing operators who were considering entering or further developing in this sector have stalled expansion plans because of the discouraging nature of agreeing rates with the NTPF for new developments. A scientific and judicious approach needs to be taken by the NTPF in attempting to reduce they negotiate and hence the amount the HSE pays to nursing home operators under the Fair Deal scheme. The scheme when introduced was deeply flawed, and those flaws have persisted to the current day. The variations and inconsistency in pricing is leading to large anomalies and unfair advantage to some operators and the disadvantage to others. Pricing of care provision to older people should be undertaken on a more consistent and scientific basis. Care purchasers need to recognise that unless a return on capital is provided to operators, capital will not be secured to provide new and badly needed long term care bed supply. As costs rise and margins fall, increases in supply will contract and this is not in the best interests of care of the older person. Finally, it should go without needing to be said that the cost of delivery of older person care in the public sector is not the public homes rate published by the HSE. The HSE published rate is of course not the amount required by those public homes to run their activities on an all inclusive cost basis. A host