Changes in aged care present new opportunities for investors

By Paul Thorley. Published at Dec 17, 2018, in Market Wrap

The last few months have seen a massive shake-up within the aged care sector. Investors have wiped near $500 million off the share prices of Australia’s largest aged-care operators, following the announcement of a royal commission into the sector.

Meanwhile, the industry is going through significant reform, with Consumer Directed Care (CDC) now introduced into Home Care Packages (HCP), followed by the shift to give the package to consumers rather than providers. This is disrupting the market, opening it up to new players and platforms who are challenging the incumbents for market share — and winning.

With an uncertain market landscape and a pending royal commision, should investors steer clear or assess potential opportunities in alternative investments? The answer, like all investments, is in informing your choices.

Market overview: what’s changed?

HCP has been the subject of significant reform to ensure the program evolves to meet the care needs of older Australians. One change was to improve access to home services through CDC and allow consumers to choose who provides their care, taking the power away from the incumbents.

Since February 2017, all home care packages have been provided to individual consumers rather than awarded to approved providers under an allocation process. What we’re seeing, as a result, is the in-home aged care market rapidly evolve to be fully demand-driven, with the power being given back to consumers.

The recent government-sponsored Tune Review confirms this policy direction will be maintained and reinforced, that all supply constraints will be lifted. Indeed, the changes will flow through to residential care too and are expected to significantly impact the status quo in the industry.

Aged-Care set for dramatic growth

Alongside the changes taking place within the industry, we can expect to see significant growth due to Australia’s ageing population. From 2018 through to 2040, the number of over 65s will increase from 15% of the population to 20%, and over 85s from 2.8% to 6%.

The use of care services by age is predictable, allowing for demand to be measured, with or without existing supply constraints. Existing HCP will increase to 140,000 by 2022 (near-term CAGR almost 12%) and is forecast to be 170,000 by 2032. The integration of the CHSP customers and revenue in 2020 are incremental to this.

This growth in participant volume will be trumped by even faster revenue growth, as there will be proportionally more Level 3 and Level 4 HCP places, which have higher government contributions. There may also be a higher Level 5 introduced, opening up new revenue streams for providers.

Additionally, government spending on aged care is projected to increase from 1% of GDP at present to 1.6% of GDP by 2040. On top of that, the Tune report recommends higher and mandatory customer contributions, well beyond the current average of 13% for HCP and 4% for CHSP, adding further market growth to the equation and opening up the aged-care sector to privatisation.

A generational shift

With the reforms and a measurable market size, where does the opportunity lie for investors? An interesting and worthwhile insight, which will steer change in the sector, is the customer profile of those born post-1945 - more commonly known as the baby-boomers. This segment will be more motivated to self-manage and more tech-savvy, setting in motion a dramatic shift in how aged-care will be provided.

HCP participants from the baby-boom generation are a very small percentage of the current aged care market, but will represent a rapidly growing portion of new entrants – the primary market for which providers compete.

With consumer-focused reforms, and baby-boomers entering the market, the aged-care sector will continue its shift towards a heavy adoption of on-demand services. As new market entrants are used to wheeling and dealing off mobile devices, coupled with the increased choice from CDC, we are likely to see the trend of Uber-style home-care providers soar.

The investment opportunity lies in technology

Whilst these Uber-style providers may present an opportunity for investors, they are generally lean businesses with small profit margins. Their success is in their ability to scale and capture the majority of the market. Whilst investors can hedge their bets on who will come out on top, there is a risk that you may be backing a non-starter - one only has to look at the story of Foodora to see the risks inherent in backing these players.

However, there’s a bigger play that we’re seeing emerge. The industry shake-up is leading to a modernisation of the sector, with scheduling and rostering, billing and payments, and administration moving to online cloud-based services.

Now, it’s time for these cloud-based platforms to dominate, offering an end to end in-home aged-care service solution, from Primary and Secondary Care, through to Telehealth and care powered by the Internet of Things. They will bring together the disparate service providers and technologies in the market to become the one-stop-shop for aged-care.

This opportunity in the market is currently seeing software players scrambling to fill the void, with a few already hot on the heels of developing a single platform to scale with the sector. It’s only a matter of time until we start seeing the big traditional software players come into the market and start the process of consolidation through mergers and acquisitions.

For investors, picking the right opportunities early on could provide a windfall later down the track, whether it be through an IPO or acquisition. This is leading to a significant opportunity in the alternative investment market, where venture capital can provide the catalyst to stimulate growth and give investors access to potential high returns.

But, it’s important to do your research on the companies you are backing. You need to know if their leadership team is firing on all cylinders. Do they have a technology platform that enables scale and integration? Are they ready to pivot at a moments notice to meet the changing demands of the market? And, can they provide convenient, accessible, on-demand care to the new tech-savvy generation?

Only time will tell, but it’s a sector we are keeping a close eye on and one we believe offers significant opportunities to increase growth within investment portfolios.

Paul Thorley, Senior Director at Greenwich Capital Partners

Paul has over 30 years’ experience in consulting specialising in growth strategies, business transformation and complex program management.

Paul was the CEO of Capgemini Asia Pacific and Middle East and operationally responsible for USD 500m P&L comprising China, Japan, SEA, India, Middle East, Australia & New Zealand with 9,000 staff.

Paul is now an Adjunct Professor at the University of Technology Business School. He is a member of several groups working on the future of higher education and forging stronger industry collaboration.

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