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This is the massive review of the economic performance of the aged care sector performed by the Productivity Commission in 2004. It had a profound impact on policy. How valid was it and was the data it used sound?

 Australian section   

The Productivity Commission
WP Hogan 2004




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Hogan was commissioned to examine efficiency and productivity in the aged care system and his process was exhaustive. There are however multiple concerns about the way he did this and his market based approach to aged care. His recommendations must be seen in this light.


Because there was insufficient information about financial input and output Hogan did his own investigation. There must be concern that the economic data he collected was not representative and that his analysis did not control for the many variables. He looked at inputs and outputs using this data in order to calculate efficiency and productivity concluding that the system was still 17% inefficient.


He did not comment on the fact that there was no reliable information about the outcomes for the residents. It would not have been too costly to employ staff from the agency to enter a random selection of homes to record the incidence of readily measured markers of care. He made no attempt to assess the quality of their lives. Instead he accepted the accreditation findings.


Hogan ignored the humanitarian inputs which play a critical role in care. He considered aged care as if it were a commercial service rather than a community mission. In examining outputs he looked at profits and the number of beds to see how many more beds could be provided if there was a 17% increase in efficiency. He did not examine the care provided, justifying this on the basis that the flawed accreditation and complaints systems were effective and because almost all homes got full marks.


Hogan carefully avoided supplying information and considering issues which might reveal deficiencies, support criticisms of the market, or indicate that excessive pressure to be more efficient and productive would affect care adversely.


Issues that emerge are the need for much better collection of data and of regular analysis of this data. He made some recommendations to the department but these fell a long way short of requiring that providers disclose the information needed. He advised far greater public transparency. Although Hogan did not refer to the deficiencies in the accreditation system he was aware of the inadequacies of their reporting and urged a more meaningful star system.


The full report can be found at




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This exhaustive 397 page review of the aged care system does record a large amount of factual data about the aged care system in 2004 for those who wade through it all. It comes up with a large number of projections for the future and recommendations for funding the aged care system. Quite apart from an inherent shudder at a document which reveals the distance between an academic economist and his theories on one hand and the nurses, residents and families on the ground, on the other, there seems to be much to criticise in the methods used to determine the recommendations.


The Economic Process


The commission consulted extensively, put out contextual and background papers, examined international systems, and received 349 submissions. It employed multiple other organisations to do a series on modeling exercises using this data. It was a monumental undertaking.


Clearly there are large economic implications to the provision of aged care and there are economic realities which must be confronted. Economic advice is very important but economists should not be designing an aged care system and deciding how it works. One shudders at the largely unsupported underlying assumption that markets and competition for money are universally beneficial and can be used to drive and improve the abstract concept "quality care”. One shudders at the goal of efficiency and productivity when that efficiency and productivity is measured purely in financial outcomes and not in the quality of life for the elderly.


The divide in perceptions between economist on the one hand and professions and community on the other is glaringly apparent in this report. In fairness this is what Hogan was asked to do by our political masters and he paid lip service to "quality”.


"The main task of the Review has been to examine the longer term prospects of residential aged care services with particular respect to future arrangements for private and public funding, performance improvement in the industry and longer term financing.” (Preface pXl)


The objective of the 1997 aged care act was to turn the sector into a competitive market. The conservative government had by then spent 7 years (and ultimately 11 years) trying to make it work. Hogan considered way back in 2004 that they had failed. He was of course correct.


"Aged care services do not currently operate in a competitive market; the supply of services is constrained.” (page 95)


My argument is that by its very nature aged care cannot operate successfully as a market and attempting to do so compromises the objectives of the service by introducing an overriding consideration that conflicts with the mission of the service. There was little prospect that Hogan could design a market which would serve the community effectively in this sector. Six years later it is clear that he did not. While steps can be taken to limit negative impacts, Hogan's recommendations in this regard fell far short - and even then were ignored.


Because a "free” market was the holy grail to be aspired to, any form of regulation, however necessary was seen as an impediment to the efficiencies to be gained. This is readily apparent from the economic modeling on which future directions were projected.


The ACDCM (Aged Care Dynamic Cohort Model) met these challenges by innovations which identify the unusual demand/supply interactions in aged care. Key regulations are modeled as constraints on the 'optimal' solution. (The ACDCM applies mathematical techniques to find the best solution to allocating aged care services given constraints.) (Page 60)


Quite separate from the data Hogan sought mechanisms by which the system could be funded and in doing this analysed it as if it were a market and as if competitive market forces applied. Where market forces were not being applied, he sought ways in which they could be better applied.   


Like other market economists Hogan focuses on demand and downplays need. He therefore concentrated on what would be demanded and not what was needed. There is a subtle but important difference. Demand can be created by marketing and scare mongering. Need exists and can only be met. By creating demand markets introduce pressures to over-service, and to exploit the vulnerable (eg Psychiatry in the USA ----- Cardiac surgery in California).


The Government needs to give serious consideration to replacing the needs-based planning arrangements with more market based solutions. Such solutions will allow provision to be more responsive to demand, without necessarily increasing the cost to the taxpayer. (Page 276)


In trying to maintain equity while still making aged care more market like Hogan sought ways in which those who could afford to contribute to the costs would do so fairly. I do not have a problem with people who can, taking control of their lives and contributing. but this does not turn them into effective customers.


The Bottom line for a market in aged care


Measuring productivity and efficiency requires that we measure the product and relate this to the economic and human inputs into the system. In this instance the primary product for the community is the care of frail and vulnerable people, and the quality of life that they have. As a community this is what we are interested in. We expect our aged care system to provide the best possible care and the best possible life with the human and financial resources we are able to contribute.


The product for market entities is the profit that can be generated from caring for the frail aged. Once the decision was made to drive aged care with market rather than community processes, then profitability became a prime concern for politicians. The government is the prime funder of aged care and they use tax payers money for this. If politicians expect to attract businessmen into this market then they must provide sufficient funds to make enough profit so that aged care is competitive with other industries.


Once this decision is taken there is a dilemma. Profits and care compete for the same dollar. When both must be generated then, other things being equal, the relationship will be an inverse one. Profit pressures from the market will generate more profit and less care. Efficiency and productivity readily become a mechanism for facilitating the diversion of resources from care to profit.


As a community, concerned about the quality of the lives of our elderly, and faced with a market in decrepitude, our prime interest is in the forces that are being applied to counter profit pressures. How efficient are they in redressing this balance so that funds are diverted from profit to care? That the processes are opaque should arouse our suspicions. The reports coming out of our nursing homes suggest that things are not what they should be.



The Data

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An analysis of any report, however impressive (and this is a very impressive report) must start with an examination of the data on which that report is based. The maxim "garbage in garbage out” must be kept in mind. As a community we should expect humanitarian input and output to be included in the analysis.


Economic data


As this was an economic report directed at efficiency and productivity the data consists of inputs into the system and outputs indicating what was attained. I will look at the extent to which care and humanitarian outputs were considered later.


The most revealing part of Hogan's report is the revelation that there was so little financial accountability for the way taxpayers money was spent that he did not have the information needed to do his job. He had to collect it himself. He employed one agency to collect the data and de-identify it and then several other commercial and academic institutions to analyse it. It was then all destroyed. This was in order to ensure the confidentiality of the information so that we, the taxpayers could not see who they were and how different groups were spending our money. Some data was withheld from the report because of "confidentiality undertakings”.


Questions directed towards the structural and efficiency themes central to the work of the Review, as embodied in the Terms of Reference, called for analysis of the workings of the aged care industry and the demand for aged care services. Little work on the economic and financial circumstances of the industry had been undertaken in the past.


For example, data about accounting and financial matters relevant to the provision of residential aged care services had not been collected systematically. This omission had to be remedied (Page Xl)


The Review decided to undertake a financial data survey of providers in order to:

- determine some baseline data for further analysis;

- develop an economic model of the aged care industry (Access Economics);

- undertake an efficiency analysis of the sector (Centre for Efficiency and Productivity Analysis-CEPA). (Page 5)

Validity of data


The problem with the data collected is that the sample was not random. It was self selected. All approved providers of aged care were asked and voluntarily submitted economic data. This was a market system and this was a review on which future payment for services, and so profitability, would depend. They all wanted more money.


The likelihood of those who were most profitable being among those who responded was probably small. Yet no comment was made on this. Hogan was satisfied with a 31% response. That this bias had been introduced is suggested by the data. Only 19% of the usually more profitable for-profit sector responded, half the number of the not for profit providers.


Hogan provided a detailed analysis of the EBITDA (earnings before interest, taxes, depreciation and amortisation) profit per bed per day in relation to state and size, each with its own lengthy section. But the subheading between them "By Sector”, which should have indicated comparative profitability of the various types of operator, contains only 3 lines referring to losses in the state run system. Information which would allow us to compare the sectors whose primary motivation was profit with those whose primary motive was care has been deliberately withheld and no explanation is offered. This is critical to any evaluation of the market as a legitimate means of providing aged care


It is clear though from the next section that those who operated for profit and were prepared to disclose information were less likely to be profitable than those who were not-for-profit. This is not what you would expect, nor does it fit with experience elsewhere. Hogan also examined the percentage of operators who were profitable. While he did not give detailed figures he commented.


By sector, the community and charitable sectors reported the highest percentage of services with positive EBITDAs at around 80 per cent. In contrast, the state government sector reported the lowest percentage of services with positive EBITDAs at 38 per cent. (Page 36)

So for-profit operators were less profitable than at least two groups of not-for-profit ones.


In a recent limited study the Aged Care Crisis Centre found that, when adjusted for locality, for-profit nursing homes were twice as likely to fail at least one accreditation standard.     The Aged Care Crisis Centre contrasted this with the information supplied only 4 years after the Hogan report by the industry itself. This differed from what Hogan revealed in his report.


"The December 2008 Aged Care Association of Australia's (ACAA) submission (pages 6-7, Graph 2-Graph 3) to the Australian Senate Finance and Public Administration Committee reveals that the profit margin of for-profit nursing home operators (16%) is double that of not-for-profit operators (8%). It also reveals that private-for-profit providers make three times the net profit from each bed ($3,000 vs $1,000). "


Analysis of the economic data. Was this valid?


The second issue about this data is that it reveals that there are multiple variables which influence how each sector has performed economically, yet no attempt was made to control for other variables when setting out the data. There was no multivariate analysis and this is probably because the data was insufficient to generate acceptable results. Hogan recorded all this data which looks impressive. But with so many uncontrolled variables it is no more than an indication of what should be evaluated. No conclusions can be drawn from it. - even if it were randomly collected.


Instead the data was used for economic modeling by multiple different specialist groups who reported back to the inquiry. I lack the knowledge to comment on the modeling and its limitations. I would need some persuading that the data was likely to yield valid results.

Input Data


As I have indicated above I have some concerns about the representative nature of the economic data collected.


There are additional inputs into any humanitarian service. These are generated in the community but are expressed through the actions and commitment of staff. Morale and motivation are key considerations in the care of frail citizens and are a product of a culture of nurturing in the community. Staff, drawn from this community need to express their dedication in action.


The validity of this dedication needs to be reinforced through positive interaction. Staff express their mission, not only by wiping bottoms, but, by interacting with residents, with their families, with peers, and with management - being nurtured by each. They are also motivated by interest and positive support from the community.   


A market has altered the workplace. An excessive focus on efficiency in staffing as revealed in this report does not provide time for nurturing. Management tends to be prescriptive rather than supportive. The community is less involved in aged care and much more critical. Morale and motivation are at an all time low. Nurses leave and new recruits are deterred. The workforce is aging,   


Recommendations for increased funding, and more training places, will go some way to making the sector more attractive. I argue that the problems will not be addressed until the workplace and its links to the community are restructured so that nurturing is restored. Few will be prepared to do this sort of work well, for the sort of money we are prepared for pay. Fulfillment in other ways is required.


The focus on markets and productivity has meant that nursing is increasingly provided by agency staff and by people recruited in other countries and given minimal training. Agency staff do not provide the same continuity of care. Elderly residents require stability yet are constantly confronted with strangers in what is now their home. There are differences in culture and language when carers are from other countries. They will have different value systems. These all impact on the quality of life.


Hogan addresses these important humanitarian input considerations by largely ignoring them but in fairness he was not expected to address them.

The Output data


The economic output in the market is the profitability of the nursing homes and here there is a big problem. Some nursing homes are for-profit and are under strong pressure from shareholders to increase profitability. Church and community owned nursing homes entered the sector with a strong drive to serve but have become increasingly commercial as they have been subjected to market pressures. Government run nursing homes are subjected to much less pressure and seek only to provide a service.


To analyzer this "market" we need to know how much profit each is generating and have a measure of the humanitarian care provided so that we can see whether increased efficiency and productivity is resulting in better care and a better life or simply better profitability. We don't get this from this report.

Measures of care


The only measure of productivity used in the report is the number of high and low care aged care places that are provided.   

The intent and the primary output of the aged care system for the community is care of the elderly - the quality of their lives. Yet this is what no one measures. An analysis of this can be complex and problematic but it is possible to get a very good idea.


Unlike other sections of the health system there are a number of easily measured indicators that give clear and unequivocal information pointing to failures in physical care. These include the incidence of pressure sores, the patterns of weight gain and loss, and the quantity and skill levels of the nursing staff. They suggest understaffing and are likely to be associated with impaired nurturing.


It may be a reflection of hidden doubts about the market system, that none of these easily measured and readily documented parameters are tracked in Australia. Instead there is an accreditation system which monitors 44 processes and certifies that these processes are in place. When they are not, a facility can rapidly show that it has reinstated the processes. Many argue that it can easily be gamed and frequently is.


The 44 processes measured do not properly measure the physical care nor the quality of life of residents. Even if they did, then a process where 95% of nursing homes get 43 or 44 marks out of 44 (page 241) is valueless as a discriminator and consequently cannot be used as a measure of outcomes. That this was set up in this way goes back to the nature of the ideology - and very probably the unacknowledged uncertainties of the proponents. It was set up to succeed. The political consequences of failure were too great to risk.


Any valid test of outcomes (eg. university exams) can be plotted and evaluated on the basis of a curve. If the test does not have groups at both ends of the curve then it is not separating out the the good and the bad from the average. It is not a discriminator and cannot be used in analyses.


The other decision that has to be made is where the cutoffs are made. Who should be rewarded with prizes? Below what level are the measures unacceptable. Where is remediation required and who are so bad that they should fail outright.


These graphs gives valuable feedback to teachers and in aged care would measure the success of the accreditation process. The accreditation system is not a system for measuring outputs and cannot be used as such. You cannot measure the effectiveness of processes unless you measure the outcomes they are intended to produce.



The report's handling of output data


While Hogan arranged for studies to address the deficiencies in economic data he did not see any need to do this for care outcomes. It would have been easy to send staff from the accreditation agency into a representative sample of homes across the industry to scan records and record the incidence of pressure sores, of weight loss, and to note staffing ratios.


Instead Hogan dismissed the idea that competitive pressures and the drive towards efficiency had impacted negatively on care on the basis of the accreditation results. If 95% of providers were getting 43 or 44 out of 44 marks for setting up processes then the outcomes were good. He concluded that market pressures were not impacting on care and excluded this from further analysis. He did however address the lack of transparency. In essence therefore Hogan concluded that aged care was not being provided efficiently without examining the real output from aged care.

Some Issues in the Report

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It is worth looking at some of the issues addressed or not addressed



On the one hand Hogan recognizes the necessity of regulation to contain dysfunction originating from market pressure. On the other he sees this as a negative for the attainment of the efficiencies which he believes an effective market will generate. Strangely he describes the government as being generous but no longer able to be so! Aged care is dependent on the generosity of the public who pay taxes, and expresses their commitment to their parents. It is not government generosity but the willingness of the public - yet they are not really consulted about their willingness to contribute more.


The Australian Government (the Government), and to a lesser extent state and territory governments, heavily regulate quantity, quality, location and price. These regulatory arrangements stem, at least in part, from fears about the vulnerability of residents to exploitation and unsafe practices. Nevertheless, these constraints affect a wide range of economic outcomes. First, they diminish the extent of competition between providers and, in particular, make it more difficult for prospective providers to enter the market. Second, they restrict consumer choice and reduce the consumer's ability to bargain over entry conditions. Third, they curtail innovation in service design and delivery. Finally, they adversely restrict enterprise mix and investment in the sector.


The generosity of successive governments in funding aged care is not sustainable in the long term. (Page 2)


In essence, the regulation of residential care services can be a slippery slope, with an act of regulation not only decreasing the overall efficiency of the sector but also leading to further efficiency sapping regulation. (Page 81)


While Hogan considered that aged care was heavily regulated, he did not actually say effectively regulated. As an economist he seemed to be more concerned about the risks to residents' wealth than that to their lives and well being.


Currently aged care services are heavily regulated, with respect to quality, quantity and price. These regulatory arrangements stem, at least in part, from fears about the vulnerability of consumers to exploitation and unsafe practices. That vulnerability is most pronounced in the risk exposure of their wealth because they do not have opportunities to earn income to offset any loss of wealth. (Page 79)


I share Hogan's dislike of onerous regulation because it impacts negatively on care as well as on efficiency when that term is used broadly and not in purely economic terms. He cannot however argue for reduced regulation when at the same time he argues for and imposes a system which introduces strong pressures to dysfunction. There is a world of difference between a system where staff are expected to strive to get what profit they can squeeze from each resident's care, and a system which is structured so that available resources are stretched for maximum benefit and where all staff are strongly motivated to get the most from what is available.


I am not advocating for a system run by government nor for a system in which taxpayers bear all the cost. Our own Eva Cox has made the point that when structured as part of a civil society regulation will rest lightly and be seldom needed. Our aged care system is not structured in that way - on the contrary recurrent scandals, red flags to the underlying malaise have given rise to ever more onerous regulatory effort! Politicians have been careful not to explore the stresses in the system causing this.


Hogan acknowledges that financial pressures in the system induce providers to game the system. Are they also gaming the accreditation system? -- . a system where there are few if any objective measurements of care.


 On one hand, it indicates the potential ease with which RCS scores can be manipulated in order to classify at a higher level. - - - - - - - - - - - It should be noted that there are clear links between the documentation burden associated with administering the RCS and provider gaming. (Page 211)


In a system motivated by a mission of care providers will try to exploit weaknesses in the economic system to improve the services they provide. For example when confronted with the iniquities of apartheid in South Africa many of us became adept at getting funding and resources for our black patients by exploiting political vulnerabilities and loopholes in the system.


In a system driven by profit, not only do managers driven by pressure from above try to game the economic system but also the care provided. Those putting on the pressures turn a blind eye as they bask in the admiration of peers and enjoy their bonuses and other perks. This is well illustrated by the conduct of Columbia/HCA and Tenet Healthcare when both were among the largest and most successful health care multinationals in the world.

The Market in decrepitude


Hogan accepted that consumers were so vulnerable that a market in misfortune was fundamentally compromised. He nevertheless struggled to make it as market like as he could. He made assumptions about the adequacy of care and justified market mechanisms. Because almost all providers got full marks for accreditation, care was not being compromised. Accreditation is a measure of process and not a measure of care. That those processes are often associated with good care when motivation is strong is not in dispute but they can be gamed and whistle blowers indicate that they are.


Thus in competitive terms, the relationship between the consumer as principal and the operator as agent is inherently asymmetric. There are also other factors that reinforce this information asymmetry. In particular, regardless of the consumer's state of knowledge, once committed to receiving some services the consumer is largely 'locked in' and at the supplier's mercy-given the large financial and non-financial transaction costs involved in changing operators. (Page 80)


Hogan ignores the dilemma of the resident who has carefully evaluated a nursing home before moving in, only to find weeks or months later that that provider has sold the nursing home to a group that behaves very differently. This has been a major issue in retirement villages. It is only because some elderly retirees are robust enough to fight back that we know about it. Nursing home residents seldom survive more than 2 years so cannot do so.


Since Hippocrates, over 2000 years ago, there has been an ethic of protecting the vulnerable from the self interest of those charged with their care. - ie from the market. Instead of shielding residents from market forces Hogan suggests ways in which payments can be structured so that market pressures will be more effective in creating equity.


Of economic and fiscal interest is whether it is possible to achieve these quasi- community service obligations through alternative market-based mechanisms. For example, the requirement to care for concessional residents could be made a 'tradeable commodity'. This would allow some operators to specialise in caring for these residents while others sought higher returns from other residents. Because the 'right' to care for concessional residents would trade at a negative price in effect the higher paying residents would still subsidise the concessional residents but the value of the concessional subsidy would be set by the market at its true value. An alternative approach would be to replace the current set price arrangements with a tender for the delivery of care in a region. If a requirement was placed on the tender bids that they cater for a given number of concessional residents then the market would again determine the true value of the concessional subsidy. (Page 82)




Hogan found that "Labour costs and associated on-costs on average make up around 66 per cent of the total expenses of aged care providers”. The relationship between staffing levels and care is well established, yet the review made no attempt to link staffing levels directly to care. The likelihood that profit hungry operators would understaff and deskill, then use the shortage of nurses as a shield to hide this. That they might not be motivated to improve conditions and try to attract staff is not considered.


When viewed as a percentage of total care the report found that, in the mostly high care sector, private providers staffing costs (66%) were the lowest and state run services the highest (77%).    In the mostly low care sector the private sector were lowest again (49%) and community based providers the highest (65%). In the mostly mixed care sector the private sector was again lowest at 58% and state governments highest (77%). Hogan acknowledged that the sample was small.


Any market skeptic would have good reason to see this data as supporting claims that some for-profit operators were cutting staff and so compromising care. It is therefore interesting that Hogan's tables list the profit per bed by state, and size (number of beds) and each is discussed in detail. Yet under the heading "by sector” between these two he gives no information other than that state government nursing homes (which had the highest staffing levels) made an average EBITDA loss of -$2,620 per bed. We are left pondering what the staffing levels and profitability per bed were in the 69% of nursing homes that thought it wiser not to supply the inquiry with financial details.


Hogan may have been constrained by his prior confidentiality agreements but he does not say so. Cynics in the community would suspect that Hogan is deliberately hiding information and avoiding confronting the strongest criticisms of the market system. These are that competition for profit will cause some, and if the pressures are strong enough then most, to divert funds from care to profit. Nursing is both the biggest cost and the largest determinant of care. When corporate survival is at stake desperate managers will do whatever it takes.


Instead of addressing this issue, the review made multiple recommendations for improving the recruitment, payment, training, working conditions and retention of staff to care for residents. These differed little from the previous reviews described in this section. It did not give any attention to the need for staff to express their mission of care through their activities and to be recognized for this.


Hogan's models looked at the economic potential of substituting different skills levels, but I could not find an attempt to look at the human consequences for residents and staff of this. He did not look for any data on which such an evaluation could be made. He made no recommendations on staffing levels and one is left feeling that providers who read this report would see this as encouragement to deskill. In referring to one of his models I wondered if he was supporting deskilling. He said.


That framework means that, for example, there is a higher degree of substitutability between Registered Nurses (RNs) and Enrolled Nurses (ENs) than between RNs and buildings. (Page 61)


I could not understand the way he modeled staffing ratios (see p67). As I interpreted it the models as they affected staff were constrained by some sort of ratio of required skills based on the Resident Classification System (RCS) He is vague about where he obtained these ratios; (the department or the industry) and he does not state what the ratios are.


If there are recommended staff ratio's based on the RCS distribution then why don't we all have access to that data and information about how well nursing homes meet this. This is critical to any assessment of the sector. Staffing issues are a core concern yet the information is hidden. We want to know how the number and type of staff recommended matches against studies of staffing and care. We want to know how the nursing homes match up. This information is there and could be easily retrieved. In the section below he is describing the models.


A sophisticated measure of output for the RACS (Resident Aged Care System) system was estimated using the concept of total 'point nights'. This concept measures the product of RCS scores and the duration of residents' stay in RACS facilities.


RACS providers choose the amount of labour and capital to use subject to producing the target number of RCS point nights. (Page 67)


At the lower level in the supply side, input choice is subject to a series of quality constraints (such as the ratio of RNs per high care RACS resident). These constraints are applied to each of the inputs, and ensure that an appropriate mix of staff and level of care is available to aged care recipients. Each constraint can be altered, added or removed as desired.(Page 67)


In looking at the way the system operates in regard to staffing Hogan takes a critical view of the way in which workers and providers respond to the current system. He does not consider that this might be because it is fatally flawed. He sees both as responding to the current system in ways which impact negatively on the goals of efficiency and productivity.   


The current funding arrangements provide a disincentive to this (ie enterprise bargaining) happening. It is much easier for employers to complain that they have no ability to enter into enterprise bargaining arrangements because they have no capacity to pay because the Australian Government is not funding to an adequate level.


Given this evidence there are no grounds for thinking any conventional indexation procedure, whatever the precise measure used, would satisfy the perceived needs of many providers. Half or more might judge their position not to have been met. Changed indexation arrangements would merely form the basis for yet another round of complaints and claims for more funding.

The strategy developed for the Review is to foster efficiency and productivity in order to secure reductions in the real costs of aged care, especially in the residential sphere but not exclusively so. (Page 149)


The quote above criticises the use of salary indexation instead of market forces in determining salaries as this he claims compromises efficiency. All the evidence available is that the sector even at this time was severely understaffed and under-skilled. Nurses were working themselves harder than we have any right to ask and were paid far less than they deserve. Attempting to get them to do more or to accept less money by bargaining under the guise of enterprise bargaining must be viewed in this light. Hogan is hopelessly out of touch.


Hogan fails to consider the possibility that in responding to ever stronger economic pressures in a market system, some providers will understaff then apply their ingenuity to circumventing accreditation and compromise the care of residents. Round after round of increased oversight in the USA could not control this and there are no grounds for believing we are actually doing better in Australia.


Hogan himself describes the way in which staffing levels have eroded and documents the extent of deskilling. In addition to this the population is aging and it has become harder and harder to get a bed. The patients who do get one are much more frail and need more care - both in numbers and skills.


The number of employees in the residential care sector declined between 1995-96 and 1999-2000, while the number of people cared for by the sector increased. This period also saw significant restructuring of the industry's workforce (Table 11-1). Employment in the for-profit sector contracted by 25.0 per cent, both among employees providing direct care and other employees. At the same time, the not-for- profit workforce grew by 14.0 per cent, but with a much greater emphasis on employment in direct community services provision, at the expense of managerial, administrative and other support staff. In the nursing home sector, the number of employees fell by 12.3 per cent (Page 219)


The share of direct care provided by registered and enrolled nurses (RNs and ENs respectively) has declined in both the nursing home and accommodation for the aged industries. In contrast, the use of personal care assistants, has significantly increased. These changes reflect both the growing shortage of nursing staff and the development of more efficient workforce structures. (Page 221)


In other words those who were motivated by profit reduced staff by 25% in the face of a sicker population. Those motivated by a mission of care increased theirs by 14%. We will look in vain for any examination of the outcome for residents. Hogan sees deskilling in the face of sicker and more frail residents as "more efficient workforce structures”.


But there is more. Hogan has no concern about leaving staffing to the discretion of managers whose jobs can depend on cutting costs and increasing profitability and whose bonuses depend on how successfully they do this - provided of course that they can generate sufficient paperwork to persuade the accreditation agency that they have processes in place. Court documents show how, under pressure from managers, staff in some US hospitals were expected to meet weekly to doctor the records in order to frustrate oversight. Refreshments were provided to attract them. Staff jokingly called these "charting parties”. That is an extreme example of what can happen.


While setting general standards of care and accountability framework, the Act is not prescriptive in relation to how providers should meet these standards in relation to staff numbers, structure or work practices. (Page 228)




Hogan focused on financial performance and accepted without question that provided nursing homes scored 43 or 44 out of 44 in accreditation processes then care was not compromised.


Both the financial analysis and the efficiency studies point to substantial differences between the most successful participants and the weakest performers in the sector. (Page 30)


Together these arrangements (accreditation and complaints systems) provide a comprehensive, regulatory framework for monitoring and consumer protection. (Page 238)


Submissions and evidence presented at consultations indicate broad support for accreditation. There is general acknowledgment that standards of care and accommodation across the industry have been improved substantially by accreditation. (Page 239)


Of the 2418 decisions by 30 September 2003, 2170 (89.7 per cent) were compliant with all expected outcomes and a further 123 facilities (5.1 per cent) were compliant with all but one expected outcome. (Page 241)


The magnitude of the task undertaken by the Aged Care Standards and Accreditation Agency (the Agency) since October 1997 and the importance of the Agency's risk management role is impressive (Page 242)


The industry had claimed to be efficient and to be able to make only modest gains in productivity. Hogan's economic modeling had indicated the potential for a 17% increase in efficiency. He wanted to link funding to efficiency. In the preface to his report he said.


Yet work conducted on the efficiency of residential facilities does not support this assessment (that providers are operating as efficiently as possible); much higher gains have been calculated. Moreover, analysis of the relative efficiency of the industry points to a substantial margin between best practice and most performances. - - - - - The opportunity to secure these benefits cannot be lost. A more competitive milieu for providing aged care would extract these potential gains. (Page Xll)

His focus on efficiency and competition is clearly expressed. When it comes to efficiency the for-profits perform well. As we saw they employ fewer and less skilled nurses (two thirds of costs) and this will be reflected in their bottom line.


Aged care's regulatory and financing arrangements must promote and reward efficiency. (Page 11)


However, as part of their commitments under National Competition Policy, all governments undertook to review legislation that restricted competition, with the option of only retaining restrictions on competition if those restrictions were found to be in the public interest. (Page 12)


Input-oriented measures of technical efficiency are more suitable to the aged care sector as it is currently regulated, because the output levels of aged care services are generally not a decision variable. The number of consumers is determined through budgetary constraint, and demand generally exceeds supply, as indicated by the occupancy rates.


Analysis conducted for the Review by the Centre for Efficiency and Productivity Analysis at the University of Queensland indicates that there is a high level of technical inefficiency in the residential care sector (see Table 4-1).7 The average level of technical inefficiency is around 17 per cent (on a conservative estimate). That is, there is scope for a reduction of 17 per cent in input usage, while maintaining the same output levels. (Page 74)


For-profit residential care services have an average efficiency score that is considerably higher than the national average as well as the averages for not-for-profit and government-run residential care services. - - - - - Moreover, not only is the average efficiency of for-profit services higher but they also define a more efficient production frontier. (Page 75)


Hogan indicated the potential savings from addressing this inefficiency


In the alternative, the level of output of the sector (the number of people cared for) could be expanded by 17 per cent (23,100 people in 2002-03) at no additional public or private cost. (Page 76)


Without an assessable measure of care we have no means of knowing whether this is efficiency or simply the transfer of money from needed care to profits. He did find that those facilities providing more services were less efficient but on this data not a lot.


Finally, on data available those services deemed to 'cut corners' on quality may appear to operate more efficiently. However, this is only a weak effect. More importantly, there is no evidence that the services operating at peak efficiency (on the production frontier) were achieving efficiency by 'cutting corners' on quality. (Page 76)


One of the consequences of his accepting, what many feel is a flawed accreditation process, as proof that competition and increased economic efficiency do not compromise care is revealed in the way he handles increased efficiency quite separately to staffing levels. As a consequence he does not consider whether the increased efficiency he praises in the first quote below came by reducing staff. Any person involved in the care of residents would, when reading the first paragraph, ask about staffing costs in these nursing homes - and then call for an assessment of care outcomes rather than processes. His fails to consider the real clinical costs for residents.


It has been asserted that operators of residential care services are unable to substitute labour for technology, or significantly improve workforce practices to improve productivity. On the basis of this, it is concluded that they cannot match the productivity gains made in the acute care sector where technology and workforce reforms have significantly reduced unit costs. However, the analysis by the Centre for Efficiency and Productivity Analysis of the financial returns of low care services over the last seven years indicates that these services have achieved, on average, total factor productivity growth of around 2.0 per cent each year. In other words, output growth has been 2.0 per cent above the growth in inputs during the last seven years. In the financial years 1999-2000, 2000-01 and 2001-02 total factor productivity growth was 8.0 per cent, 6.0 per cent and 7.0 per cent respectively. (Page 129)


Labour costs are the major component for all aged care services. They account for about three-quarters of residential care costs (Page 135)


Consumers and Transparency


Hogan did support greater involvement of consumers in the aged care processes and much greater transparency. Not surprisingly neither has happened. In doing so he acknowledged the power imbalance, the vulnerability and incapacity of residents to act as effective customers, and to exert choice and so leverage.

To make data more meaningful he suggested that the accreditation results with which he had no problem be presented to the public as a star rating system. He did not explain how a system in which 95% got full or almost full marks and so 5 stars would provide any useful discriminatory information for potential families and their relatives.

The Agency should significantly improve its focus on supporting informed consumer choice and consumer input to monitoring standards by:

- improving direct communication with consumers, including those with special needs, and by better informing other organisations of the level of quality provided by specific services; and

- exploring, with consumers and the industry, a star rating system to assist consumers to more readily compare services and to provide incentives for providers to become more competitive in providing quality services. (Page XlX)

The star ratings should be displayed in such a way as to enable consumers to readily compare facilities. They should include links to any current and past sanctions relating to the facility and to comprehensive information on the approved provider including their corporate structure and any other homes operated. (Page 244)


As a complement to Recommendation 13, the existing aged care information infrastructure should be substantially expanded, building on the existing expertise within the Australian Institute of Health and Welfare and should include quality and financial performance data. (Page XXl)


Many have complained about the impossibility of making any sense of the evanescent information about nursing homes on the agency's web page. If they do any analysis then they keep it very secret. The following recommendation was never implemented.


The Agency is uniquely placed to undertake systemic and comprehensive analysis of performance yet little has been undertaken. The Agency has identified this as a priority for the coming year and is transferring accreditation audit data and other information to a comprehensive database to support analyses. --------------- This should be a far higher priority for the Agency than conducting training for providers on matters where other suppliers are readily available. (Page 245)


Assertions were made about the failures in oversight. Hogan recorded that the community had lost confidence in the system but did nothing except to press to make it more market-like. He was told what was happening but ignored it., instead pressing for more independence for providers.


Consumer lack of confidence in accreditation processes and internal complaints mechanisms also features prominently in the report of the Commissioner for Complaints. The report notes that during the period 1999 to 2002, in 4365 records 'the word or words fear, intimidation, retribution, reprisal, harassment and victimisation' are used.

Only with more flexibility in arrangements can improved strategies be pursued. This will require government to withdraw from detailed specification of activities in residential and other aged care, thereby allowing providers to make independent decisions about pricing and investment and thereby contributing to the maturing of the industry.


The 1997 reforms commenced the process of making providers more independent of government. Further changes to the relationship between government and providers are require to ensure that the latter take more responsibility for business decisions, focus more sharply on resident needs, and respond more flexibly to residents and their families. (Page 274)


Scrutinising quality of care is fundamental to maintenance and enhancement of care standards in residential aged care facilities and to consumer protection. More flexibility in financial arrangements and management options for residential aged care is only appropriate where quality is maintained and enhanced and where residents are protected. (Page 274)

Hogan was more concerned about protecting residents finances and turning them into aged care shoppers. He suggested that some sort of government agency, rather than the community should act for residents. I doubt this would have satisfied those in the community with experience of government agencies. In spite of this he continued his attempts to make the system more market like so that residents and their families could exert market power.


Further, a clear objective of aged care policy is enhancing choice. This can only be achieved if care recipients or potential care recipients have available to them sufficient information on which a valid choice can be based. Such information includes financial information.


The Review judges that measures should be put in place firstly to improve financial management within the industry, secondly to improve governance practices generally and thirdly, to ensure that financial information is available to stakeholders. (Page 166)


(Vouchers) In the longer term, consideration should be given to placing the choice of provider in the hands of the prospective resident or the resident's family, that is a system whereby the prospective resident is granted an authority to spend aged care monies on care and accommodation should be considered. (Page 297)


In the longer term, the Government may wish to consider the establishment of a contracting agency to act on behalf of the Government to negotiate prices and conditions for residents in facilities operated by board and management of provider entities. (Page 298)


Comments made by some participants in the consultations have caused the Review to feel uncertain about the commitment of providers to upholding resident's right to security of tenure, particularly in the case of those residents whose bonds are nearing the end of the period for retention payments. (Page 248 - Security of Tenure)


Hogan was critical of the department's abilities to act in the interests of residents.


It has also come to the notice of the Review that the Department of Health and Ageing lacks any knowledge of the entities and their owners with place allocations. This failure diminishes the capacity of the Department to scrutinise and act in the interests of the residents.


No less important is the need for the Department of Health and Ageing to support the quest for a more efficient industry. (Page 290 Improving Departmental information)


Accommodation bonds


The review expressed its concerns about the adequacy of the protection of accommodation bonds when providers were unable to fund repayments. He stressed the likely embarrassment for government if residents lost their bonds due to company failure. As residents were later to discover these concerns were well founded. Hogan made recommendations. The problem is still present.


There is an obligation on government to ensure these funds are not exposed to risk of any loss. The position as it currently stands is that where sole traders and partnerships go bankrupt or companies go into liquidation, there is little protection for those entitled to reimbursement of bond monies paid. (Page 164)


The review closely examined accommodation bonds and means tested payments and made a number of recommendations, particularly in regard to the failure to require aged care bonds in high care facilities and the discrepancy in income from bonds in low income country localities when contrasted with more affluent city locations.


With all this specification of possibilities, the central point is the importance of funding through accommodation bonds is paramount in low care and the lack of provision in standard high care explains the shortcomings in putting in place high care facilities. (Page 153)

The Approved Providers


Over the years I have complained bitterly about the inadequacies of the approved provider system for assessing potential aged care providers. Hogan identified some of these. Recommendation 15 reads


The names of entities and major shareholders of the companies and associate companies having ownership or part ownership of residential aged care services should be required by the Department of Health and Ageing.


The monitoring and authorisation of transfers should be extended beyond key personnel to personnel of entities owning providers, subject to review after 2008. (Page XXl)


Legislation addressing this issue was finally passed in December 2008. I questioned its adequacy.

The Industry


Hogan viewed the "industry” as underdeveloped financially. He did not consider that "undeveloped” might also apply to the oversight of the services - this was something that had already been heavily criticised.

The industry can generally be characterised as having a relatively low level of sophistication; financial accountability and reporting is generally undeveloped and prudential arrangements are similarly dubious. - - - - - - - - some entities, particularly the major religious organisations, have highly professional administrative and financial arrangements. However, the majority of the industry comprises small entities, often partnerships or sole traders, with a low degree of sophistication in administrative and financial terms. (Page 21)


He also examined profitability in terms of the top 10% and also in quartiles. He concluded that impressions about performance (by which he meant economic performance) were not always correct.


" The impressions gained from many consultations and discussions in regional and metropolitan locations were of any number of very effective operations. These observations are confirmed by the quartile distribution for rural providers.” (Page 39)

Hogan made no attempt to examine the basis for profitability. He does not give us the staffing ratios of the top 10% nor for the 1st and 4th quartiles. He could have had ready access to the accreditation findings, yet he failed to address the critical concern that increased profitability was at the expense of care.


Hogan's focus on profitability as a positive and his attitude to service as revealed by better staffing levels is revealed in his comments after examining profitability. The best staffed facilities made a loss so he removed them from his analysis.


The prevalence of poor performers in the state government, high care and small size range of services has a negative effect on all services across the quartiles by bringing down the overall average EBITDA. (Page 56)


If the State government operations are removed from the analysis by sector the average EBITDA for all other services is increased by $625 to $2 626 per bed year. (Page 56)


Hogan's conclusion that the sort of management in place determines profitability is born out by my examination of the health and aged care systems in the USA. In that country economic managers made record profits by the misuse of vulnerable citizens. They made billions of dollars by fraud. The largest and most successful were the prime culprits. Their success was based on these practices.


Hogan's findings are not unexpected as some providers in all sections have recruited managers from the marketplace in order to ensure their profitability. He made no attempt to determine what changes they had made in order to increase profitability. His own figures suggest that this is likely to be by reducing staff, yet he ignores this. His conclusions are based on his analysis of profitability in terms of the top 10% and by quartiles.


There is a wealth of information in this collection of data on the workings of providers. - - - - - - There is no category or classification where a provider is handicapped from achieving a relatively high performance.


The implications are clear. Even allowing for a preponderance of high care, small size and state-operated facilities in the lowest quartile, there is a strong pointer to the dominance of management themes to explain relatively weak standing. There is nothing inherent in the circumstances of any provider which determines a poor outcome. (Page 56)


For-profit and Not-for-profit


The attitude to not-for-profit operators, those who entered the market in order to provide care rather than profit is revealing. He tacitly acknowledges that they like the rest of the community regard the care of the elderly as primarily a charitable endeavour and that operating as a market competitor is foreign and inappropriate.


Fifthly, the uneven playing field between for-profit and not-for-profit operators also militates against the development of an optimally efficient industry. Governments offer tax and other advantages to not-for-profit operators to support their charitable purposes. However, in an industry where not-for-profit and for-profit operators are in direct competition these advantages can impact adversely on the operation of the market because not-for-profit operators do not bear the costs of operating at sub-optimal efficiency. (Page 82)

Cherry picking - a two tiered system


Hogan acknowledges that the government focuses on equity and tries to avoid a two tear system - something which limits its ability to operate as a market. He then gives information showing that we do have a two tiered system and that for-profit providers cherry pick those able to pay bigger bonds.   


He is certainly not opposed to providers "adjusting” their resident profile in order to increase efficiency - as if changing the word used alters what happens. This is how many fraud prone US companies made vast profits - even unnecessarily admitting and over-treating vast numbers of children, many of them normal, to psychiatric hospitals when they would have been better at home - and doing major heart operations on hundreds of people who did not need them.


Cherry picking by Mayne Health's hospitals resulted in discrimination against patients whose treatment was not profitable and who were consequently denied care. The accreditation process made no attempt to restrain Mayne. Doctors objected strongly and took their patients elsewhere. They almost bankrupted Mayne Health, forcing it to sell all of its hospitals. Their economic power (leverage) was recognised and the message went home. Hospital owners no longer try to adopt the US type business strategies espoused by Mayne.


Admission to nursing homes is not controlled by doctors. There is no one to protect the frail elderly from corporate predators.


Many providers actively manage their resident profile to optimise bonds. Others may seek to manage their profile but have limited opportunities to do so given residents' financial resources and their length of stay. On the other hand, some providers choose to take residents on the basis of need.


Managing the resident profile is an integral part of assessing potential residents and waiting lists. However, what may be regarded as prudent management by some providers may be seen as 'cherry picking' by others. This causes some tension across the sector especially where resident choice, or actually gaining access to care are jeopardised. As it was put to the Review, the result of cherry picking for some frail older people is that 'they never get picked':


Hogan does not criticise this cherry picking. Instead he later advocates greater freedom for providers to negotiate these with residents. Who will protect those denied admission?


There is little flexibility for providers and consumers to negotiate mutually appropriate modes and levels of payment. The Review is firm in its stance that providers should have greater flexibility in attracting and managing their income and negotiating arrangements with potential consumers. (Page 164)

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