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The audit objective was to assess DoHA's administration of prudential arrangements for the protection of residential aged care accommodation bonds.
1. Over the next forty years, the proportion of Australians over the age of 65 is projected to double. This ageing of the Australian population is expected to increase the demand for aged care services, which will necessitate additional investment in quality residential aged care infrastructure. In order to meet this demand, the aged care industry requires access to capital to fund the construction of new aged care homes and to re-build or upgrade existing homes. Capital funding for the aged care sector is, in part, sourced from accommodation bonds lodged by residents.
2. Residents accessing low level aged care or those receiving extra services in high level care may be asked to pay an accommodation bond to an approved provider of aged care. With the average new accommodation bond at $190 000 (as at 30 June 2008), bonds generally represent a significant proportion of a resident's life savings. Aged care providers are entitled to retain an amount from the bond each year for up to five years, in addition to the investment income derived, in order to improve building standards and increase the quality and range of aged care services. The balance of the bond is refunded to the resident, or their estate, on departure from the home.
3. Only aged care homes that are certified by the Australian Government as meeting required standards of accommodation can charge accommodation bonds. As at 30 June 2008, around 60 000 bonds with a total value of $8 billion were held by approximately 1000 approved providers of aged care, with an average annual increase in the total bond value of around 25 per cent.
4. A prudential scheme to protect accommodation bonds was first established in 1997 with the introduction of the Aged Care Act 1997 (the Act). In order to improve the protections for residents paying bonds, the legislation introduced mandatory requirements for providers that included: a contractual guarantee of repayment from the provider to the resident; statutory timeframes for the repayment of bond balances by aged care providers to residents; and the submission of a certified annual statement by providers that they followed the requirements, were able to pay liabilities, maintained adequate insurance, and repaid bonds as required.
5. In 2006, the Australian Government supplemented existing prudential regulations with standards on liquidity, record-keeping and disclosure to further protect the significant sums of money held by providers on behalf of residents. The standards are aimed at assisting providers improve their financial management practices, enhance financial sustainability, and reduce the risk of default on the refund of bond balances. The changes in 2006 also introduced a requirement for the annual statement of compliance to be accompanied by an audit opinion provided by an independent, registered auditor.
6. In addition, the strengthening of protections in 2006 included the establishment of the Accommodation Bond Guarantee Scheme (the Scheme) whereby the Government guarantees repayment of bond monies to residents if an insolvent or bankrupt provider defaults on its obligation to refund accommodation bonds. In the event of the Scheme being triggered, there is provision for the industry to ultimately pay a levy to allow the Government to recoup the monies repaid to residents under the Scheme. The Scheme is administered under the Aged Care (Bond Security) Act 2006 and the Aged Care (Bond Security) Levy Act 2006.
7. Since its inception in 2006, the Scheme has been activated on three occasions, with bond balances to be refunded by the Commonwealth under the Scheme totalling around $19 million. The Government did not levy the industry to recoup its outlays in relation to the first Scheme event and a decision is yet to be made in relation to subsequent events.
8. In introducing and augmenting prudential regulations, Australian governments have established arrangements covering bond refunds, uses for bonds and derived income and prudential standards, with new standards introduced over time to reduce the risks to residents and government. The approach taken to date involves a regime of self-managed funds held by individual aged care providers whereby providers must meet prudential standards on liquidity, record-keeping and disclosure, and ensure that bonds and bond income are used for the purpose of providing aged care to care recipients. However, in order to allow providers access to bond funds as a source of capital, the legislation does not prescribe restrictions in relation to the decisions taken by providers on where they invest bonds. That is, providers are free to determine how they invest bond holdings as long as they can demonstrate that the bonds, and any investment income generated, are used to provide aged care to care recipients. This reflects the policy approach stated by the Government in 2006 that it was not the Government's intention to run the business of each provider.
DoHA's prudential regulation function
9. The Australian Government, through the Department of Health and Ageing (DoHA), is responsible for regulating:
- the prudential requirements under the Aged Care Act 1997 (the Act) and User Rights Principles 1997 (the Principles);
- rules regarding the timeframes for refund of accommodation bonds and the payment of interest on late refunds; and
- the use of accommodation bond funds and ensuring that the income derived from them is directed to improvements in residential aged care infrastructure and services by aged care providers.
10. The aim of prudential regulation is to safeguard the significant and increasing bond holdings lodged by older Australians residing in aged care homes, while keeping the regulatory burden and costs to the aged care industry to a minimum. To this end, the Government has assigned DoHA responsibility for developing, in consultation with stakeholders, any necessary additional standards in order to reduce the risks to the residents and the Government. The establishment of new standards does not involve amendment to the primary legislation and can be achieved through amendments to the Principles. Amendments to the Principles require a policy decision by the Australian Government and are subject to Parliamentary scrutiny.
11. DoHA's role in administering the legislative framework established for prudential regulation under the Act and the Principles primarily comprises the following core activities:
- monitoring compliance and acting on non-compliance by approved providers with their prudential responsibilities: this involves assessing audited annual provider compliance statements, evaluating complaints data, reviewing regulatory intelligence, investigating possible cases of non-compliance and addressing non-compliance;
- educating and informing approved providers and care recipients of their rights and responsibilities: this involves producing and distributing advisory materials to assist stakeholders to understand and meet prudential requirements;
- monitoring the efficacy of the policy framework for prudential regulation: this involves identifying possible inefficiencies and gaps in the prudential framework, and determining the appropriate remedial response, which may include seeking amendments to the primary legislation or introducing new prudential standards; and
- safeguarding bonds: this involves administration of the Accommodation Bond Guarantee Scheme including the Aged Care (Bond Security) Act 2006 and the Aged Care (Bond Security) Levy Act 2006.
12. Within the legislative framework established by Parliament, DoHA has discretion to target its regulatory resources across its core activities in order to gain reasonable assurance as to providers' compliance with established regulations. In 2008–09, the department had resourcing of $1.9 million and 12 central office staff to perform the prudential regulation function.
13. The department's administration of prudential regulations is positioned within the much larger national quality assurance framework for residential aged care established under the Act. This quality framework imposes a broad range of regulations on aged care providers in the key areas of accreditation, certification, and support for users' rights, which includes complaints investigation. Responsibility for regulation under the framework is broadly allocated across DoHA and portfolio agencies.
14. Government reforms to the regulatory framework over time have necessitated an expansion of DoHA's regulatory responsibilities and have required the acquisition and development of new, specialist skills and tailored regulatory arrangements. In particular, it has been necessary for DoHA to acquire skills in areas such as financial analysis and insolvency in order to monitor prudential compliance and to ensure the effective operation of the Scheme.
15. DoHA has also facilitated the evolution of the regulatory framework for prudential regulation and commenced work to enhance arrangements in light of its initial experience. Further changes to the legislative framework to strengthen protections for residents' bonds and improve the operation of the Scheme, based on DoHA's initial regulatory experiences, were passed by Parliament in December 2008.
16. In April 2009, the Senate Standing Committee on Finance and Public Administration reported on its inquiry into Residential and Community Aged Care in Australia. The report commented on a broad range of residential aged care issues, including financial risk factors in aged care and the viability of aged care providers. The committee considered there was a need to establish a clear understanding of the financial status of aged care providers and recommended that DoHA undertake a 'stress test' of the aged care sector in order to measure the sector's financial wellbeing.
Audit objective, criteria and scope
17. The audit objective was to assess DoHA's administration of prudential arrangements for the protection of residential aged care accommodation bonds.
18. The ANAO's assessment was based on the following criteria:
- DoHA has a sound governance framework to support prudential regulation;
- DoHA's oversight of prudential arrangements is sound; and
- DoHA effectively manages compliance with prudential arrangements.
19. The audit methodology was developed in accordance with the better practice principles outlined in the ANAO's Administering Regulation Better Practice Guide, which was published in March 2007. The audit report examines the extent to which the department has incorporated these principles into its prudential regulation function.
20. An examination of policy matters, such as the size of accommodation bonds or distinguishing between high care and low care in allowing the application of bonds, was outside the scope of this audit.
21. The ageing of the Australian population is expected to result in an increase in demand for quality residential aged care homes and an expansion in building works to meet this growing demand through new and redeveloped infrastructure. Capital funding to support this increased investment in aged care homes will, in part, be sourced from resident contributions in the form of accommodation bonds.
22. Since the inception of prudential arrangements in 1997, there has been rapid growth in the number of bonds, the total value of bond holdings and the proportion and diversity of aged care providers relying on bonds to fund the delivery of aged care services. The scale of bond holdings (now totalling some $8 billion), the self-managed model of stewardship, the ability of a large and diverse range of providers to make unfettered investment decisions relating to residents' funds, and ongoing structural changes in the aged care sector including the emergence of larger and more complex providers and the entry of major publicly listed corporations, present new challenges for the Department of Health and Ageing (DoHA). These challenges and successive government reforms of regulatory arrangements for accommodation bonds have expanded the scale of DoHA's responsibilities.
23. In the context of these challenges, the administrative framework established by DoHA to manage prudential arrangements for the protection of residential aged care accommodation bonds does not sufficiently support effective regulatory oversight. The department has established some of the elements necessary to underpin a sound administrative framework, such as a dedicated prudential regulation capability, a separate database to hold prudential data, and an annual audited provider compliance statement process. Notwithstanding, the following three key areas require attention in order to strengthen regulatory oversight: the systematic assessment and treatment of prudential risks that have resulted from new and evolving threats; the expansion of DoHA's regulatory activities to include whether bonds and bond income are being used for the purpose of providing aged care as established under the Aged Care Act 1997 (the Act); and the development of robust approaches to effectively identify and act upon instances of provider non-compliance with prudential regulations.
Managing risks to effective regulation
24. DoHA has indicated that the department is aware of a range of prudential risks, had considered their impact, and is working on approaches to manage these risks. Approaches included liaison with key stakeholders, such as major financiers and insolvency practitioners, to build an understanding of contemporary underlying factors that contributed to the levels of risk. While acknowledging departmental work in this area, DoHA's regulatory activities had remained generally reactive in nature and were not informed by the systematic identification of risks to the protection of bonds. There is scope to strengthen the department's capacity to identify and assess the significance of emerging threats, through effective risk management and the targeted collection of regulatory intelligence. Additional work in these areas would better position DoHA to reduce the likelihood of adverse events by adjusting regulatory settings or tailoring its compliance activities.
25. While providers' decisions on where to invest bond holdings are unfettered, there has been a legislated requirement since the introduction of the Act in 1997 for bonds and bond income to be used for the purpose of providing aged care to care recipients. Access to bonds and bond income is an important avenue of funding for the aged care industry and is intended to complement other funding sources to improve the quality of aged care infrastructure and the range of aged care services. Currently, DoHA responds to the possibility of non-compliance with the legislated uses of bonds and bond income by employing its information gathering powers on a case-by-case basis once a provider presents with problems. DoHA has not, however, established regulatory processes to determine provider compliance with legislated uses for bonds and bond income.
26. The department has recently commenced work on the development of legislative options for consideration by the Government to clarify the uses of accommodation bond funds. By clarifying the use of bonds, DoHA considered that the department would be better positioned to assess whether aged care providers are compliant with the legislated uses of bonds and derived income under the Act.
Monitoring compliance with prudential regulations
27. While DoHA has stated its approach to compliance in general terms in the User's Guide to the Regulation of Approved Providers Holding Accommodation Bonds, it has not comprehensively documented its approach to the monitoring and management of non-compliance over time in the form of a compliance strategy and underpinning compliance schedule. As a result, there is limited assurance that the department's activities to monitor provider compliance with prudential regulations are being effectively managed over time. As prudential regulation of around 1000 aged care providers is delivered by a relatively small team with an annual operating budget of around $2 million, it is important for the department to employ a cost-effective approach to the monitoring of compliance with prudential regulations. An approach of this type would inform the establishment of a balanced program of compliance activity targeting the department's limited resources at the highest priority compliance risks and supporting the active management of changing and emerging risks to provider compliance.
Governance arrangements for effective regulation
28. DoHA's expanded role as a prudential regulator since 2006, in response to the rapidly increasing value of accommodation bonds, has broadened the department's aged care responsibilities beyond the traditional focus on quality of care matters. This change in focus requires a different set of skills and knowledge, with the department building its capability in this area. In addition, the management of the dual role of the department—that is its role in achieving the policy objectives of accessible, quality and affordable aged care and its role as a prudential regulator—is challenging and requires careful management.
29. In several recent cases where providers have experienced operational difficulties, the prudential regulator has had a large role in departmental efforts to maintain residential aged care services in identified areas of need through ownership transfer from a troubled provider to an alternate provider. The involvement of the regulator in negotiating ownership or service delivery matters, particularly where future compliance action may be warranted against an alternate provider with whom the department has negotiated a transfer, poses some risk to the perceived objectivity and impartiality of the regulator. By formally recognising these risks and considering mitigation strategies, the department would be better placed to manage potentially conflicting roles and responsibilities.
30. DoHA indicated that it was aware of a range of risks to provider compliance, had considered their impact and is working on approaches to manage these risks. These approaches included liaison with key stakeholders to build an understanding of the underlying factors that contributed to the level of risk. This work to manage the broad range of risks to the effective administration of prudential arrangements for the protection of residential aged care accommodation bonds was not, however, sufficiently reflected in DoHA's planning materials. The department had documented the following two risks: failure to identify emerging issues and respond appropriately; and failure to maintain skills and corporate knowledge. The limited number and high level of the identified risks and the absence of an underpinning assessment does not sufficiently inform DoHA's approach to monitoring and managing prudential regulation risks. Moreover, a number of controls reported as being in place to mitigate identified risks were either not in place or not sufficiently established.
31. The effective management of prudential risk is also reliant on a regulator's timely access to, and analysis of, relevant regulatory information and data. DoHA currently accesses regulatory information through a variety of sources, including the Aged Care Complaints Investigation Scheme (particularly in relation to complaints patterns associated with bond refunds), Conditional Adjustment Payment (CAP) financial data and information from the Aged Care Standards and Accreditation Agency (the Agency).1 However, DoHA does not consolidate and analyse information available to the department to better inform its assessment of key contemporary risks, including the impact of volatile financial markets on the security of bond holdings. Improved access to timely information would assist the department to better quantify risks and establish appropriate treatments to ensure that the regulatory framework delivers intended protections. Under the Act, DoHA has a suite of information gathering powers that it could utilise to obtain relevant information to inform its assessment of risk, such as targeted information on the investment of bond holdings.
32. The department has established a basic set of performance information within its annual operational plan, but has not identified measures and targets that fully inform an assessment of its regulatory performance by internal and external stakeholders. The establishment of one performance measure, with targets primarily relating to the timing of the annual compliance statement process, does not adequately cover all regulatory activities and does not reflect a balanced approach to performance measurement. Measures and targets could include: provider awareness of regulations; the percentage of compliance actions finalised within pre-determined timeframes; the impact of regulation on the aged care industry; or the responsiveness of DoHA to the regulation of a new issue or introduction of deregulation where appropriate.
33. The regulatory framework establishes the requirement for approved providers, which have obtained building certification, to use accommodation bonds for the purpose of providing aged care to care recipients. DoHA did not consider that the legislation provided processes or powers that effectively supported regular and broad-based monitoring of the use of accommodation bond funds and bond income. Rather, DoHA used its information gathering powers on a case-by-case basis where the possibility of non-compliance had emerged. Consequently, DoHA has not established risk-based compliance processes to monitor the use of accommodation bonds and bond income in order to provide reasonable, targeted assurance of provider compliance. DoHA has, however, concluded that improved clarity surrounding the use of bonds would enable the department to more readily assess whether aged care providers are compliant, with work commenced on the development of legislative options for the Government's consideration to clarify the use of accommodation bonds and the income derived.
34. Regulators often use a client service charter and a regulatory code of conduct to inform regulated entities of their rights and to enable them to formulate expectations about how a regulator will administer regulation. DoHA has not developed and published a service charter or regulatory code of conduct for its prudential regulation function. As such, there is limited guidance to inform regulated entities of their rights and to guide their expectations about how the department will administer prudential regulations.
35. DoHA has not yet finalised policy and procedural documentation for key aspects of its regulatory functions such as compliance monitoring. Overall, the development of documentation is at an early stage. Additional guidance material for regulatory staff would reduce the risk of operational inefficiency and inconsistent application of regulatory requirements.
36. Routine monitoring of compliance enables a regulator to adjust the focus of its regulatory activities over time to reflect changing priorities that result from new and evolving threats. DoHA has not documented its compliance strategy or underpinning compliance program/schedule and is in the preliminary stages of developing prudential risk indicators. Finalisation of the documentation and supporting risk indicators would more completely support the alignment of the department's day-to-day monitoring approaches with short, medium and longer term regulatory objectives.
37. The primary element of DoHA's prudential monitoring activity is the Annual Prudential Compliance Statement (APCS), which the department relies on to provide an assurance of provider compliance with prudential regulations. In the absence of prudential risk indicators, the department's application and use of the APCS requires all providers to respond to a standard set of questions. DoHA also obtains supplementary regulatory intelligence, including complaints data, CAP financial data and information from the Aged Care Standards and Accreditation Agency. DoHA should consider whether the collection and use of information is sufficiently targeted in a rapidly changing aged care environment, and more broadly in investment markets, which can affect an individual provider's ability or willingness to comply with prudential regulation.
38. While DoHA utilises data, both from within the department and available externally, to inform its compliance activities, it is yet to establish a process or system to bring together all regulatory intelligence in order to build a comprehensive risk profile of providers. Information is currently sourced from separate databases and, potentially, an array of official files held in both Central Office and in State/Territory Offices. As a consequence, there is an increased risk that key pieces of regulatory intelligence will not be readily available to inform monitoring activities. DoHA has, however, re-aligned its structure to centralise and co-locate the prudential and approved provider regulatory functions to improve the sharing of regulatory intelligence. The department has also incorporated CAP administration into the same area to ensure the use of information from this program is maximized. A group of aged care program managers has also been formed to regularly discuss intelligence about providers of concern.
39. A comparison by DoHA of APCS data from 2006–07 to 2007–08 indicated improved overall reported compliance by providers with each prudential standard (except the Records Standard) and an overall improvement in the timeframes for refunding bonds. In 2007–08, reports lodged by aged care providers suggested that compliance against the three prudential standards—liquidity, record-keeping and disclosure—on average ranged between 95 and 99 per cent, with reported compliance with the disclosure standard below 90 per cent for state/local government providers. In the same period, on average 87 per cent of providers reported that they had refunded all bond balances to residents or their estates within statutory timeframes. These data on compliance levels are derived from self-reporting by providers backed by independent reports from registered company auditors. Unlike some other regulatory regimes, the department does not have a risk-based compliance monitoring program that provides reasonable assurance as to the appropriateness of self-reporting arrangements. Furthermore, the department does not collect data from providers on the value of late bond repayments.
40. The ANAO tested database records for a randomly generated selection of 65 provider compliance statements for 2007–08 in order to gain an assurance over the integrity of prudential data holdings. Testing found that, for around 3 per cent of the sample, issues such as the conformance of audit opinions with requirements, qualified audit opinions or reported non-compliance with prudential standards were not identified through the review processes established by DoHA.
41. In those instances where reported provider non-compliance with prudential regulations was confirmed following an investigation, DoHA instituted remedial action. In 2007–08, the department issued 62 ‘warning letters' and one Notice of Non-compliance. The power to impose a sanction on a provider is also available to the department in cases of serious non-compliance with legislated responsibilities. The use of sanctions to remedy prudential non-compliance is infrequent, primarily because the existing sanctions have limitations in providing a proportionate response for cases of non-compliance. DoHA has indicated that it is considering regulatory reforms to deliver more appropriate remedies for prudential non-compliance and limit any adverse impact upon the financial viability of providers subject to non-compliance action.
42. Since its inception in 2006, the Accommodation Bond Guarantee Scheme (the Scheme) has been activated on three occasions, with bond balances to be refunded by the Commonwealth under the Scheme totalling around $19 million. The Government did not levy the industry to recoup its outlays in relation to the first Scheme event and a decision is yet to be made in relation to subsequent events.
43. The three Scheme activations since 2006 have been administratively challenging for DoHA, particularly given the lack of precedent and the change in departmental focus from traditional quality of care issues to prudential considerations. DoHA has worked through these challenges in order to calculate outstanding bond balances and repay residents. Notwithstanding, the department's administration of the Scheme would be further enhanced through the finalisation of guidance materials and the conduct of timely post-event evaluations.
44. To enhance regulatory performance and, as a consequence, ensure the protections intended by the regulatory framework are realised, the ANAO has made seven recommendations to strengthen DoHA's administration of prudential arrangements.
45. The major strengthening of protections for accommodation bonds in 2006, including the introduction of prudential standards and the Accommodation Bond Guarantee Scheme, significantly expanded the department's regulatory responsibilities and necessitated investment in specialist skills such as financial analysis and new regulatory arrangements. At the time of introducing the 2006 legislative reforms, it was noted that the regulatory framework would be adjusted over time in light of experience and the ANAO's report will assist in informing the ongoing development of the regulatory framework. The department considers that there is an existing base of work that can be further developed or improved upon and this is reflected in the responses to the recommendations.
1 The Conditional Adjustment Payment (CAP) was introduced by the previous government in 2004–05 as part of its initial response to the Hogan Review. The aim of CAP is to provide additional medium term financial assistance to residential aged care providers while encouraging them to become more efficient through improved management practices.