Why the aged care operators were smashed

Aged care operator Japara Healthcare Ltd (ASX: JHC) has seen its share price plunge again today, after the company warned it faced a fall in government funding.

It shouldn’t have been a surprise to the market really.

Back in June we highlighted that the government was looking at cutting back spending through the Aged Care Funding Instrument (ACFI), after the Minister for Aged Care Sussan Ley revealed that 1 in 8 of the 20,000 claims audited in 2014-15 were deemed to be incorrect or false and even worse in 2015-16 at 1 in 7.

The ACFI determines how much the government pays aged care facility operators to look after our elderly. It’s not a single rate and the base rate ranges from as low as $36 a day to as much as $110 a day depending on the needs of the resident. Then there are add on supplementary items which can see the ACFI rate soar.

Japara says it saw a 5.3% increase in its average ACFI per resident per day to $184.44 in the 2016 financial year, but also says it expects to see low-single-digit ACFI growth in 2017. 72% of Japara’s revenues come from government funding, so the company is highly sensitive to any cuts to the ACFI.

In May 2016, the government announced $1.2 billion in cuts to ACFI funding over four years – but that might only be the start. And then there’s the potential for further legislation/oversight of the industry which could further hamper the aged care operators’ ability to generate substantial growth.

Regis HealthCare Ltd (ASX: REG) and Estia Health Ltd (ASX: EHE) also saw their shares prices sink – losing 5.9% to $4.61 and 5.4% to $4.89 respectively. Both companies are likely to report a similar for government funding in the financial year ahead.

What’s next for the aged care operators?

Unfortunately, it’s unlikely to be good news over the long term – despite Australia’s growing aged-care requirements. As one of the federal government’s biggest expenses, aged care funding will face increasing scrutiny and the potential for more cuts is highly likely.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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