Pricing your way to a financially successful home care future

Whilst it is healthy that more providers are giving consumers a greater diversity of choice over services, rapid growth also brings challenges.

The expansion of Australia’s ageing population has led to the perception that the aged care sector is a growth bonanza. Consequently, the number of organisations seeking approved provider status has expanded rapidly, writes David Powis.

David Powis

Whilst it is healthy that more providers are giving consumers a greater diversity of choice over services, rapid growth also brings challenges.

To many new providers, the industry is either new territory or their prior experience has been limited to non-business, non-management involvement. A significant number may therefore have a limited understanding of how the aged care sector is funded, managed and controlled by the bureaucracy.

The recent decision by the government to unilaterally alter the provider-determined percentage/flat fee arrangement for administration and case management in home care to the more restrictive model of a department-determined criteria for care and package management is an example. Under this regime, full operating costs, overheads recovery and profitability rely upon the provider including those amounts in the hourly staff charge-out rate.

This single change has introduced another element of risk, one which most providers may not fully understand. If all the available hours of service are not delivered and charged, the provider will fail to achieve full operating cost and overhead recovery, or deliver the budgeted profitability.

Funding arrangements in aged care are tight, but at least with the percentage/flat payment for administration and care management providers could recover operating/overhead costs and profit from the funding model and remain viable, irrespective of “unspent funds”.

A key business requirement is to appropriately match the organisation’s service offering with its pricing arrangements, to deliver:

  • value for money to the consumer
  • recovery of operating costs and overheads
  • a fair return to the provider
  • competitive positioning in the market

Competitive positioning is problematic, because when individual organisations are competing with other organisations who do not understand the funding model either, this can lead to unpredictable and potentially disadvantageous outcomes for all – consumers not receiving adequate services, failure of businesses and individual or industry reputation damage.

To avoid these potential challenges and consequences, providers must:

  • understand the funding and accountability models
  • have financial knowledge or support from somebody who does, allowing a professional costing model to be sourced or developed
  • ensure modelling is professionally conducted and outcomes fully understood.

Without a sustainable financial model, the best ambition will not deliver a quality outcome for consumers over the short to long term.

If providers understand the drivers that influence pricing and therefore pricing policy, there is then a need to apply operational data to the model to arrive at what can be seen as an accountable, replicable and professional approach to pricing.

Outcomes should never be based on the fallacious assumption that some other organisation’s figures can be copied or modified. Each organisation has different parameters, cost bases, client profiles and service models. Each costing is therefore unique to the organisation, if it is to be truly reflective of that organisation’s ability to deliver sustainable, quality services.

It should be obvious, but it bears repeating, that we are in the “people services business”. This service model should not be price elastic (price elasticity of demand being the percentage change in the quantity demanded of a good or service divided by the percentage change in the price). In fact, aged care servicing is price inelastic. In simple terms, this means that demand for services does not increase proportionately as a price decreases.

While there may be a short-term negative response to a price change, that could be for a range of extraneous reasons not solely directed at price, including, but not limited to, quality of service, reputation and competitive offers.

Providers should therefore concentrate on legitimising their pricing model based on a formalised and accountable approach to its costing, then justify the price based on the consumer valued service aspects of quality, client relationship building, inclusiveness, transparency, service and value-add offerings.

Good providers will be rewarded for having a consumer-care focus and delivery model which recognises the importance of the relationship between consumers, their support structure – generally family – and the provider, who contracts to ensure the full range of consumer needs are met.

The good news is that pricing models are available for providers to ensure that their pricing is professionally calculated and not dependent on “good luck”.

The old adage that “any road will get you there, if you don’t know where you are going”, must not apply to provider pricing. Rather,be warned: “if you can‘t validate that your pricing will meet your business goals, you will only become aware it is inadequate when you start to run out of funds.”

David Powis is an industry aged care consultant and Managing Director at e-Tools Software.

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