Does Funding Policy Override Provider Strategy?

Aged Care Policy Now Requires a Customer Revenue Model

The AN-ACC price will increase by 2.55% to $303.19 from 1 October 2026. The hotelling supplement remains frozen at $22.15 pending review. Award minimum wages increased by 4.75% from the first full pay period commencing on or after 1 July 2026.

Ageing Australia, supported by many of the national and very large providers, has challenged the funding decision. They are right to press the case for funding that supports quality care and continued investment.

There is a strategic point that sits underneath the announcement.

The Aged Care Act 2024 and the pricing advice supporting it are built on the principle that government meets the cost of clinical care. Where that principle holds, care revenue will cover care costs and contribute little else, and the return which funds maintenance, refurbishment and new capacity has to come from accommodation and everyday living revenue.

A small shortfall on a large line becomes a large increase on a small one

Care revenue is the largest line in a residential profit and loss statement. A shortfall of a few percentage points against cost growth on that line produces a dollar figure which then has to be recovered from accommodation and everyday living revenue. Those lines are a fraction of the size.

We have modelled an 80-bed home using StewartBrown's March 2026 year-to-date benchmark rates at 95.2% occupancy. The model applies the AN-ACC and award changes, pension-linked fee movements, and an assumed 3.5% CPI increase across relevant prices and non-wage costs. Occupancy and service volumes are held constant.

Under those assumptions, the home requires a further $184,016 of contribution in 2026–27 to preserve its previous operating result adjusted for inflation.

The starting benchmark is loss-making, so preserving that result preserves a loss. Restoring break-even requires approximately $447,849.

The $184,016 has to come from two lines which together produce $681,221 after the modelled CPI increases, so the required uplift is 27% on the only revenue over which the provider holds meaningful control.

Model output: illustrative 80-bed home

FY2025–26 proxy annualised from StewartBrown March 2026 year-to-date benchmarks. Not published full-year actual results. Forecast period 1 July 2026 to 30 June 2027. Expenses shown in brackets.

The target preserves the prior year result adjusted for inflation. With a negative baseline, this preserves an inflation-adjusted loss, and it is not a viability target.

Source of the additional contribution

What each lever would need to deliver

Increases are expressed above CPI, applied to the income exposed to repricing. The accommodation figures apply to new-admission resident income at the modelled 20% in-year exposure. Required increases are mathematical targets, not evidence that residents will accept them.

Neither lever can carry the requirement on its own

Our model allocates half the requirement to each of the two lines. That allocation is an editable assumption rather than a recommendation, and no provider should adopt it without testing its own market.

The allocation table demonstrates something more useful than the split itself. Recovering the full requirement from higher everyday living fees alone would need an increase of approximately 112% above CPI on the exposed income. Recovering it from resident accommodation revenue alone would need approximately 173%.

Neither figure describes a decision a board could implement. Divided evenly, the requirement becomes 56% and 86%, which remains demanding and at least sits within the range of a considered repricing programme.

For most providers, the practical answer will involve both lines moving together in any year when real funding falls. Neither line holds the revenue base to absorb the requirement alone.

Repricing takes two to three years to reach full effect

Accommodation repricing applies to new residents, so the revenue effect follows resident turnover rather than the pricing decision.

At the 40% annual turnover assumed in our model, a new price schedule reaches around 40% of residents by the end of the first year and around 80% by the end of the second. Full annual effect arrives at approximately two and a half years.

Higher everyday living fee revenue moves faster where the offering is already established, and slower where the service and the resident conversation still have to be built.

Up to 47% of the market has not started

Up to 47% of the market does not charge a higher everyday living fee. A long tail of providers hold room prices well below the $789,000 they may charge without approval from IHACPA.

Those providers will read the percentages above and conclude that the exercise is not open to them. We would encourage them to test that conclusion.

A provider with no higher everyday living fee has an entirely untested base. A provider holding rooms at $450,000 in a market which would support $650,000 has a repricing decision available immediately. The providers already charging at the top of their local market are the ones with the least room to move.

None of this removes the need to test affordability, local demographics and willingness to purchase. It does suggest that capacity to respond is unevenly distributed, and that the providers who feel least equipped are frequently the ones holding the most unused pricing capacity.

Advocacy is worth doing, and the framework will outlast it

Pressure between funding growth and cost growth has a long history.

COPO indexation was applied to residential aged care from July 1996, and its treatment of wage costs reflected an expectation that providers would absorb part of their cost growth through productivity improvements. Parliamentary inquiries have since documented concerns about its adequacy for a labour-intensive service.

There have been years when funding growth outpaced costs and restored some financial capacity, and provider experience has varied. That variation has not changed the direction. The productivity expectation built into indexation in 1996 has never been withdrawn, the government has stated its objective of slower expenditure growth relative to GDP, and the Act now sets out the funding principle directly.

In our view, there was little basis for expecting this pricing round to expand care margins, and we would encourage boards to plan on the basis that future rounds will not expand them either.

Providers should continue to challenge gaps in the cost assessment.

An ordinary strategic problem, and the responses other sectors use

When the margin on a core product line falls and cannot be restored through price, boards in other sectors work through a familiar set of responses.

Raise the price of adjacent products. Reduce the cost of delivery. Diversify the revenue base. Integrate vertically or horizontally to capture margin held elsewhere in the chain. Consolidate for scale. Exit the line, or the business.

Aged care boards commonly consider the first two and stop there. The funding framework now brings the remainder onto the ordinary strategic agenda.

Two cautions apply to the middle of that list. Opportunities for genuine vertical integration in aged care are limited by regulatory requirements and by differences between the business models involved, and ownership should offer a demonstrable advantage over a partnership. Scale improves results only where the combined organisation can deliver identifiable operating benefits.

None of this suggests that every provider should diversify or merge.

A board that cannot restore margin from business as usual does, however, owe its members a plan to change the model. Local demographics may limit additional customer revenue. A charitable mission may require services which cannot recover their full costs.

A board may deliberately retain a loss-making service, and it should also know the annual subsidy required, the source of that subsidy, and the organisation's capacity to maintain the commitment.

Three matters for the next board meeting

Some improvements can be tested within months. Property development, diversification and ownership changes require substantially longer. The board needs to know whether the organisation holds sufficient financial capacity to complete its preferred response.

A practical starting point

We have developed a summary model using published benchmarks. Your finance team can use it as a starting point, substituting your own occupancy, case mix and cost structure.

Providers who have already repriced accommodation and established a higher everyday living fee will find the exercise confirms work under way. Providers who have not started will find that the transition takes two to three years, which puts the decision on the agenda well before the year in which the revenue is needed.

We would welcome the opportunity to work through the options with your board.
Contact Stephen Rooke at Pride Aged Living.

We’ll be exploring these issues further in our next webinar below, including how providers are adapting their business models across residential aged care and home care.

Join us on 24 September for this webinar hosted by Inside Ageing and Pride Aged Living, where Stephen Rooke and Jason Howie will compare notes from across residential aged care and home care on what separates the providers who have adjusted from those still running the old model with new paperwork on top.

Who should attend: Board members, CEOs, CFOs and senior executives across residential aged care and home care.
 

Learn more and register here