By Andrew Main

The nasty air pocket hit on Monday by aged care stocks Estia, Japara and Regis is a handy reminder that any share you buy that’s reliant on government subsidy is going to provide the occasional, unexpected price jolt because of policy changes.

To be specific, an advisory by the Department of Health on what fees aged care providers could charge their residents caused a number of brokers to downgrade their earnings forecasts on the stocks. On Monday, they closed down 11.7%, 14.7% and 16.7%, respectively.

If you’d panicked and sold at the bottom during the day you’d have seen Estia down 62%, Japara down almost 46% and Regis down 36.6%.

Last Friday, the Department of Health and Ageing put out new guidelines stating that extra service fees charged by aged care providers would not be supported by the Aged Care Act if the fees paid did not result in a direct benefit to the individual, or the resident could not take up or make use of the services.

In other words, the government was putting a limit on what fees providers may charge residents.

That might sound a bit Orwellian until you remember that those fees relate to the benefits the oldies might not be receiving, and that the fees had recently gone up because of proposed cuts in the Federal Budget.

Viewed in that way, you could say the Government’s just keeping an eye on what’s being charged.

And rightly so. In one instance, the fees were referred to by a provider as “capital refurbishment fees”, and you don’t need to be an actuary to know that few oldies spend enough time in high care to justify being slugged for the costs of fixing the place up.

We won’t make a dire joke about refurbishing the capital base.

And before you suspect that having the government overseeing all this is a Big Brother tactic interfering with the workings of the free market, just remember that it can easily cost over $100,000 a year to provide high care for an elderly patient, but they are unlikely to be charged any more than half that amount by the provider, thanks to taxpayer subsidies.

That’s the most that people at the top end of the assets scale will pay.

The family of a retiree on an age pension who owns their own home would find that the maximum they have to pay is 85% of their pension, or about $17,500 a year. We, the taxpayers, pay that pension and also the remaining aged-care accommodation costs.

The free market’s a long way away from the aged care market.

The barney between the providers and the government basically goes back to the May Budget, where Treasurer Scott Morrison proposed to cut $1.2b over four years from ACFI, the Aged Care Funding Instrument. That’s the mind-bendingly complex financial system via which the taxpayer subsidies are paid.

In simple terms, it looks as though that’s a reduction in the subsidy of around $20 a day per resident, and you won’t be amazed to discover that the providers’ charges to residents had gone up by around $15 on the same basis.

Investment bank analysts revisited their numbers over the weekend and largely downgraded the listed players.

Bank of America Merrill Lynch, for instance, cut its forecast for Estia’s earnings by 5% for this financial year, 12% for next and 24% in 2019. The fees for extras had previously been included in earnings estimates.

I’m pleased to tell you that Estia enjoyed a moderate price bounce yesterday, as did the others.

The recently battered Estia recovered the most, climbing over 5.2% to $2.93.

Estia Health’s profit result last week came in below forecast, so its share price has been badly mauled, coming off close to 50% in a week at one point.

It also dropped its guidance for this financial year, and that was before the weekend’s unpleasant surprise.

To top it all off, Estia’s founder, Peter Arvanitis, resigned and sold off more than 17 million shares at a discount to market.

But if you look a long way forward, the outlook for the sector must be better than all this.

We all know we’re living longer, and that’s not likely to change any time soon.

Elderly citizens in need of care are all going to have to live somewhere, and the Government isn’t equipped to provide anything much more than financial support to help them in their old age.

We know the cost of all this is going to rise as well, since aged care doesn’t simply get cheaper because there are more oldies around.

What’s going to happen and keep happening, like tectonic movements off New Zealand, is that the providers and the Government are going to carry on needing each other.

And they are bound to arrive at funding compromises that will allow as many frail oldies as possible to live in high care facilities, at a subsidy cost which won’t ruin the government, but won’t drop the care standards either.

We’re going to keep seeing providers variously making juicy margins and crying foul when subsidies drop, and we’re going to keep seeing the Government sticking its nose in in the way it did on Friday if it thinks someone’s gaming the aged care system.

It’s a tightrope act for the government but as Mrs Thatcher used to say, TINA. There is no alternative.