ACT co-op fail becomes an RACGP credibility fail

The RACGP experts and leaders who cried bulk-billing wolf this week could have avoided some damage to their credibility.

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Various RACGP “experts” and leaders used the collapse of ACT-based bulk-billing GP co-operative National Health Co-op (NHC) this week as the centrepiece of an argument attacking the government on GP pay.

They implied that the collapse of NHC was the inevitable result of trying to sustain itself on a bulk-billing model, and that “pure bulk-billing clinics are becoming less and less sustainable”.

Dr Emil Djakic, a member of the RACGP expert committee on funding and health system reform, said the collapse “should serve as a warning for the general population that high-quality general practice is no longer being adequately provided for”.

“There is a breaking point where a business becomes non viable,” he told the college information service, NewsGP, suggesting that the collapse had shone “a light on the fact that if they [NHC] can’t do it, how can anybody else”.

That Medicare rebates have not kept pace with inflation for many years now, and that various other pressures on general practice dictate that government should probably be paying a bit more attention to GP remuneration models into the near future, isn’t in much dispute.

But crying bulk-billing wolf in the case of the NHC collapse before examining the circumstances is a major misfire by the RACGP, as nothing in the collapse supports the theory that it was an inevitable consequence of trying to sustain a bulk-billing model.

The RACGP hanging the collapse almost entirely on bulk billing is even a little embarrassing.

Where around the country are bulk billing practices collapsing? The Medical Republic contacted two major GP advisory firms to see how many of their clients were going under who relied a lot on bulk billing. Both reported none this year that could be tied to the bulk billing.

Healius, which remains a company still primarily drawing its revenue from bulk billing, was bought by one of our smartest local private equity outfits BGH Capital for more than 10 times EBITA less than a year ago (a massively high valuation) which sort of suggests that there might be a bit of life in a GP practice doing a lot of bulk billing yet.

To pin so much on such a thin premise with so little forethought significantly detracts from the credibility the college may have built up with government on all those occasions it has made well-evidenced and -constructed arguments (which it does do).

Worse, talking about GP pay the way it has this week so publicly– mostly doom and gloom – can act to undermine the confidence of doctors in the profession or the ones seeking to enter it, and to test the patience of the public, whose average take-home pay is just over $60,000 compared to the average of a GP of nearly $200,000.

It’s hard to think of any other professional body that whinges about the pay of its constituents as publicly as the RACGP does. You don’t see lawyers, accountants or dentists hitting the press regularly to say they’re underpaid and put upon. There’s a reason for that. Most people do not care and they’ll immediately compare your salary to theirs and not feel a great deal of empathy after that.

This is not to say that in relative terms GPs are not copping it on the pay front and the government needs to give GP remuneration some more careful thought given the vital role they play in the the healthcare system. But you do have to wonder about the tactics the college is using to get this message across.

On all the evidence available so far, NHC has most likely failed as a result of its management, with the possibility of some mishaps surrounding the accounting of major leasing deals done by the organisation with the Australian National University (ANU).

That NHC has been running a bulk-billing model no doubt puts more pressure on it than if it wasn’t, but it almost certainly did not cause its failure.

As with most cases when a group goes into administration, lines of communication become blurred very quickly between the organisation and the administrator.

So far, the administrator is remaining fairly tight-lipped, saying that they are starting their investigation only now, that it’s a large organisation, and it’s too early to provide any detail. It’s the typical spiel you get early on from an administrator wanting to keep things close to their chests, until they really have a handle on what is going on and how to handle it.

The CEO of the organisation left a few weeks ago, which isn’t a good sign in events such as these. The board has seen off the CEO before she can be asked tough questions. When asked why the CEO left just a few weeks before voluntary administration was declared, a spokesperson for NHC directed us to the administrator.

The administrator has yet to get back to us on a whole series of questions, including why the full set of accounts for every year for the organisation, which on Tuesday this week was freely available for download and examination, have been delinked on the portal of the Australian Charities and Non Profit Commission (ACNPC).

It’s another sign of potentially something being a lot more wrong than what so far has been alluded to by the acting CEO and past COO and the board as a simple case of the organisation forecasting forward and deciding that in the not-too-distant future, it will inevitably go insolvent so it had better stay on the safe side of things and enter administration. One reason given in the mix of things that were going wrong was the removal of JobKeeper entitlements.

When we contacted the ACNPC to ask why the reports had been made inaccessible, the ACNPC claimed that it was simply an IT error and they would look into fixing it. We pointed out to them that the IT error was occurring only on this particular group on the portal, and the ACNPC person insisted it was just coincidence. The administrator did not know the documents had been made inaccessible to the public but noted it.

Luckily, we managed to download the financial reports for 2020 and 2019 on Tuesday of this week when the story first broke. It was when we went back to get all the reports back to 2013 yesterday, in an attempt to build up a long-term financial profile of the organisation, that we hit trouble.

Notwithstanding that, the 2019 and 2020 figures tell a story of an organisation that is in no way in any financial trouble. In fact from a cash perspective (which is the best perspective as far as a business is concerned) things were decidedly on the up and up.

The 2020 report includes the first half-year of 2020, which is when the major impact of COVID hit most organisations. Following are some financial indicators that in almost all circumstances would indicate an organisation in pretty good financial shape:

• From 2019 to 2020, revenue increased by a very respectable 12% from $13.2 million to $14.9 million, although $500,000 of that is likely JobKeeper
• In the same period, profit did reverse significantly from $716,000 to a loss of $65,000 but the cash position of the group improved over 100% from $743,000 to $1.534 million. In the context of the cash improvement, the loss is not substantial and usually it would not be indicative of an ongoing problem.
• In the same period, the pay for “key management” (including two board directors) increased a whopping 61%, from $546,175 to $880,993. Interesting and worrying that in a year the organisation took $500,000 from the government in JobKeeper payments, it put up its key management compensation by 61%. Another sign perhaps that there was something systemically wrong somewhere.
• In the same period, the organisation undertook nearly $2 million worth of property improvement, mostly via practice fit-outs. To double your cash position in a year you also forked out $2 million on fit-outs is a fairly strong pointer to you being liquid.
• In the year, the organisation supported nearly 72 full-time-equivalent employees across the whole organisation, which is a lot for nine practices with only 25 doctors, the point being that there is a lot of room to cut fat should a liquidity crisis be emerging on the horizon, as has been claimed by NHC.

The only thing the administrator would officially say so far was that “recent staff changes and the end of JobKeeper have left the NHC facing an insurmountable forecast deficit for the 2021/22 financial year”, none of which explain how in one year, and after more than 10 years of reasonably smooth running, the organisation suddenly won’t make it through the next year.

It doesn’t add up. Canberra was one of the least hardest hit COVID regions and with revenue going up to June 2020 significantly the business could not have been hit that hard by COVID.

We can’t provide a lot of detail before 2019, because all the financial reports have been removed from the ANCP portal back to 2013, but what information is still up in the form of summarised information indicates things were reasonably smooth for the period and the organisation, rather than suffering from the ill winds of a bulk-billing decline, was growing substantively from year to year.

As an example, in the year 2016, revenue for the group was just over $5 million, which means in the past five years the group has grown its revenue base by nearly 300%. In the same period, the group has maintained a healthy cash balance each year, often over $1 million, and in most years either returns a decent profit or a modest loss. In 2018 the group had revenues of nearly $12 million and a profit of nearly $200,000.

Until June 2020 at the least, where revenues were nearly $15 million, we are not looking at an organisation that is struggling to grow, or, on the surface of the financials at least, struggling to meet its ongoing cost commitments. In other words, bulk-billing is not the demon in this story. Something else is.

What?

It’s still hard to tell but as we’ve alluded to a bit already here, there are some worrying elements in the pattern leading up to the collapse:

• So far, the organisation and the administrator are suggesting that the basic business model , after years of healthy and apparently profitable growth, is very suddenly on the rocks. But the numbers don’t tell a story of a long inevitable decline at all. In fact, they are telling the opposite story.
• Even if the organisation did suddenly hit a very bad year, it had in relative terms a lot of cash, and it has a lot of fat in overpaid senior management and probably too many employees. It also spent big on fit-outs, which is all a cash layout. You don’t do that if you are slowly being suffocated by your business model.
• Everything seemed to fall apart very quickly for the group after the board met a few weeks ago, when no doubt the preliminary 2020/21 figures were presented. The CEO left, the COO became the interim CEO and two weeks later the group entered voluntary administration.
• In the 2020 financial report, the page for the independent auditors’ report is marked as being left deliberately blank, waiting for the insertion of the report. Given the report was lodged months ago, this isn’t a good look. It’s actually not legal not to have the independent auditors’ report attached to your financial reporting if you’re a public company or charity.

You can’t be sure, but the pattern points to something very big and systemic that has likely been wrong for a long time and not been picked up by senior management or accountants. The administrator alludes to this when he says that the board and management had considered mixed billing, consolidating clinics, a possible merger or sale, significantly increasing membership fees, and a government subsidy for bulk-billing clinics. But:

“Unfortunately, none of these have proven to be viable to turn around the forecast deficit in a timely manner, while staying true to the purpose of the NHC and providing affordable healthcare.”

How does an organisation with great revenue growth over the years and good cash balances suddenly forecast an insurmountable deficit that it can’t even fix by slashing management salaries, staff numbers, consolidating properties and maybe having a chat to their bank about a short term loan?

It smells like there might be a very large one-off liability falling due in the next year and perhaps ongoing after that which no one saw until the past few weeks. The business on spec would be able to slash a lot of cost very quickly without damaging its core services. But apparently not enough to save it from what is coming in 2022.

What could be coming?

It’s very hard to tell on the limited accounts we have seen but a possible culprit is a deal done between the organisation and the ANU on a 20-year lease for all its clinic properties for $26 million.

In 2016, the International Accounting Standards Board (IASB) issued IFRS 16, “Leases”, which essentially started a new era of lease accounting. It appears that the NHC has chosen to adopt this new standard in its 2020 accounts.

Usually, such changes affect the balance sheet of companies a lot, but not so much cash positions, but apparently in the case of IFRS 16, the changes can have meaningful impacts to the cashflow of a lessee.

In any case, bulk-billing didn’t kill NHC.

It was growing for 10 years right until the end and for most of those years was in good shape. More likely its governance, management or both have caught up with it.

On that subject, the board of the organisation, one of whom was the recently departed CEO, reads like a Who’s Who of the Canberra bureaucratic elite. Which makes the sorting out of this mystery a nervous wait for all concerned.