In the final months of 2018, briefing note after briefing note began landing on the desks of Health Minister Greg Hunt and then Aged Care minister Ken Wyatt, warning of “increasing pressure” on aged-care operators. Advice prepared by the Department of Health raised the prospect some could “fall over”.

At the same time as Scott Morrison was denying he had cut billions from the aged-care sector while he was treasurer, the two ministers in charge of the system knew they had a terrible problem. In short: without a bailout, the industry’s key operators could go under. Tens of thousands of elderly people would be left without care.

The Department of Health documents, addressed to Hunt and Wyatt, divided nursing home providers into two categories: “winners and losers”.

Before changes to taxpayer subsidies enacted by Morrison as treasurer, which saved the budget $2 billion, 80 per cent of all services were classed “winners”, according to the Department of Health’s own analysis.

After the changes, more than half became “losers”.

This was, on the face of it, the unspoken reason the Coalition offered a $320 million one-off cash injection to struggling aged-care providers in February this year.

But the figure itself raised eyebrows in the aged-care sector. Nobody could figure out how the government had arrived at that precise value. What assumptions had been built into the calculation? Why this amount and not, as the industry had proposed, a $675 million transition subsidy while they awaited the outcome of a royal commission?

It puzzled key players. Then, things became clearer.

The $320 million was the minimum amount needed to prevent some of the biggest aged-care companies in the country from defaulting on their loan covenants or facing a hike in their borrowing costs.

The government was particularly worried about private multinational Bupa, which currently faces sanctions or serious risk notices over a third of its 72 facilities around the country. Liquidity was also an issue for Japara, Estia and Regis, the three aged-care giants listed on the Australian Stock Exchange.

“As soon as those organisations said, ‘We are going to go public’, enormous warning bells should have gone off in the Department of Health.”

The government believed there was no choice but to intervene: if the aged-care industry’s major players collapsed, there would be no back-up. Like the financial institutions at the heart of the global financial crisis, they had become “too big to fail”.

“We knew we needed some kind of short-term payment because a lot of people were saying they were under stress,” a government source familiar with the negotiations tells The Saturday Paper.

“The question was: Do we wait for these providers to fall over? Or do we try to stop that from happening? Obviously, you go in first.

“$320 million was what we could afford. Greg Hunt went in fighting for what we could get.”

Prompted by Labor’s reforms in 2012, huge super-providers took over the industry, mopping up smaller operators that could not compete. They made a fortune. A senior industry source says that Japara, Regis and Estia run something like 20,000 beds. For context, the source says, there are only 90,000 hospital beds in the country. “The government now has a vested interest in keeping them open because the alternative is much worse.”

The smaller providers that remain in the industry have already started to falter. The government’s own independent Aged Care Financing Authority has noted “there appears to be a growing number of smaller providers, particularly in regional and remote areas, facing significant financial stress and seeking to leave the industry”.

In July, a Gold Coast aged-care centre, Earle Haven, shut down overnight. More than 100 Queensland hospital and ambulance staff had to rescue residents as part of a “mass casualty action plan”. There was nowhere for them to go.

Meanwhile, the government is facing growing criticism over its failure to penalise the larger providers that have been found to provide squalid living conditions for residents.

Take Bupa, for example, which has earned the attention of regulators. Given its track record, industry observers have wondered why Bupa has not suffered more serious consequences, such as being barred from operating aged-care homes.

“Bupa are fucked,” says the government source. “But you can’t just shut them down. You cannot turf residents out on the streets. Where would they go?”

Australia’s modern aged-care system is something of a chimera, a bolt-on upgrade of a single overhaul that took place in 1997 under John Howard’s prime ministership.

That reform dramatically rewrote the rules, asking wealthy people to pay more for their own care in old age and further opening the sector to property developers, private equity scouts and business, in a bid to outsource to the market the growing weight of public expenditure.

In 2012, Labor’s Mark Butler, as minister for Ageing, managed to finish what Howard started, unlocking the full force of private capital by letting aged-care providers charge residents a bond at whatever value the market would tolerate.

As soaring house prices around the country made the elderly who owned their own homes wealthier, bonds grew, and so did the aged-care sector. In the nation’s richest postcodes, bonds charged to residents hit $1.5 million or more.

Providers expanded, built new facilities and – crucially – began absorbing small nursing homes as they went.

In quick succession, three private aged-care companies were listed on the ASX in 2014. First was Japara in April that year, followed by Regis Healthcare in October and Estia in December.

“As soon as those organisations said, ‘We are going to go public’, enormous warning bells should have gone off in the Department of Health,” the senior industry source tells The Saturday Paper.

“That introduced a new factor. It’s not enough for these companies to run a business and be content: they must keep growing. They must keep returning a profit. Their shareholders demand it.”

For a time, conditions proved no obstacle to that mission.

Since 2015, the three listed aged-care providers have paid out almost half a billion dollars in dividends to their shareholders. Estia has paid $159 million, Regis $157 million and Japara $126.5 million.

But in the year ending June 30, 2019, government revenue accounted for more than 70 per cent of income for these aged-care behemoths. Japara took in $287.7 million, Estia $483 million and Regis $452.3 million.

Business types have dismissed concerns that quality care cannot be guaranteed by providers motivated by profit. They argue, with some merit, that media coverage of elderly residents stranded in unacceptable living conditions translates to jittery shareholders and a drop in share value.

But this is no normal market.

These aged-care providers depend on government revenue for income. Meanwhile, they are more regulated than almost any other industry.

This means the smallest change in direction or focus from the federal government can send them spinning.

Which is exactly what happened in 2015.

As treasurer, Morrison signed off two key budget changes that shaved $2 billion from growth forecasts for the Aged-Care Funding Instrument (ACFI).

Sussan Ley, then Health minister, argued that claims made on this funding instrument, especially in complex healthcare, were rising faster than the actual frailty of residents. To the government, it was suspicious.

This was not the first cut to the sector, nor the first time that argument had been made. Labor shifted $1.1 billion out of ACFI in 2012 but repurposed that money to an aged-care workforce supplement, which was tied to enterprise bargaining. When he became prime minister, Tony Abbott axed the supplement and the money went back into the general sector pool.

But the 2015 change came at a time when complexity for the aged-care sector was increasing and historical underfunding began to bite. Due to reforms of at-home care, those entering residential aged care did so in a frailer condition than ever before.

Added to that was the fact that when Morrison as treasurer took $2 billion away, the money was not reinvested in the sector.

It is no coincidence that the share price of the three listed aged-care providers peaked in November 2015, a month before the first cut. It has never recovered. In the years since, Regis’s share price has halved. Both Japara and Estia have shrunk by a factor of three.

The aged-care industry giants now face a prickly reality.

Firstly, they are haemorrhaging money. Across the sector, providers will be losing about $8 per bed per day on residents alone by the end of this year. Accommodation bonds cannot be used to pay for these direct nursing costs – it’s against the law. They can only be used for capital investment.

For Estia, Japara and Regis, a review done by Ansell Strategic in August 2018 found that without the “one-off boost in federal funding in the fourth quarter, none of the three providers would have reached guidance”.

It continues: “The condition follows the austerity measures introduced in the 2016 Federal Budget and low indexation of subsidies relative to ever-growing care costs.

“Across the country, providers have shelved or canned their building projects ahead of the largest demographic shift in Australia’s history.”

Meanwhile, the report notes, “In the last 12 months there has been an increase in the number of providers facing liquidity issues, including the appointment of Administrators.”

Facilities that do run into trouble now have few prospective buyers. In Western Australia, aged-care company Berrington – with two sites in the leafy Perth suburbs – has gone into voluntary administration. KPMG, the administrator, sought an extension from August 1 to November 1 to find a buyer. So far, it has failed to do so.

A spokesman for the Department of Health says it is “working closely with the administrator” to remedy the Berrington situation.

“Should the sale process be unsuccessful, and the business is wound up,” says the spokesman, “Refundable Accommodation Deposits will be refunded through the Australian Government’s Accommodation Payment Guarantee Scheme.”

The value of bonds at this facility is about $100 million. The government could be on the hook for some or all of that, pending liquidation. The land on which these centres operate is leasehold, which complicates the sale equation.

Another complication in the books of many providers is that the government rations the number of aged-care beds in any given area, using an algorithm. Most providers count these bed licences as an asset, although their value is only theoretical because they are not actually owned by the operator. In a liquidation they are essentially worthless.

Regis Healthcare managing director and chief executive Linda Mellors told The Saturday Paper that her company continues to grow and “has built and opened 10 new aged-care facilities since May 2016”.

But this comes with a caveat. In the past financial year, “the earnings contribution from this growth was more than offset by growth in expenses”, Mellors said.

The February funding boost, she said, “whilst welcomed by providers, was insufficient to cover this gap”.

Earnings forecasts for Regis next year will be even less than the result it has posted for this financial year.

Aged Care Minister Richard Colbeck said annual Commonwealth funding has hit $20.5 billion, which includes the one-off $320 million injection.

“This [one-off] funding boost equates to approximately $1800 per resident and will provide additional support to the sector while the government considers longer-term reform funding options,” he told The Saturday Paper.

As it happens, all three listed providers have more current liabilities than they have assets, leaving a deficit on this measure of between $60 million and $135 million.

According to the Ansell Strategic report, “a number” of companies have had to offload some of their assets “in recent times” to ensure they had enough cash to refund the estimated number of bonds due in any one year. Bonds are refunded when a resident leaves care or dies.

The report levelled a sobering statement: “Without an improvement in sector performance in the very near future, the Government may face a much greater exposure than short-term funding relief.”

Essentially, the sector holds almost $30 billion in accommodation bonds. The three listed aged-care providers have a liability of more than $2 billion between them. No aged-care provider has enough assets to pay these debts back all at once if they go bust.

The sector is waiting on the findings of the aged-care royal commission and hoping they will bring clarity or further funding. An interim report is due at the end of this month – although the commission has been granted a six-month extension for its final findings. It is the view of a faltering industry, and the people in its care, that substantial reform simply cannot wait that long.