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9.9 Aged care


Aged care costs are projected to grow significantly over the next decade, driven primarily by our ageing population. Australian Governments will continue to play a major role in the delivery of aged care services, though there is some scope for greater self provision.

Significant reforms to the aged care sector are currently being implemented over five years, with a major review scheduled in 2016-17. The Living Longer, Living Better reform package is largely based on the recommendations of the Productivity Commission’s 2011 report Caring for Older Australians. The aims of the recommended reforms include containing growth in expenditure, strengthening price signals and increasing incentives for self provision by reforming funding arrangements. There are several other avenues of reform that could be further considered, discussed below.

It should be noted that the Living Longer, Living Better reforms have not yet been fully implemented and that the review scheduled in 2016-17 will help to identify any further adjustments or improvements required.

Rationale for government intervention

The Productivity Commission found that there is a strong rationale for government involvement in aged care in order to ensure equity in access to care, and also to overcome information gaps and ensure the protection of vulnerable consumers (Productivity Commission, 2011).

Over past decades there has been an increase in the level of private co-contributions toward the cost of care. Various reviews of the aged care system in recent times (for example the Henry Tax Review (Australian Government, 2010a) and Productivity Commission (2011)) have suggested that there is scope to increase the level of private contributions to the cost of aged care.

Current structure of the programme

The aged care sector covers a wide variety of organisations providing different levels of care (high care, mixed care and low care) and services. Commonwealth expenditure of around $13 billion is delivered through payments to the providers of services in residential care, home care, community care or flexible care. Residential aged care places and Home Care Packages are allocated to approved providers through an annual aged care approvals round. The sector is regulated by the Commonwealth Government, including caps on the number of places in residential care.

Residential care

Within residential aged care, the Commonwealth provides approximately 71 per cent of funding, of which 80 per cent is provided via the Aged Care Funding Instrument – the mechanism used to allocate Commonwealth Government subsidies. The next most significant funding source is resident care fees, which make up 25 per cent of total funding, followed by revenue from accommodation payments (including regular accommodation payments and amounts from accommodation bonds) at about 4 per cent of total funding.

Residents are asked to pay daily fees to contribute to everyday living costs such as care, meals, linen, laundry and electricity. Currently, the maximum basic daily fee for new residents is up to $45.63 per day. This is calculated by determining 85 per cent of the single person rate of the basic age pension ($751.70 per fortnight). The government sets this maximum daily fee level and the income test treats all income (pension or private) the same.

Accommodation payments can be in the form of bonds paid by lump sum and/or a rental-style periodic payment. If a resident’s assets are less than $44,000 then the government meets the full accommodation cost. The amount of an accommodation bond is determined between the aged care facility and the resident.

Residents in aged care facilities who have sufficient assets can be asked to pay for their accommodation through an accommodation bond or through a periodic fee, depending on the type of aged care they receive. These are a significant source of funds for providers and represent 48 per cent of assets for the sector (Aged Care Financing Authority, 2013). An estimated 84.7 per cent of aged care homes held accommodation bonds at 30 June 2012 (Department of Health and Ageing, 2012). The amount of the bond is required to be refunded to the resident (or their estate) when they leave the aged care facility. The average amount of accommodation bonds has significantly increased over recent years, rising from $58,000 in 1997-98 (Productivity Commission, 2011) to around $265,500 in 2011-12 (Department of Health and Ageing, 2012).

Under the accommodation bonds guarantee scheme, the Commonwealth Government guarantees the repayment of the bond balance if the aged care provider becomes bankrupt or insolvent and is unable to repay the outstanding bond balance. In return, the residents’ rights to pursue the defaulting provider to recover the accommodation bond money transfer to the Commonwealth Government.

From 1 July 2014 new means testing arrangements will be introduced. The current income and assets tests will be combined. An annual cap of $25,000 will apply to a resident’s means-tested contribution to their care costs, together with a lifetime cap of $60,000 for means-tested care fees. The principal residence will continue to be exempt from the assets test if occupied by a spouse or other protected person. However, it will be taken into account when determining a resident’s contribution to their accommodation payment.

In the event the government cannot recover the full amount from the defaulting provider, it may levy all providers holding accommodation bonds to recoup the shortfall. Since the scheme was introduced in 2006-07, it has been activated five times requiring payment of around $25 million. Government has not sought to levy providers to recover this cost.

Home Care Packages

Home Care Packages are coordinated services tailored to meet the consumer’s specific care needs (from basic to high care) including care services (such as assistance with bathing, dressing and mobility), support services (such as cleaning, laundry and gardening), clinical services (such as nursing, allied health and therapy services) and other services (such as home modifications) to support a person to live at home. There are now four levels of Home Care Packages, ranging from covering basic care needs to high level care, as assessed by an Aged Care Assessment Team.

Care recipients can be asked to pay a basic daily care fee and consumers on higher incomes may be asked to pay an income-tested care fee. The following means testing guidelines apply:

  • pensioners receiving the maximum rate pension are exempt from care fees;
  • care fees for part-rate pensioners are capped at $5,000 per year;
  • people with an annual income of more than $43,186 pay an income tested care fee on a tapered scale up to a total of $10,000 per year; and
  • no one pays more than $60,000 in income tested care fees over their lifetime.

Home care package funding comes mainly from Commonwealth Government payments ($1.1 billion) with some care fees ($80 million) also paid by care recipients (Aged Care Financing Authority, 2013). There are 59,201 packages in total.

Home and Community Care

The Commonwealth Home and Community Care (HACC) programme provides basic maintenance, support and care services for older people and their carers to support older people to stay at home and be more independent in the community. From 1 July 2012, the Commonwealth assumed full operational responsibility for HACC services in all States except Victoria and Western Australia. In these States, basic community care services continue to be delivered under a joint Commonwealth-State funded HACC programme until otherwise agreed. The Commonwealth HACC programme provides services to approximately 480,000 older clients and the joint programmes in Victoria and Western Australia provide services to approximately 350,000 clients of all ages.

Unlike Home Care Packages, the person receiving care will contact their HACC provider directly, instead of being assessed. HACC services include allied health (such as podiatry and occupational therapy), centre based day care, respite care and counselling and information.

In 2011-12 the Commonwealth Government provided funding of $1 billion to the Commonwealth HACC programme and contributed $462 million to the jointly funded programs in Victoria and Western Australia (Aged Care Financing Authority, 2013).

From 1 July 2015, HACC and related programmes will be rolled into a new Commonwealth Home Support Program, which will also include a new national fees policy.


As shown in Chart 9.9.1, it is estimated that Commonwealth expenditure on aged care will be around $13 billion in 2013-14, and that this will increase by around 4.9 per cent each year over the next decade in real terms. In 2023-24 it is estimated that the Commonwealth Government will spend over $26 billion on aged care.

Chart 9.9.1: Projected spending on aged care

This is a pie chart showing the break down of aged care expenditure. Residential and Flexible Care accounts for 82 per cent of total expenditure, Home and Community Care 12 per cent and Home Care six per cent.

Source: National Commission of Audit.

The majority of aged care expenditure is on residential aged care, as shown in Chart 9.9.2. In their inaugural report to government, the Aged Care Financing Authority (2013) stated that in 2011-12, the Commonwealth Government paid $8.7 billion to approved providers of residential aged care in the form of subsidies on behalf of care recipients, which represented an annual average growth in expenditure of 9.8 per cent since 2007-08.

Chart 9.9.2: Aged Care expense by type 2012-13

This chart shows projected expenditure on aged care increasing from around $13 billion in 2013-14 to $26 billion in 2023-24.


Source: Department of Finance, 2013.



Demographic trends are the key driver of the projected increase in aged care demand and expenditure. The number of people aged 85 and over is expected to quadruple by 2050, from 0.4 million people to 1.8 million people (Australian Government, 2010b). Also, with increased life expectancy, the period of potential disability and the chronic disease burden also increases and thus the need for higher intensity care.

Other societal trends will also drive increased expenditure on aged care into the future. Older people are increasingly less able to turn to family members for their care needs, so are more likely to require formal care. Increased numbers of older people for whom English is a second language will mean that there is a need for a wider scope of skills and settings in aged care provision.

As labour costs represent around 75 per cent of total costs in the industry (Australian Government, 2010b), the scope to reduce costs of delivery is somewhat constrained, particularly as the sector already finds it difficult to attract and retain staff. The Department of Health estimates that the size of the workforce will need to be two to three times larger by 2050.

Growth in residential care subsidies in particular is driven by growth in demand for places, annual indexation and the increasing level of frailty in the resident population. The Aged Care Funding Instrument is also key in determining the proportion of costs covered by residents as it is used to determine the level of care/assistance that older people require.


As noted above, significant reforms to the aged care sector (the Living Longer, Living Better package) are currently being implemented over five years with a major review scheduled in 2016-17 to inform any further changes.The key issues to be addressed as identified by the Productivity Commission and reflected in the Living Longer, Living Better package are to:

  • simplify the current system;
  • contain growth in expenditure and improve sustainability;
  • strengthen price signals and increase incentives for self provision by reforming funding arrangements;
  • build the sector’s capacity to move to a less regulated, more competitive environment; and
  • improve service quality and access.

A further issue in the aged care sector is that there may be growing interactions between the aged care sector and the National Disability Insurance Scheme (NDIS). These interactions have not yet been fully explored or considered and may present opportunities for reforms to enhance care, increase efficiency and address workforce challenges.

Potential areas for reform

The Government has indicated support for the Productivity Commission’s recommendations and that the Living Longer, Living Better package is a ‘first step’ upon which further reforms can be built. In addition to this, the Government has committed to negotiating a five year Healthy Life, Better Living Agreement with stakeholders to define reform implementation policies for the sector and reduce red tape compliance costs.

Additional reform options that could be explored are outlined below. These options should be considered within the context that the current Living Longer, Living Better reforms have not yet been fully implemented and that the review scheduled in 2016-17 will help to identify any further adjustments or improvements required.

Strengthen means testing arrangements

As part of the Living Longer, Living Better reforms, significant changes to the means testing arrangements for both residential and home care services will apply from 1 July 2014. When the changes are fully implemented:

  • in residential care, average contributions rise from 32 to 37 per cent, while for self-funded retirees they increase from 48 to 59 per cent; and
  • for home care, average contributions rise from 14 to 21 per cent, while for self-funded retirees they increase from 16 to 51 per cent.
  • for HACC (to be renamed Commonwealth Home Support Program, from 2015), average contributions rise from 5 to 15 per cent.

These changes have been grandfathered and will not affect people already in care before 1 July 2014. These are substantial changes, which in conjunction with changes to the Aged Care Funding Instrument, will deliver significant savings into the future – initially $3.2 billion over five years. These savings have been redirected into more aged care places and services.

There is scope to strengthen means testing further, in particular by taking into account the full value of the principal residence, as recommended by the Productivity Commission. The current means test for residential care only takes account of the value up to a cap of $144,000 and only in certain circumstances (for instance, it does not apply where a spouse remains in the principal residence). This amount is substantially lower than current median house values of $550,000 in capital cities and $349,000 across the rest of Australia (RP Data – Rismark, 2013). The means test could take account of the full, or at least more of the value of the principal residence.

Aside from these changes, it may also be possible to allow older people to use the equity in their principal residence to meet part of the costs of aged care generally (noting that for Home Care and HACC, there is no assets test). The Productivity Commission examined home equity release schemes as part of its inquiry and recommended that a government-backed aged care equity scheme be established to enable older people with wealth primarily in the form of a home, accommodation bond or other non-liquid assets to draw down on those assets to meet their aged care costs.

In order for this to occur, the Government would need to implement arrangements to promote reverse mortgages and other products to access housing equity. Such schemes have been adopted in other countries and could be used as a template for reforms in Australia.

In its submission to the Commission, Catholic Health Australia argues that there is a need to move more in the direction the Productivity Commission indicated, including greater use of user charges and a public equity release programme. It sees this as being a necessary pre-condition to drive greater contestability in the sector and increase the current restrictions on the number of residential aged care places.

As noted above, significant increases in private contributions to aged care will begin from 1 July 2014 and the additional impact of any further changes to means testing should be considered in this context. It should also be noted, however, that the changes have been grandfathered and therefore are not affecting anyone currently in the aged care system.

Removing the grandfathering provisions in the Living Longer, Living Better reforms could provide additional savings, but would be difficult to justify given they have already been announced. Grandfathering has been a feature of other changes to the aged care system over successive decades.

Aged care accommodation bonds guarantee

Accommodation bonds are effectively interest-free loans from residents of aged care facilities to aged care providers. As noted earlier, the government provides a guarantee in respect of bond repayments. There is limited rationale for this contingent liability to be borne solely by the Commonwealth. The stock of accommodation bonds and therefore the Commonwealth’s contingent liability associated with the guarantee has been growing rapidly. The 2013-14 Mid-year Economic and Fiscal Outlook reported that, on 30 June 2012 the maximum contingent liability, in the unlikely event that all providers defaulted, was approximately $13.1 billion.

The Productivity Commission recommended that ‘the Australian Government should charge residential providers a fee to reflect the costs of providing the government guarantee on accommodation bonds.’

The Commission recommends that the Commonwealth introduce a fee for aged care providers to access the guarantee for accommodation bonds, or use a transition period to cease operating the guarantee and require providers to source appropriate insurance from the private sector. There has been concern among providers that the private bonds insurance market is underdeveloped, however it would be reasonable to assume that the market would respond to the new and substantial demand for appropriate insurance products. A transition period would further help to address this risk.

Review the Payroll Tax Supplement

Currently, not-for-profit providers of residential care are exempt from paying State payroll tax. In the interests of competitive neutrality, the Commonwealth currently refunds for-profit aged care providers for the payroll tax that they pay. This payment is above $100 million per year. There is limited rationale for the Commonwealth to effectively be paying this State tax. Consideration should be given to terminating this supplement, noting that it is likely that these costs would be passed on to new residents. The aged care sector is generally not characterised by high profits and some providers may struggle to continue without this subsidy.

In the event that the Payroll Tax Supplement remains, it should be taken up in the White Paper on Taxation and/or White Paper on the Federation.

Regulatory burdens

The aged care sector is characterised by a relatively high level of regulation, which applies to price, quantity and quality. A submission to the Commission from Aged and Community Services Australia notes that there are potentially straightforward reforms which could be implemented to reduce the reporting burden on aged care providers. They cite the example of the need for a 39-page application form which is required when an approved place is transferred to another provider and also the need for separate auditing of financial information.

Further efforts should be made to ensure that the level of regulation in the sector is optimised and ‘easy wins’ are achieved in terms of relatively simple measures which would reduce the reporting burden applying to providers.


Aged Care Financing Authority (ACFA) 2013, Inaugural Report on the Funding and Financing of the Aged Care Sector, ACFA, Canberra.

Australian Government 2010a, Australia’s Future Tax System Review, (Henry Tax Review), Australian Government, Canberra.

Australian Government 2010b, Intergenerational Report 2010, Australian Government, Canberra.

Department of Health and Ageing 2012, Report on the Operation of the Aged Care Act 1997 2011-12, Canberra.

Liberal Party of Australia and National Party of Australia 2013, The Coalition’s Policy for Healthy Life, Better Ageing, Canberra.

Productivity Commission 2011, Caring for Older Australians, Inquiry Report no. 53, Canberra.

Productivity Commission 2013, An Ageing Australia: Preparing for the Future, Research Paper, Canberra.

RP Data-Rismark 2013, November Home Value Index 2 December, viewed January 2014, <http://www.rpdata.com/research/home_values_edge_slightly_higher_in_novem....