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7.9 Aged care

Currently around 1 million older Australians receive some form of aged care support. The majority of these are people who receive services in their own home and the community. Around 200,000 people are in permanent residential care.

With the ageing of the population, the number of Australians aged 65 and over will rise rapidly, from roughly 3 million today to over 8 million by 2050. Moreover, by 2050 it is expected that more than 3.5 million people will need access to aged care services, with around 80 per cent of these delivered in the community.

There is a strong rationale for government involvement in aged care on equity grounds and also to overcome information gaps and protect vulnerable Australians. However, over recent years there has been increased acceptance and use of private co-contributions toward the cost of care.

Formal aged care services are predominantly financed by government, with supplementary user contributions also required in many areas. Public funding is primarily delivered through payments to the providers of the various care services.

Aged care expenditure is expected to be around $13 billion in 2013-14, with strong growth expected over coming years. Expenditure on aged care is currently growing at around 4 to 5 per cent per year in real terms. As shown in Chart 7.13, residential age care is the single largest area of expenditure. Expenditure is being driven primarily by demographic and health factors.

Chart 7.13: Aged Care expenditure by type

Chart 7.13 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.

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 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. An estimated 84.7 per cent of aged care homes held accommodation bonds at 30 June 2012.

Significant reforms to the aged care sector are already being implemented under the Living Longer, Living Better package. This package aims to contain growth in expenditure, strengthen price signals and increase incentives for self provision by reforming funding arrangements. The reforms are being implemented over a five year period, with a review scheduled in 2016-17 to identify any further adjustments or improvements required.

While this reform package will do much to improve services and affordability, the Commission considers that additional measures are still needed to ensure effectiveness and sustainability of government programmes in this area.

The Commission notes that significant changes to the means testing arrangements for both residential and home care services will apply from 1 July 2014. The current income and assets tests for residential care 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.

The Productivity Commission in its Caring for Older Australians report recommended that for both residential care and home care services means testing arrangements should be strengthened. The current means test for residential aged care takes partial account of the value of the principal residence, up to a cap of $144,000, substantially lower than the current median house vale of $445,000. This means test should take account of the full value of the principal residence.

The Productivity Commission also suggested that a government backed aged care equity scheme could 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.

This could apply to non-residential aged care. 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.

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.

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 government. There is little rationale for this contingent liability to be borne solely by the Commonwealth.

Consistent with the recommendations outlined above in Section 5.1 on better managing the Commonwealth’s balance sheet, the Commission recommends that a fee should be charged on providers covered by the accommodation bond guarantee. Alternatively, providers should be required to source appropriate insurance from the private sector, allowing the government to withdraw from these arrangements altogether.

Currently, not-for-profit providers of residential care are exempt from paying State governments’ payroll tax. In the interests of competitive neutrality, the Commonwealth currently refunds for-profit providers for the payroll tax that they pay. The Commission recommends that this supplement should be terminated, as it is effectively shifting the payment of a State tax to the Commonwealth.

The aged care sector is categorised by a high level of regulation, which applies to price, quantity and quality. There would be benefit in reducing duplication in many aspects of financial reporting and reducing other regulatory requirements for aged care providers. The Commission suggests that this issue be pursued further by the Commonwealth Minister as part of the implementation of its recommendations on aged care.

Recommendation 25: Aged care

With the ageing of the population, more Australians will be receiving some form of aged care support. The Commission supports the range of reforms currently being introduced in the aged care sector, but recommends additional measures be undertaken to improve the effectiveness and sustainability of the sector by:

  1. including the full value of the principal residence in the current aged care means test;
  2. implementing arrangements to allow older Australians to access equity in their principal residence, to pay for part of the cost of their aged care services;
  3. introducing a fee for aged care providers to access the accommodation bond guarantee or, alternatively, requiring providers to take out appropriate private insurance to cover the risk of default;
  4. terminating the Payroll Tax Supplement; and
  5. reducing duplication in all aspects of financial reporting for the aged care sector as well as reducing other regulatory requirements for aged care providers.