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Chapter 7: Prudential arrangements
5.1 The Department of Health and Family Services (DHFS) has estimated that by the fourth year after implementation of the accommodation bond scheme, the scheme will generate about $125 million each year.  Clearly, it is anticipated that there will be a significant pool of funds if the combination of retentions and interest are to generate that amount.
5.2 DHFS expressed its commitment to ensuring the protection of accommodation bonds as follows:
The prudential arrangements for accommodation bonds will provide an unconditional guarantee that residents will not be disadvantaged where an individual facility is unable to refund amounts owed within the two months or shorter period as set out in Section 57-21 of the Aged Care Bill. 
5.3 The Aged Care Bill provides that the prudential requirements may be specified in the User Rights Principles. The User Rights Principles in respect of prudential arrangements have not been drafted at this stage because they are still the subject of consultation with industry and consumer stakeholders. 
Appropriate prudential arrangements
5.4 The Committee received evidence as to some of the risks associated with the payment of an accommodation bond to a nursing home. These included:
- insolvency of the proprietor of the facility;
- fraud on the part of the proprietor, operator or an employee of the facility;
- a sudden loss of residents resulting in an obligation to repay more accommodation bonds than the liquid assets of the facility could satisfy; and
- closure of the facility. 
5.5 As noted in Chapter 1, following the announcement of the reforms to residential aged care in the 1996-97 Budget, four working groups were established to provide advice on the implementation of the new system. The role of the Funding and Other Implementation Issues Working Group was twofold:
- identify issues outside the scope of the other groups which need to be resolved in implementing the package, in particular those related to entry contribution and income testing arrangements and funding matters generally, and
- advise the Minister on possible approaches and their implications.
5.6 That Group reported to the Minister in January 1997. The following issues were raised when considering the various options for prudential arrangements:
- the desirability of avoiding duplication or conflict with state retirement village legislation;
- the extent of access to capital sums and interest provided by the arrangement;
- the adequacy of security for residents;
- the costs to government and providers;
- the ease of administration;
- the impact of the arrangements on the willingness of financial institutions to lend funds for capital improvements;
- the capacity to apply the arrangements to leasehold or other situations where the providers have limited equity in the property; and
- the implications for current funds held by hostels. 
5.7 Submissions to the Committee demonstrated almost universal acceptance of the need for prudential arrangements to ensure protection for resident contributions against the risks outlined above.  However, a number of operators of homes expressed concern at the proposed prudential measures. Reference was made to the apparent lack of any problems in relation to the protection of hostel entry contributions since their introduction in the late 1980s, and the potential cost of the measures for operators. In particular, it was suggested that the likely rise over time in the cost of insurance would result in the erosion of capital funding. 
5.8 The Committee agrees that complete protection of the balance of accommodation bonds is critical to the confidence of prospective nursing home residents in the accommodation bond scheme. It is therefore imperative that prudential arrangements which are developed gain the absolute confidence of the older people whose bonds the arrangements are designed to protect.
5.9 The Funding and Other Implementation Issues Working Group also considered and rejected a number of possible prudential models:
- trust funds the Group concluded that these would place significant limitations on the use of the bond for capital purposes and thus would not achieve the intended purpose of the arrangements;
- bank guarantees - these would be difficult to obtain in circumstances where there is no property against which to secure the guarantee (eg. where premises are leased) or where there was not sufficient equity in the property to support the guarantee; and
- providing residents with a first charge on the value of the assets in the event of insolvency, as occurs with retirement villages in some States - this again results in problems where the value of the asset is less than the amount charged against it. 
5.10 A number of organisations referred to State and Territory retirement village arrangements which is provided in some State legislation. However, whilst provisions exist in a number of States, they are not uniform and some States do not have any legislative provisions at all. 
5.11 The Minister, in responding to the Working Group report, stated that `work in progress suggests that a mandatory prudential scheme will best meet the objective of ensuring strong protection of older people's financial investments in their own care'.  The Minister convened a new working group of providers and consumers to undertake more detailed development work and to provide her with further recommendations on how such an arrangement could best be implemented.
5.12 The Department engaged a consultant with expertise in financial and risk management to undertake the first stage of the developmental process to specify the features of the scheme as a prelude to seeking tenders from organisations able to construct and manage it. 
5.13 The consultant is developing a proposed arrangement for the prudential scheme. DHFS has advised that the scheme is comprised of three tiers: 
- A liquidity requirement for every service provider to ensure that the provider has the capacity to repay 3 or 4 bonds in a very short space of time. This requirement need not be satisfied by a pool of money but could take the form of access to a line of credit.
- There will be an industry owned pool of funds to be used in the event of some catastrophic event. If there is some difficulty and someone cannot pay in the time required by the Act, those funds would be drawn. The creation of the industry owned pool will require a diversion of funds from service providers for a period until the desired level of funds is accumulated. When that level is reached the need to draw further from providers would cease. The amount of the industry owned pool is still unknown.
- There will be a policy of `stop-loss' insurance to cover the event that the aggregate of the pool is exhausted. The Committee has been made aware that the cost of this cover will be met on a flat dollar amount per bed basis.
Exemptions to prudential arrangements
5.14 Church groups have argued that their record of ensuring the protection of entry contributions in the hostel sector coupled with their ability to provide a guarantee of accommodation bonds backed by their substantial resources means that they should be exempted from any insurance scheme.  It is not clear whether they would object to being required to contribute to the industry owned pool.
5.15 The Committee understands that requiring church groups to take part in the insurance arrangements will reduce the overall risk and consequently lower the premium payable by all service providers.
5.16 Anglicare Australia felt that it would be wasteful for church based bodies to take part in a system where they would be financially penalised for doing so.  Anglican Community Services (SA) commented as follows:
Given that the cost of the prudential arrangements will have to be met from monies currently available and used for the provision of care, Anglican Community Services believes that residents currently in organisations which are rated as having low or virtually nil risk in regard to their financial structure and their ability to guarantee the return of refundable amounts should not be disadvantaged by having to share the costs of the higher levels of risk found in other elements of the industry. 
5.17 Community Services Australia (CSA) expressed the view that if the charitable sector was the one which posed the greatest risk there may be some justification for spreading the risk across the industry as a whole. However, they could see no justification for imposing an added burden on the charitable sector in order to improve the profits of the private sector.  The Committee has sympathy with that argument but believes it needs to be balanced by the recognition that smaller non-profit operators (who are not resourced to give the same guarantees as the larger churches) will also be subject to higher premiums as a result of the churches not participating in the scheme.
5.18 CSA said that the Uniting Church was prepared to guarantee absolutely all monies received as accommodation bonds and, on that basis, felt that it should not be forced to pay a premium to insure against risk to the monies. 
5.19 The Australian Catholic Health Care Association (ACHCA) submitted that a precedent for exemption by the Catholic Church from an industry-wide prudential system already exists in the Class Exemption granted by the Australian Securities Commission with respect to the prospectus provisions of the Corporations Law. 
5.20 The Committee received evidence from Anglicare as to a possible compromise under which church groups would take part in the insurance scheme but would not be financially penalised for doing so. This would involve the insurance premium for each service provider being assessed on the basis of real risk factors such as differential management capacities, gearing levels, capital adequacy and liquidity ratios.  The Committee is unsure of the administrative cost of such an arrangement or its impact on the very small non-profit facilities many of which may be located in rural areas.
5.21 The Committee received further evidence from Anglicare that its facilities are separately incorporated and have differing arrangements with their respective dioceses.  Additionally, not all facilities are backed by the Anglican Church.
5.22 The Committee has been made aware that nursing homes and hostels run by the Uniting Church through CSA are backed by the respective assets of the Synod of each State/Territory except South Australia where facilities are separately incorporated.
5.23 ACHCA described the more complex structure of the Catholic Church run or approved nursing homes and hostels.  There are three classes of owners or sponsors Diocesan based, Congregation based or lay organisations such as Southern Cross Homes (SCH) and St Vincent De Paul. In simple terms, the Diocesan sponsored organisations are backed by the assets of the Church whereas the Congregation sponsored and lay organisations are not. However, the Church advised that it may be prepared to back those organisations if appropriate arrangements were put in place for example, the granting of a mortgage in favour of the Church over the assets of the facility.
5.24 The potential uncertainty as to which facilities would or would not be covered by a guarantee by the Church would mean that a blanket exemption from the major churches would not be appropriate.
5.25 The Department has not ruled out the prospect of exemptions. The Bill does provide a power for the Minister to make exemptions and to provide principles on which the Minister would base decisions in relation to exemptions. The Minister has publicly stated that those exemptions will be tightly administered and would be granted only in a case where the exemptee has precisely the same obligations as a person covered by the prudential scheme in terms of obligations on repayment and liquidity. 
5.26 The Committee agrees with the view expressed by CSA and does not believe that the large church groups capable of providing sufficient assurance in respect of their facilities should effectively subsidise the for-profit operators. At the same time, the Committee acknowledges that smaller non-profit homes may be forced to pay higher premiums as a result of the absence of the church groups from the scheme.
5.27 The Committee agrees with the exemption of facilities run by church organisations from the compulsory insurance arrangements. However, the Committee believes it will be necessary to separately consider the relationship between each church based facility and the church to ensure that the facility is properly backed by the church.
Timing of implementation
5.28 Based on the Government's original intention that the accommodation bond scheme would commence on 1 July 1997, concerns were expressed as to whether the prudential arrangements would be in place by that date and if so, whether they would be compromised as a result of the haste.  The Minister subsequently announced that the implementation of the Bill will commence on 1 October 1997. The Committee believes that the prudential arrangements need to be in place by the commencement date failure to do so will result in great uncertainty for prospective care recipients. As noted earlier, the Committee believes that it is imperative that older people have complete confidence in the prudential arrangements that are implemented. It is not certain whether, if the prudential arrangements are not in place by the date on which the Act commences, the payment of bonds will be somehow delayed or suspended until those arrangements are in place.
5.29 The Committee understands that the User Rights Principles relating to prudential arrangements will not be released until June. The Committee's ability to comment more fully on the proposals for prudential arrangements has been limited by the lack of detail on anything other than the most bare framework of the proposed arrangements.
The Committee believes that prudential arrangements are essential to ensure the complete protection of accommodation bonds which is critical to the confidence of care recipients in the accommodation bond scheme.
Recommendation 23: The Committee recommends that the requirement for prudential arrangements relating to accommodation bonds, as contained in the User Rights Principles, should be incorporated into the principal legislation.
Recommendation 24: The Committee recommends that the prudential arrangements should:
(i) provide an unconditional assurance that the balance of the accommodation bond is able to be refunded in accordance with the provisions of the Aged Care Bill 1997 when enacted;
(ii) be able to be complied with at the least cost to providers as possible, so as to ensure that as much of the amount received by way of accommodation bonds can be used for the intended purpose of capital improvement;
(iii) be mandatory for all providers of aged care who receive accommodation bonds, subject to the recommendation in respect of church run and church associated facilities;
(iv) be reasonably straightforward and easily understood by residents and their families; and
(v) be in place at the commencement date of the Aged Care Bill 1997.
Recommendation 25: The Committee recommends that while a blanket exemption for church run or church associated facilities is not appropriate, exemptions should be permitted for these facilities in certain circumstances. The relationship between each church-based facility and the relevant church will need to be considered to ensure that the facility is properly backed by the church before any exemption from the prudential arrangements is granted.
Recommendation 26: The Committee recommends that a review of the prudential arrangements including the mechanism for granting exemptions should be undertaken every 12 months for the first 4 years. The review should incorporate an actuarial assessment of claims records.
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 Transcript of Evidence, p.249 (DHFS).
 Submission No.94, p.56 (DHFS).
 Exposure Draft Aged Care Bill 1997 Principles, p.278.
 Submission No.58, p.28 (APSF); Submission No.65, p.11 (COTA).
 Funding and Other Implementation Issues Working Group, Initial Report, January 1997, pp.9-10.
 As examples, Submission No.24, p.7 (NSW College of Nursing); Submission No.9, p.9 (NANHPH); Submission No.56, p.24 (ANHECA); Submission No.65, p.11 (COTA).
 Submission No.54, p.5 (Resthaven); Submission No.55, p.4 (SCH Tasmania); Submission No.60, pp.19-20 (ACA).
 Funding and Other Implementation Issues Working Group, op.cit., p.10.
 Submission No.56, pp.24-5 (ANHECA).
 Steps to Better Care: Implementation of the Government's Residential Aged Care Structural Reform Package, Statement by the Minister for Family Services, 10 February 1997, p.7.
 Submission No.94, p.57 (DHFS).
 Transcript of Evidence, p.291 (DHFS).
 Submission No.62, p.7 and Transcript of Evidence, p.78 (Anglicare Australia); Transcript of Evidence, p.172 (CSA); and Submission No.38, pp.26-27 (ACHCA).
 Transcript of Evidence, p.78 (Anglicare Australia).
 Submission No.57, p.5 (Anglican Community Services SA).
 Submission No.66, p.20 (CSA).
 Transcript of Evidence, p.172 (CSA).
 Submission No.38, p.26 (ACHCA).
 Transcript of Evidence, p.76 (Anglicare Australia).
 Transcript of Evidence, p.81 (Anglicare Australia).
 Submission No.38, pp.26-27 (ACHCA).
 Transcript of Evidence, p.292 (DHFS).
 Transcript of Evidence, p.134 (ACA); Transcript of Evidence, p.170 (CSA).