Chapter 4


Chapter 4

Residential aged care

4.1         Residential care services provide accommodation and support for people who can no longer live at home. This Chapter provides an overview of issues raised throughout the course of this inquiry into the proposed changes to residential care under the Living Longer, Living Better (LLLB) aged-care reform.

The new pricing paradigm

4.2        Under the proposed amendments to the Aged Care Act 1997 (Act), residential care recipients may incur three kinds of costs:

  • a basic fee of up to 85 per cent of the single basic pension;
  • means tested accommodation payments;
  • means tested care payments; and if applicable
  • other amounts agreed between the care recipient and the approved provider, such as the Extra Service Fees.

4.3        Changes are also proposed to the arrangements through which residential care providers can collect and retain fees, as well as the purposes for which capital can be utilised.

Means tested accommodation and care fees

4.4        Aged care residents will be required to pay a fee of no more than 85 per cent of the single basic pension. At the present time, this equates to $15 364.[1] In addition, care recipients with income above the maximum income for a full pensioner and assets exceeding the asset free threshold will be required to pay means tested care and accommodation fees.[2] These fees will reduce the amount the government contributes to the cost of the resident's aged care services.[3] A resident's mean tested contribution will first be distributed towards accommodation costs. After the full cost of accommodation is paid, the remaining means tested contributions will go towards the cost of care.[4]

4.5        It is intended that a person's income will be calculated according to the rules applied by the Department of Human Services for pension purposes.[5] The method of calculating the value of a person's assets would be based on criteria in section 44–10 of the Act, but the existing test would be modified. Chiefly, refundable deposit balances will be considered an asset, and houses that are not occupied by a 'protected person' will be included in the asset test up to a maximum value determined by the Minister. The asset test will also be applied with reference to the Subsidy Principles rather than the Residential Care Subsidy Principles as is currently the case.[6] The Explanatory Memorandum to the Aged Care (Living Longer Living Better) Bill 2013 states that the inclusion of refundable deposit balances is consistent with the current treatment of accommodation bonds.[7] The government has indicated that, at present, it is intended that for the purposes of the asset test the value of a person's house will be capped at $144 500.[8]

4.6        For persons whose income and assets exceed the minimum levels, the maximum means tested contribution will be:

  • 50 per cent of income above the income threshold; and
  • 17.5 per cent of the value of assets between $40,500 and $144,500; and
  • 1 per cent of the value of assets between $144,500 and $353,500; and
  • 2 per cent of the value of assets above $353,500.[9]

4.7        The government subsidy will be reduced by this amount. Service providers may recover that reduction by charging residents by up to this same amount. There are further effects on the calculation of subsidies and care fees in cases where a resident is eligible for supplements such as respite supplement, dementia supplement, or veterans supplement.[10]

4.8        Residents will not be required to pay a means tested fee, and will not have their care subsidies reduced, if their means test amount is equal to or less than their accommodation supplement.[11] Means tested care fees will also be capped at the lesser of an annual and lifetime amount determined by the Minister[12] or the actual cost of the resident's care.[13] Currently, it is proposed that the means tested care contribution will be capped at $25 000 per year, and not exceed an accumulated total of $60 000.[14]

Accommodation and hardship supplements

4.9        Proposed section 44–28 would establish the eligibility criteria for accommodation supplements. Notably, the Minister has discretion to determine supplement amounts according to the income of the care recipient, the value of assets held by the care recipient, the status of the residential aged care facility, or any other matter specified in the Subsidy Principles. The Explanatory Memorandum to the Bill notes that this is intended to allow the Minister to provide higher supplements for new or significantly refurbished aged care residential facilities.[15] The Department advised that this capacity to adjust payments is designed to encourage investment in residential aged care facilities.[16] The Minister would also be authorised to vary the supplement to reflect a residential aged care recipient's means.[17]

4.10      An aged care residential recipient would be eligible for an accommodation supplement if also the subject of a financial hardship determination. Pursuant to proposed section 52K–1, the criteria for determining financial hardship status would be established under the Fees and Payments Principles. An applicant would have 28 days in which provide any additional information requested by the Secretary of the Department. If the additional information is not received within this time, the application for financial hardship status would be taken to have been withdrawn.[18]

Residential care providers–collection and retention of fees

4.11      The Aged Care (Living Longer Living Better) Bill 2013 contemplates comprehensive changes to the aged care pricing structure and payment framework.

4.12      Proposed Division 52–G of the Bill would impose a ceiling on the cost to residents of refundable accommodation deposits (RADs) and daily accommodation payments (DAPs). In particular, proposed section 52G–2 would prohibit residential aged care providers from charging an accommodation payment for respite care, and for residents with a means tested amount less than the maximum accommodation supplement the person would be eligible to receive. Further, proposed section 52G–2 would limit the amount that could be charged. An accommodation payment could not exceed the maximum amount determined by the Minister or approved by the Aged Care Pricing Commissioner.

4.13      Under existing arrangements, aged care recipients living in residential care may be charged an upfront accommodation bond (or lump sum) if they are entering low care or an extra service place. There is no fixed amount for a bond. The amount of the bond is to be agreed between a resident and the approved provider (as part of a bond agreement) but cannot be of a value that would leave them with less than 2.25 times the basic pension amount (minimum permissible asset value). Residents can choose to pay a bond via a lump sum; periodic payment (fortnightly or monthly) or a combination of both. The bond balance (i.e. the bond minus retention amounts and any other allowable deductions) must be refunded to the resident or their estate when they leave the aged care home.[19]

4.14      The current arrangements permit aged care providers to collect retention amounts from bonds and to earn income from the bonds through investments. There is no restriction on the use investment income, however, by law a provider can only use the bond itself for the following purposes: capital expenditure, refunding bonds, refunding debt accrued for capital expenditure and refunds, investment in particular financial products and loans for capital works or investment in particular financial products.[20]

4.15      If a resident is entering high care under the current system they are not required to pay a bond but may be asked to pay an accommodation charge, which is a daily charge fixed from the date of entry into care and approved by the Department based on an asset test.[21] People receiving respite care do not have to pay any accommodation charges or bonds.

4.16      The proposed changes to how care recipients in residential care pay for their aged care would only apply to those who have the capacity to contribute to the cost of their accommodation. Those with low means would have their accommodation costs met by the Government in part or in full via the accommodation supplement.[22]

4.17      From 1 July 2014 there would be three types of payments a residential care provider may receive towards the cost of accommodation, determined by the resident’s means. These are:

  • Accommodation supplement: This is a Government contribution toward the cost of accommodation for residents with low means.
  • Accommodation contribution: This is an amount paid by residents who can afford to pay some of the cost of their accommodation, with the difference paid by the Government in the form of an accommodation supplement.
  • Accommodation payment: This is an amount paid by residents who are able to meet their accommodation costs.[23]

4.18      Those residents making an accommodation contribution or accommodation payment would be able to pay for their accommodation by periodic payment, known as the Daily Accommodation Payment (DAP), by lump sum, referred to as a Refundable Accommodation Deposit (RAD), or through a combination of both.[24]

4.19      Equivalent RAD and DAP prices would be able to be determined using an interest rate up to the maximum permissible interest rate (MPIR).

4.20      Under the reforms, and in line with the proposed removal of the low care/high care distinction, there would be opportunity for RADs to be paid by residents entering what is currently high care, This means there would be an additional 94,000 places for which RADs would now be able to paid.[25] People receiving respite care will continue to not have to pay any accommodation fees.

4.21      Under the proposed legislation the maximum amount of a RAD that a resident would be required to pay must leave the resident with at least the minimum permissible asset level (currently $41,500).[26] Daily Payments would be able to be paid by the resident from external sources or can be drawn down from a RAD that the resident has paid to the provider. In this case the provider could increase the DAP by an amount that compensates for the impact of the decreasing RAD balance.[27]

4.22      A RAD would able to be used by the provider in substantially the same way a provider is currently permitted to use bonds with the proposed addition of the following permitted uses under the User Rights Principles 1997:

  • Loans made for the purpose of refunding accommodation bond balances or entry contribution balance;
  • Loans made to repay debt accrued for the purposes of capital expenditure or refunding accommodation bond balance; and
  • Investment in Religious Charitable Development Funds.[28]

4.23      There would also continue to be no restrictions on the use of income derived from investing refundable deposits, accommodation bonds or entry contributions, however, the collection of retention amounts from the bond or RAD will no longer be possible.[29]

4.24      Under existing arrangements, residential aged care providers may deduct what is called a retention amount from accommodation bonds for residents who enter into low care or extra service aged care. While residential care providers have discretion to determine the fee deducted, this bond retention amount cannot exceed government specified caps. A retention amount may be deducted from an accommodation bond for a maximum of five years, which generally commences on the day the resident enters the aged care facility as a permanent resident.[30] Since July 2012, the maximum retention amount for residents whose bonds are above approximately $39 000 is $323 per month. It is less for those with smaller bonds.

4.25      Under the proposed changes to Australia's aged care system, residential care providers would no longer be able to charge a retention amount. Consequently the only deductions that can be made from RADs are those made with the resident's agreement. Providers will be able to retain interest earned on RADs.[31]

4.26      Residential care providers would be required to enter into an accommodation agreement with the proposed care recipient before, or no later than 28 days after, the person enters residential care.[32] Proposed section 52F–2 would also specify the matters that must be included in an accommodation agreement. Accommodation agreements would be required to include a clause that 'within 28 days' after entering the residential care facility, the recipient must choose the method of paying for their accommodation. The recipient would have a choice between a DAP, a RAD or a combination of both. Before the election is made, residential care recipients will be required to pay a DAP. If after 28 days the care recipient has not made an election, by default the care recipient will continue to pay a DAP.

4.27      All providers would be required to set their accommodation prices according to the Accommodation Pricing Guidelines and requisite Principles under the Act. Providers would also be required to publish their accommodation prices, however providers and residents may agree to an amount less than the published price as part of an accommodation agreement.[33]

4.28      The proposed accommodation payment arrangements would only apply to residents entering on or after 1 July 2014. The arrangements for existing residents continue under their old provisions, unless the resident re-enters care after leaving care for a period of 28 days or more, or if they move facilities and decide to enter under the new arrangements.[34]

4.29      Consumer groups such as COTA and NSA were very supportive of the payment provisions in the proposed legislation:

Consumers strongly support the LLLB provisions that provide for real choice of method of payment for accommodation between periodic payment, a refundable lump sum, or a mix of both; and also the requirement to publicly advertise accommodation rates - both periodical payments and lump sums. Consumers strongly object to the current system where the price is often set based on the consumers' total assets. This has led to cherry picking consumers based on the amount they can afford to pay.[35]

Residential providers' concerns of the proposed new pricing arrangements

4.30      Residential providers noted several areas of concern with the proposed introduction of a new pricing framework. These concerns included a proposed ceiling on DAPs and the possible flow on effect to the value of RADs; the risk of care recipients moving from RADS to DAPs; the necessity of prohibiting bond retention and the 28 day requirement. Some providers argued that these matters would have an effect on the means by which they could remain commercially viable and restrict the funding available for aged care infrastructure. This was of particular concern for low care-only providers, providers in rural and remote areas and small providers where values of bonds are already considered relatively low and there are ongoing difficulties in maintaining a financial base for development and refurbishment of infrastructure and beds.

Restrictions on RAD and DAP fees

4.31      Throughout a significant portion of this inquiry it was proposed by the government that DAPs would be split into three levels:

Level 1 extends from $0 to the maximum amount of the Government accommodation supplement. This is $50 per day in 2012 prices and is indexed. The equivalent Refundable Accommodation Deposit is $238,845.

Level 2 ranges from the Government accommodation supplement to $85 per day and will be indexed. The equivalent Refundable Accommodation Deposit is $406,037.

Level 3 prices are all amounts above Level 2 and must be pre-approved by Government.[36]

4.32      A number of providers expressed the view that setting an effective ceiling of $85/day on DAP would be uncommercial and many were quite strong in their assessment of the effect this would have, with Vasey RSL Care Ltd stating that the pricing limits are a 'recipe for disaster' and would remove 'much of the mechanisms of a free market'[37] whilst the National Presbyterian Aged Care (NPAC) Network saw them as 'counterproductive in restricting providers unnecessarily from setting fee levels which allow development of new residential care facilities'.[38]

4.33      Throughout a significant portion of this inquiry it was proposed that equivalent RAD values would be calculated from anchored DAP values using an interest rate up to the maximum permissible interest rate (MPIR).[39] There was strong concern that as a consequence of this methodology the equivalent RAD value would also be limited compared with what could be achieved under the current system or even the value that could have been achieved under ACFA draft recommendations.[40]

The decision by the Minister to not accept the recommendation of the Pricing Commission relating to accommodation payments and to “with a stroke of a pen” reduce the maximum Level 2 price to $85/day – effectively $406,000 against their recommendation of $500,000 is of great concern.[41]

4.34      Many providers felt that under the proposed system RADs would also be subject to 'volatility' to the extent that it would 'bear no relationship to the cost of accommodation.'[42]  Much of this concern stemmed from the fact that a quarterly determined Maximum Permissible Interest Rate (MPIR) as opposed to a Weighted Average Cost of Capital (WACC) would be used in combination with the anchored DAP value to calculate the RAD.[43] This generated significant concern that with a anchored DAP, fluctuations in the MPIR would result in unmanageable and more frequent fluctuations in the value of RADs.[44]

In particular we raise concern over the proposed method of calculating the equivalent Refundable Accommodation Deposit (based on the Daily Accommodation Payment and the Maximum Permissible Interest Rate.) This method will lead to significant fluctuations in the Refundable Deposits over time with changes to the interest rate possibly leaving the provider to make up losses incurred when one resident leaves and the new resident arrives under a higher interest rate scenario. This will cause uncertainty to cash flows and funding for infrastructure.[45]

The proposal to adopt DAP as the primary price reference has the unintended consequence that in a rising interest rate environment, RADs will reduce and DAPs stay fixed which will further exacerbate a provider’s liquidity shortfall in the event that consumers elect to shift to DAP from RAD...[46]

4.35      In contrast some providers perceived the proposed controls on DAPs and RADs were a positive factor in in that the relative wealth of the consumer would not be an allowable factor in determining accommodation prices:

We also support Daily Accommodation Payments (DAP) and Refundable Accommodation Deposits (RAD) being introduced and being based on the quality of the accommodation provided, not the assets of the individual (as used by some Providers in assessing accommodation bonds).[47]

4.36      This perspective was shared by the Department of Health and Aging (the department) who explained that the change to the pricing structure is intended to promote fairness, by ensuring that client costs are based on the services provided rather than a resident's financial status: 

The system will move from one where the value of an accommodation bond varies depending on the means of the prospective resident, to one where it is based upon the value of the accommodation on offer.[48]

4.37      It was noted by the department that at the core of much of the confusion and angst surrounding the new DAP and RAD measures was the fact that that some submitters[49] were erroneously treating the ceiling on daily accommodation payments as effectively being a cap or limit. The existence of a cap was refuted by the department:

Some submissions have suggested that there is a cap on the size of accommodation payments, implying that prices above a certain level cannot be charged.

There is no ‘cap’ on accommodation payments.[50]

4.38      The department likewise rejected claims [51] of a cap on RADs or lump sum payments:

...lump sum payments (known as refundable accommodation deposits) will be able to be charged at any level provided the price has been set in accordance with accommodation pricing guidelines...[52]

4.39      The department went on to explain that providers could apply for Level 3 pricing, in line with the proposed Fees and Payments Principles, if they felt they needed to exceed the $85/day DAP ceiling:

Prices of up to $85 per day can be charged on a self-assessment basis, in accordance with the accommodation payment pricing guidelines. Providers wishing to charge in excess of $85 per day can charge that price if approved by the Aged Care Pricing Commissioner. The criteria for assessing applications have been set out in the draft accommodation payment pricing guidelines. Consultation on the draft accommodation payments guidelines closed on 1 May 2013. Feedback was received from industry groups, consumer groups, advisory bodies and both not for profit and for profit providers. The Government is now considering comments received.[53]

4.40      In their response to the influence of the MPIR, the department indicated that 'the methodology and use of the MPIR was recommended by the Aged Care Financing Authority after consultation with industry' as it 'broadly reflects the treatment of a lump sum payment as unsecured finance' and 'creates a relationship between accommodation payments and the financial market.'[54] The WACC was seen to not be applicable in these circumstances as it 'varies between businesses' and 'is not a fixed rate across industry.'[55]

4.41      In response to concerns in relation to volatility the department indicated that over the longer term the MPIR would 'move in both directions' which would result 'in RAD values that will also rise when interest rates fall.'[56] They also stated that a variable MPIR could be counteracted by adjustments to the DAP. They stated:

...that there is significant flexibility under the announced methodology to moderate the impact of changes in the MPIR by adjusting the DAP in response to interest rate changes. This allows the provider to maintain a desired RAD value, or mitigate movements.

For example, on 1 July 2014 a provider may publish a DAP of $50 with an equivalent RAD of $238,845 (based on the December 2012 MPIR of 7.62%). On 1 October 2014, the MPIR may rise to 8%. If the provider chooses to keep their DAP at $50, the equivalent RAD becomes $227,500.

However, under the current methodology, the provider is also able to retain their RAD at $238,845 by adjusting their DAP to $52.49.[57]

4.42      The Aged Care Financing Authority (ACFA) examined the issue and consulted with stakeholders. It reported:

The dependency of the industry on funding by bonds (RADs) is causing alarm amongst sections of the industry and financiers as to the consequence of a potential net drop in the level of such funding. Although DAPs and RADs are by calculation financially equivalent, providers are not indifferent to the consumers’ choice. This is because DAPs impact revenue and profitability, whilst RADs provide cornerstone balance sheet funding and access to interest receipts thereon and for bonds received prior to 30 June 2014, retention income for up to five years.

ACFA commissioned KPMG to undertake scenario modelling to provide estimates of the possible impacts from each of the pricing and method of payment changes in the currently different low and high care sectors. At an aggregate industry level, a net fall in RAD funding appears unlikely. However at a facility or provider level, short and medium term changes may cause transitional funding contractions that may not be easily replaced by incremental third party debt or equity contributions.[58]

4.43      In response to concerns from the sector, ACFA recommended some changes to the way in which providers could calculate the value of DAPs and RADs.[59] In undated correspondence to ACFA the Minister has indicated that he will accept a number of their recommendations including:

That for a transition period until 1 July 2017, and subject to the outcome of the review described in recommendation 3, the equation using the MPIR as “conversion factor” be anchored in the RAD so that providers can determine a RAD price and then convert that to a DAP price based on the MPIR. The DAP price would then adjust each quarter with movements in the MPIR with the RAD price remaining constant. From 1 July 2017 the anchor point would change to the DAP with the RAD adjusting with movements in the MPIR, subject to the findings of the review. As already announced both RAD and DAP prices and combination options would need to be published by the provider.[60]

4.44      As a consequence of this proposed change in methodology the previously indicated levels of DAP/RAD pricing could be impacted as could the process involved in determining Level 3 pricing approvals. The correspondence from the Minister to ACFA has indicated that the impact on the pricing approval process will be considered as part of the process involved in finalising the Accommodation Pricing Guidelines.[61]

Committee View

4.45      Evidence before the committee highlighted that there is significant concern among stakeholders about the implications of the new funding arrangements on their provision of services, especially in relation to regulation of DAP and RAD values. The committee recognises that for some providers the proposed changes may initially necessitate changes to their existing business model.

4.46      While remaining cognisant of the concerns of some providers, the committee believes that these measures are consistent with the objective of increasing transparency and equality within the aged care pricing system,[62] and that at least some of the concerns were based on the superseded pricing model initially proposed by the Department, as well as misapprehensions about how the system will operate. The committee believes the review by ACFA, and the Minister's positive response, will alleviate some key concerns.

Movement from RADs to DAPs

4.47      With consumers being offered more choice in terms of how they could pay their accommodation fees and with significant changes to the means testing arrangements proposed, concerns were raised about the impact of potential movement by consumers to a DAP as opposed to a lump sum payment in the form of a RAD. It was thought that many consumers would find such an option more financially viable, to the detriment of the providers. In the absence of indicative financial modelling, ANZ argued:

A significant shift from RAD to DAP would potentially have adverse consequences for the financial viability of many providers as well as curtailing investment appetite...if $12 billion of RADs were replaced tomorrow by $12 billion of DAP, it is estimated that an equity gap of around $5 billion would exist in the industry...It is unlikely that providers have access to such equity pools.[63]

4.48      Catholic Health Australia drew on the Productivity Commission report to illustrate their concerns with relation to a potential loss of lump sum payments

The Productivity Commission’s report noted that a significant shift to daily payments by new residents could pose a liquidity risk for providers whose balance sheets are heavily leveraged on lump sum payments, at least for a transition period, because withdrawn lump sums that are not replaced would need to be refinanced. In some cases, this could lead to loan covenants being compromised, with implications for ongoing operations. Some financial institutions have also informally noted that the sector and the financial markets are not mature enough to assemble the capital required for the expansion of services without a significant injection of capital through refundable deposits.[64]

4.49      It was also suggested that these changes were a push to see RADs permanently replaced by DAPs in order to reduce the 'potential contingent liability' faced by the Australian Government:[65]

The measures are also intended to encourage a transition from lump sum deposits to annuity payments (effectively rent) to reduce the Government’s exposure to bond payment defaults.[66]

4.50      The department rejected the implication of a policy change in this direction, stating:

The reforms enabling consumer choice of payment method are not designed to reduce the Government's potential bond liability but instead reflect the policy view that individuals should be able to choose a payment method that best takes into account their own personal circumstances and preferences - a significant and important policy objective of the reforms. In fact modelling by KPMG suggests that the total bond liability may grow as a result of the reforms.[67]

4.51      It was acknowledged by the department that there was a possibility that there could be a movement from RADs to DAPs by consumers, which could result in a reduction in RADs, particularly in low care. However they felt that the losses claimed by some submitters were excessive:

The KPMG modelling suggests that there may be a movement of around 33% from bonds to daily payments in low care based on a pure financial consideration of the choice by the individual. This is significantly less than the 60% assumed by the Guild.[68]

4.52      The department also indicated there would be an increase in RADs at the high care end of the spectrum which would counteract any losses experienced in the low care end of the spectrum.

Not only does removing the high and low care distinction allow bonds in high care, it also provides potentially increased revenue in the form of accommodation payments for high care places. For non-supported residents (around 60% of residents) providers will be able to charge an accommodation price based on the value and amenity of the facility, rather than be restricted to the maximum daily accommodation charge ($32.58 March 2012 prices).[69]

4.53      The department referred to KPMG modelling to further illustrate the potential increase in bonds through high care RADs, stating there would be:

...an increase in bonds in high care of $3.4 billion and an increase in revenue of $93 million compared to an estimated decrease in bonds in low care of $403 million and a decrease in revenue of $68 million in low care (not accounting for a potential increase in revenue from combination payments).[70]

4.54      Some submissions suggested that residents who are requiring high care are unlikely to pay a RAD due to expectations of a short time spent in care.

Behaviourally, it is counter intuitive that high care residents will pay RADs - instead it is much more likely DAPs will be paid. High care residents’ typical length of stay is 6 -12 months given higher frailty whereas low care residents who presently pay RAD bonds typical length of stay is 2 -3 years. So the time period available for high care residents to be organised to pay RADs is much reduced compared to current RAD paying low care residents. Further low care residents typically take significantly longer to arrange their entry to residential care (thus greater planning time) given their lower acuity and greater ability to continue residing in the family home. Conversely, high care resident admission is much more event driven (sudden ill health, sub acuity event etc) and planned sale of the family home before admission is much less likely.[71]

4.55      Whilst the department acknowledged that 'stays are on average shorter in high care', they indicated 'the difference is not anywhere as stark as many submissions imply and many high care residents have long stays (e.g. residents with dementia).'[72]

Data shows that the average length of stay in high care is actually 2.7 years (compared to 3.5 years in low care), with 55 per cent of stays being greater than one year (70 per cent for low care) and 40 per cent of stays being greater than two years (55 per cent for low care). Furthermore, when high care residents are eligible to pay an accommodation bond, (i.e.in an extra service place) approximately 93 per cent pay a bond or combination payment.[73]

4.56      The department also informed the committee of other proposed changes which could potentially encourage care recipients to use the RAD option, such as the ability for the consumer 'to make the agreed accommodation payment by drawing down a DAP from a RAD'.[74] They also reiterated that there was a range of existing non-financial factors unique to each consumer that may mean a RAD may be the preferred option independent of any financial advice to the contrary:

...including estate planning considerations as well as the desire to simplify arrangements and personal affairs.[75]

4.57      The department was also concerned at the general perspective taken in a number of submissions in relation to the new payment options:

A number of submissions have raised concerns over the potential financial impact on providers of the new choice of payment rules. These concerns have largely reflected a view that there may be a significant shift from residents paying lump sums to periodic payments and this may affect the funding arrangements for some providers.

These submissions have generally not taken a balanced view. In particular, in considering the drivers of why a resident may choose a lump sum or periodic payment they have tended to not take into account all the factors that will influence an individual’s decision.[76]

4.58      Consumer groups such as COTA and NSA were doubtful that there would be a shift away from RADs but urged monitoring of the situation:

COTA does not think there will be big shift away from RADs in the short term. If it does that will be an expression of consumer preference, which is the purpose of the reform. However this should be closely monitored and government should be prepared to provide bridging finance or loan guarantees as part of an industry adjustment package.[77]

4.59      The department indicated that such monitoring was a key aspect in the implementation of the reforms:

The Government intends to monitor the impact of the reforms and seek ongoing advice from ACFA on the impacts of the reforms on the sector generally and on different parts of the sector.[78]

4.60      ACFA has also stated in its correspondence to the Minister that they will

...examine further the impact of current financial arrangements on capital formation and investor confidence, including superannuation funds, in future annual reports.[79]

Committee View

4.61      The committee has noted the concerns of the industry regarding the possible impact of a large exodus from RADs to DAP. However, the ability for residents to choose payment methods reflects the recommendations of the Productivity Commission to make the system more transparent and ensure appropriate consumer choice.[80] The modelling done by KPMG, an interim report on which was prepared specifically because of the committee's concerns in this area,[81] provides reassurance while also identifying areas for attention.

4.62      The committee considered that modelling and reached a similar view to that of Catholic Health Australia, which in a supplementary submission argued:

...the accommodation payment reforms may pose transitional financial risks for low care and ‘ageing in place’ services, and hence risks for the residents for whom they care, because their business models are based on receiving bonds. Mostly not-for-profit providers share this risk as their resident profiles are often dominated by residents who enter care as low care bond payers who ‘age in place’ for as long as their care needs can be safely met.[82]

4.63      The committee notes that the Productivity Commission was aware of the potential need for transitional arrangements in some cases:

During the transition period, however, the Commission is cognisant of the liquidity risk to smaller providers from its proposed changes and the possible disruption this might cause to consumers. In this context, a small and targeted assistance package for certain providers could be desirable over the transition period...This is not, however, a proposal to prop up insolvent providers, which have an obligation under corporations law to cease trading.[83]

It recommended some limited transition support:

The Australian Government should provide, during the transition period, capped grants to existing smaller approved residential care providers, on a dollar-for-dollar basis, for financial advice on business planning to assist in assessing their future options.

Subject to an audit to demonstrate solvency, the Australian Government should offer — during the transition period — existing smaller approved residential care providers a loan facility for the repayment of accommodation bonds. The Government should charge an interest rate premium on the facility to discourage its use when private sector options are available.[84]

4.64      The committee believes that the KPMG modelling has begun to quantify and clarify the nature of some of those transitional risks, and recent correspondence between the Minister and ACFA, discussed earlier in this chapter, demonstrates that the government and regulators are alert to many of the issues. It is important that the financing of the sector receive close attention during the transition, because if significant problems arise, they cannot be allowed to continue until the statutory review, that is not due until three years after the commencement of Schedule 1 of the main Bill.

Recommendation 3

4.65      The committee recommends that the Minister direct the ACFA to report regularly to the Minister on the impact of the reforms on providers (for example, the number and distribution of care recipients choosing DAPs and RADs). ACFA's brief should include specific consideration of the impacts on different types of providers (e.g. current low-care-only providers, small providers, and rural providers).

Recommendation 4

4.66             The committee recommends that the Government immediately put in place arrangements to monitor the impact on low care providers, and prepare to make available transitional support along the lines recommended by the Productivity Commission, including support services for providers seeking assistance in transitioning to the new system.

Removal of the option to charge a bond retention amount

4.67      Some residential aged care providers questioned the decision to remove bond retention amounts, arguing that it may make providers less viable and inadvertently raise the cost of accessing care for older Australians.

4.68      The policy was challenged on the basis that it will lead to financial uncertainty for providers. Edgarley Home Inc, South West Alliance reasoned that bond retentions are an integral part of a residential care facility's financial base:

The other point I want to raise is about bond retentions. We believe that they should stay. The reason is that they give us certainty over a period of time: we know over a five-year period we are going to get X amount of dollars.[85]

4.69      The proposal to remove bond retention amounts was further challenged on the basis that it is likely to increase the difficulty for elderly Australians to access the aged care services they need. Some residential aged care providers argued that the removal of the option to retain part of a bond amount, or a RAD, would be likely to increase accommodation costs:

There is also potential that the removal of the bond retention amount will result in higher bond prices, which will make up for lost revenue. From an economics viewpoint this will certainly be the case. We need to ensure that this will not leave residents unable to pay accommodation bonds, particularly those on low-income levels.[86]

4.70      The department acknowledged that a way to make up for the loss of the retention monies would be for a provider to change accommodation pricing at their discretion:

...the removal of retentions does not prevent an aged care home from receiving the equivalent revenue flow from accommodation payments as they do currently, nor does it mean that a resident will have to pay more for their accommodation than they would under the current arrangements...a resident can [now] choose whether they pay that amount by daily payment, lump sum, or a combination of both, including the ability to drawdown the daily payment from the lump sum.[87]

4.71      The department provided an example of how this could work in practice:

Take for example a provider currently charging a lump sum of $100,000 and keeping the full retention amount of $323 per month. The provider could calculate an accommodation price for these amounts in both daily and lump sum terms, which provides an equivalent cash flow, and the resident could choose how they pay.

If paid entirely as a daily payment, the amount for this scenario would be $31.58 (using MPIR as at Dec 2012).

If paid entirely as a refundable accommodation deposit, it would be $150,866 (fully refundable).

The resident can also choose to pay a combination of a refundable deposit and a daily payment. One possible combination would be a $100,000 lump sum (subject to being left with the minimum permissible assets level as is currently the case) and daily payments of $10.65, approximately $323 per month.[88]

4.72      UnitingCare Australia acknowledged that the effects of removing the option to charge a bond retention amount was not as they had first anticipated:

The way that the legislation has been structured it is not as significant an issue as it might have been. It will be more difficult than the current arrangements for providers to enable people to access care, but it can be done. In the scheme of things that is not as significant as we thought it would be. I think it is better that that is put on the table. There have been changes in the way that you can charge for accommodation payments which overcome most of the issues around retention.[89]

4.73      While there will no longer be bond retention amounts, there will remain the capacity to retain interest earned on the bonds, and with median and mean bond values in the sector currently over $200 000[90] this is a significant source of income.

Residential providers' concerns about the 28 day requirement

4.74      Some residential aged care providers expressed strong concern about the requirement to include in accommodation agreements a clause specifying that within 28 days after entering an aged care service care recipients must choose how to pay for their accommodation. As Grant Thornton Australia advised, the requirement was considered a significant departure from current practice:

Currently, residents and providers agree on the basis of payment for accommodation (a lump sum bond or annuity equivalent) before the person enters the facility. Under the proposed Aged Care (Living Longer Living Better) Bill 2013, this decision would be deferred up to 28 days after the person enters the facility.[91]

4.75      Residential aged care providers argued that the requirement was commercially unsound. Multiple aged care providers argued that the capacity to take possession of property before determining whether to rent or to buy is contrary to established commercial practice. Leading Aged Services Australia argued that '[c]ommercial certainty requires that both parties have properly determined the commercial relationship, including mode of payment, before it has commenced.'[92] Similarly, as Mr Ross Johnston, Chairman, Aged Care Guild, hypothesised:

[W]e would be just "Bed for sale", and 28 days after the resident comes in they would tell us how they will pay us. What business operates like that? I do not know.[93]

4.76      Comparing the proposal with residential property transactions, Mr Darrell Clark, General Manager, Parkwood Aged Services Pty Ltd, commented:

An analogy would be the property developer was building some units, he is going to finish it, build it, make it lovely. People are going to move into it, and 28 days after they move in they are going to tell this property developer whether they are going to rent it or buy it from him.[94]

Shepparton Retirement Villages Inc was of a similar view.[95]

4.77      The comparison of the proposed arrangement with the residential property market was common throughout the representations made by residential aged care providers regardless of their location. Representing over 25 aged care residential services in Perth, Western Australia, Mr Geoff Taylor, Director, Aegis Aged Care Group, submitted:

It is uncommercial. We are talking about residences here. If you are looking at a residence with a view to moving in there you have to make a decision on whether you are going to rent or buy it before you move in. You do not make that decision after you have moved in...If they are not making a decision on whether they are going to pay a lump sum or a daily payment until four weeks after they have moved in, and you have a bond to repay to someone going out, then you have a problem.[96]

4.78      It was argued that this apparent deviation from standard business practice would undermine the financial stability of residential aged care providers. Mr Bertram, Shepparton Retirement Villages Inc., advised that the 28 day requirement would lead to a 'cash shortfall' for service providers.[97] Mr Taylor, Aegis Aged Care Group also advised that the requirement would lead to financial uncertainty.[98]

4.79      Such views were not limited to smaller aged care providers, but were held by representatives of larger aged care residential services. Mr Johnston, Aged Care Guild, stated that the 28 day requirement would lead to the following situation:

[Residential aged care providers] would lose control of how we sell our beds...We would lose control of our capital structure, where our cash and assets are; we will have to find this massive cash outflow...it runs the risk that there will be a serious capital outflow.[99]

4.80      Some of the concerns regarding the 28 day rule appear to have arisen due to a misunderstanding of the intended operation of the reforms. For example, it was put to the committee that the requirement would prevent aged care residents from making payments, either through a DAP or a RAD, before the 28 days have expired.[100] This is not correct. It was also suggested that the requirement would allow residents to choose after a 28 day period.[101] Again, the committee understands this is not correct.

4.81      The wording of Bill makes clear that a payment decision is to be made 'within 28 days'. The proposed section requires aged care recipients to be given a window in which to determine their preferred payment method. However, the proposed section does not prohibit payments being made before the 28 days have expired. As the Department advised, section 52F–3 of the Bill would ensure that '[c]are recipients will have up to 28 days after entering an aged care facility to decide how to pay for their accommodation' (emphasis added).[102] The proposed section is directed at the decision about how to pay. However, residents could reach agreement with the provider on payment method at the point of entry, if they have the necessary information available to them.

4.82      Furthermore, the 28 day rule was supported by those advocating for older Australians, with some even calling for a longer decision making period. National Seniors Australia commented that 28 days may be insufficient for persons wishing to sell their home, and accordingly recommended that in such circumstances the timeframe should be extended.[103] Consumer representatives particularly commented on the feasibility of the 28 day timeframe for rural and regional areas. Ms Charmaine Crowe, Senior Policy Adviser, Combined Pensioners and Superannuants Association of New South Wales Inc., advised that a 28 day timeframe would be insufficient for elderly Australians seeking to sell their homes in rural and regional Australia. Ms Crowe advised that 'in reality people are going to need much longer'.[104]

4.83      It was also questioned whether the 28 day timeframe is sufficient for the completion of income and asset assessments. Aged and Community Services Australia advised of reports of 'considerable delays' experienced with government income and asset assessments. It was further submitted that delays can be particularly acute in rural and regional areas.[105]

4.84      In response to submitters' concerns, the Department advised that that there are existing protocols between the Department, the Department of Human Services (DHS) and the Department of Veterans' Affairs for means assessments. Under current arrangements, approximately 97 per cent of means assessments are conducted within 14 days of the date the means test application is received by the DHS. Additional time may be required if applicants do not provide all necessary information. The committee was advised that the proposed income and asset assessments will be conducted according to existing protocols. It is not anticipated that additional time will be required to conduct the assessments.[106]

Committee View

4.85      The committee supports the introduction of a 28 day window in which residential aged care recipients can evaluate which payment method, or combination of methods, is right for them. The new requirement would disentangle the burden of securing needed services from the pressure that can accompany significant financial decisions, particularly where entry into care is unplanned. The window will provide security and certainty for Australians needing residential care, and the necessary space in which to carefully evaluate financial choices.

4.86      Evidence before the committee highlighted that there is confusion among stakeholders about the meaning and effect of the proposed 28 day rule. Two areas of particularly significant confusion were evident. First, it appeared that there is widespread misunderstanding of the application of the 28 day window. It would be contrary to the intent of the reforms were residents to be informed that payments cannot be made before 28 days after entering a residential care facility. Such a system is also unlikely to be inefficient, and carries with it the financial concerns raised by residential care providers. It is of concern to the committee that there is such widespread misunderstanding. It is incumbent upon the department to clarify any misunderstandings of the application of the 28 day rule.

4.87      To this end, the department may wish to revise the Explanatory Memorandum to the Aged Care (Living Longer Living Better) Bill 2013 to expressly state that proposed section 52F–2 would not prohibit residents from commencing payments before the 28 days have passed. Rather, it prohibits residents from being required to commence payments within this timeframe. Similar clarifying statements should be included on the Living Longer Living Better website and any relevant explanatory publications.

4.88      The committee notes concerns, particularly in rural and regional areas, that additional time may be required. However, on the basis of information presented to the committee, there is insufficient evidence to support a legislative change. The committee notes that selling a property is not the only way in which the needed capital could be raised, so the capacity to complete the sale of a residence, even where it is the person's only substantial asset, need not be completed on the 28 day timeframe. Nevertheless, the adequacy and any negative effects of the 28 day timeframe on rural and regional residents should be monitored and considered as part of the independent review of the Living Longer Living Better reforms.

Accommodation agreements and enforcement of financial obligations

4.89      The committee further heard concerns that the integrity of the aged care residential system could potentially be compromised by the introduction of a 28 day window in which clients may determine which payment method to adopt. Put simply, it was argued that the 28 day timeframe would provide clients unfettered access to accommodation but would not impose any obligation for the clients to pay for the accommodation and services received.[107]

4.90      In response to concerns, the committee was advised that the Living Longer Living Better reforms would not change existing debt arrangements. The committee was informed that pursuant to the User Rights Principles 1997, providers may ask a resident to leave the facility if the resident has not paid an agreed fee within 42 days of the due date.[108] However, suitable alternative accommodation must be available.[109]

4.91      Specifically, the User Rights Principles 1997 state:

The approved provider must not take action to make the care recipient leave, or imply that the care recipient must leave, before suitable alternative accommodation is available that meets the care recipient’s assessed long-term needs and is affordable by the care recipient.[110]

4.92      As Ageis Aged Care Group and Parkwood Aged Care Services submitted, it was questioned whether providers could enforce a resident's payment obligations after the 28 day period. Mr Clark, Parkwood Aged Services Pty Ltd, commented:

Residents are going to move in and, after 28 days, they are going to say whether they can or cannot [pay]. In this letter from Mr Butler...he is saying that if they...are going to walk in and, if they do not pay, you are allowed to kick them out. That does not happen. He is saying that in the letter but, in reality, I have never heard of that. It is written there, but I cannot understand how it can be used.[111]

4.93      Ageis Aged Care Services also questioned the practicality of the debt arrangements:

There will be some unscrupulous families who will play it to their advantage and not pay. Then you will be chasing them. Our only right of recourse is if the fees are unpaid for 42 days. You can then ask them to leave but you have to find them somewhere else to go. You are in a no-win situation because you will have these people there who will not pay and cannot be asked to leave. Who else is going to take them if the reason you want to move them on is because they are not paying their fees? It is just inequitable to do this.[112]

Committee view

4.94      The committee notes that there are no substantive changes to providers' capacity to recover debts.

4.95      A few providers appeared unclear about the options available to residential aged care providers to respond to unpaid fees. The committee notes that the concerns expressed with the requirement to determine whether there is existing suitable alternative accommodation were not commonly raised. Further, no data was provided to demonstrate the extent of any problem. On the basis of evidence presented the committee, it is not clear that the concerns are shared across the residential aged care service provider community.

Financially disadvantaged residents supplement

4.96      Currently, the Residential Care Supported Resident Ratio requires residential aged care facilities to ensure that a proportion of their services are provided to supported, concessional and assisted residents. The required proportion varies according to geographic location. At present, the New South Wales Far North Coast has one of the lowest ratio requirements, at 17.10 per cent, while Darwin, Alice Springs and Barkly in the Northern Territory, and the Pilbara in Western Australia are required to have 40 per cent supported residents.[113]

4.97      In its inquiry into the aged care system, the Productivity Commission commented on the arrangement by which a 25 per cent discount to the full rate of the accommodation supplement is applied to facilities that do not have more than 40 per cent supported residents. The Commission recommended that this arrangement be abolished. The Government provided in–principle support for measures to ensure a basic standard of residential aged care for underprivileged Australians. However, the Government did not expressly endorse the Productivity Commission's recommendation. Rather, the Government committed the Aged Care Financing Authority to examine the ongoing appropriateness of the current supported residents arrangements.[114]

4.98      The Government has committed to increasing the accommodation supplement for supported residents. The committee was advised that from 1 July 2014, the Government accommodation supplement paid to aged care providers for supported residents will increase from approximately $32 per day to approximately $52 per day (2012 prices). The increased accommodation supplement will, however, be available only for 'newly built or significantly refurbished services.'[115] Additionally, for non–supported residents, residential aged care facilities would also have the capacity to increase accommodation fees for refurbished facilities.[116]

4.99      The ANZ supported the proposed new accommodation supplement, describing the supplement as 'a plus for the industry'.[117] However, several residential aged care providers speculated that the rules regarding access to the new supplement would negatively affect the industry.

Capacity to attract 40 per cent supported residents

4.100         The 40 per cent requirement was characterised as a potential constraint on industry development.[118] Grant Thornton submitted that the 40 per cent requirement is as inappropriate as it is unrealistic:

Across Australia, there are simply not enough financially disadvantaged people to meet this ratio on a national basis and facilities would be penalised in more affluent areas where there is still demand for services by people with limited financial means. This creates a disincentive to accommodate poorer people who need these services.[119]

4.101         Mr Taylor, Aegis Aged Care Group, also questioned whether the ratio requirement is feasible:

Mathematically, this is not possible. We argued this at the introduction of the Aged Care Act in 1997. If the government is saying that to get the full concessional supplement you need to have more than 40 per cent concessionals, it is not possible for everybody to have 40 per cent concessionals when there is only 21 per cent out there. So you are controlled by what other providers do. In some areas within a region there might be a lot more than 21 per cent concessionals—there might be 30 per cent or 40 per cent—but in other pockets of that region there might be very few.[120]

4.102         Mr Graeme Prior, Chief Executive Officer, Hall and Prior Aged Care Organisation, advised that '[o]f the six in New South Wales only one meets the ratio.' Mr Prior further submitted that the issue is of long-standing:

I have sat in meetings with departmental officials at various times over the last 12 years on this issue. It seems to be an issue that has suffered from an inability to get more traction around the equities or inequities of this issue.[121]

4.103         The committee was also informed that there can be a high degree of reliance on the additional income the supported resident supplement provides:

It is an issue that could lead to the failing, in some cases, of a facility. Your cost structures are set—they are so high—and your funding from the Commonwealth is under very tight formulas and under extreme scrutiny the whole time. This is an area where a facility could fail at some time in the future if it falls beneath 40 per cent and it gets penalised. That happens all the time.[122]

4.104         The residential aged care providers also questioned the rationale behind limiting the supplement to new or significantly refurbished facilities. Shepparton Villages argued that the requirement to significantly refurbished existing facilities before being entitled to access the supported resident supplement was 'too severe and will not provide financial incentives to upgrade and add beds'.[123]

Implications for supported residents

4.105         Additionally, evidence before the committee indicated a reluctance on the part of some providers to continue offering services to disadvantaged clients. As comments by Rose Lodge revealed, it is evident that there is concern within the industry that the contemplated changes to the pricing framework will make offering services to disadvantaged Australians commercially unviable:

The lack of retentions and also the limit on the maximum bond that our facility can charge will require Rose Lodge to look towards more Accommodation payments than it currently takes. The impact upon our community is that there will not be as many available places for financially-disadvantaged residents as we will not be able to cross-subsidise their places.[124]

4.106         UnitingCare Australia also claimed that the reforms may have 'unintended consequences':

The arrangements for “significant refurbishment” may have unintended consequences for services that currently cater for people on low to moderate incomes. The higher accommodation payment and supplement that applies to significantly refurbished facilities provides an incentive to upgrade facilities. While we support the provision of high quality services to all older people regardless of their income and assets, the traditional resident base of these facilities may no longer be able to afford to access the upgraded services. An inability to adapt to the changes may lead to more service failures.[125]

4.107         Such concerns were raised alongside calls for additional support for disadvantaged Australians. It is a platform of the Living Longer Living Better reforms that older Australians 'will be able to get aged care they want and need, no matter where they live and their financial means.'[126] The committee received submissions that, while supporting the objects of the reforms, argued that increased funding is needed to ensure that aged care residential services are in a financial position to provide services to vulnerable Australians. In particular, it was argued that current funding arrangements are inadequate for facilities that provide residential services for homeless Australians.[127]

Committee view

4.108         The committee notes that most of the issues relating to the supported residents supplement are longstanding policy issues in the sector, dating back to the late 1990s, and only indirectly related to the current bills. It notes that the Aged Care Financing Authority has previously considered some matters relating to the refurbishment criteria, and currently has under review the matter of the threshold of 40 per cent supported residents. It understands that the Aged Care Financing Authority is to report to the government on this by the end of 2013, in advance of implementation of the new higher levels of accommodation supplement.

4.109         The committee acknowledges a number of potential issues to which submitters have referred, particularly

  • The 'all or nothing' nature of the 25 per cent discount that takes effect if a facility has below 40 per cent supported residents, with no graduated scales involved; and
  • the possibility that refurbishment incentives could lead to higher fees, affecting accessibility to residents on low to moderate incomes.

4.110         However, given that aspects of both existing and proposed policy are designed to address these kinds of problems; mindful that matters are currently being considered by the Aged Care Financing Authority; and noting that most aspects of this matter lie outside the bills; the committee does not have further comments on the issue.

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