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Alan Kohler: The complicated, dismal aged-care funding paradox

Last Saturday, on April 1, as the voters in Aston were trouncing the Liberal Party, the interest rate on an unpaid aged-care refundable accommodation deposit (RAD), which used to be called a nursing home bond, increased from 7.06 per cent to 7.46 per cent.

It’s just another consequence of the rate hikes that paused, and may have ended on Tuesday. The aged-care deposit interest rate changes quarterly so Saturday’s might have been the last.

But it has already been a silent killer of family budgets. A year ago the RAD interest rate was 4.07 per cent, so in 12 months the cost of not paying, say, a $500,000 deposit – which is the average size of these things – has increased 83 per cent from $20,350 a year, or $55.75 a day, to $37,300 a year, or $102 a day.

This is a massive, largely hidden, increase in the cost of aged care.

For those who don’t understand the aged-care system, which is just about everybody since it is mind-numbingly complicated, you have three options with the RAD: Pay it in full up front; pay part of it, and pay interest on the amount unpaid; or pay none of it and just pay the interest on the full amount.

(When my mum went into aged care last year, we did option two like a lot of families, since she had some money from the retirement village unit, but not enough to pay the full RAD of $600,000).

For the amount of RAD that’s paid, the operator gets to keep the interest it earns from a strictly controlled list of possible investments. The RAD has to be repaid when the person leaves (or dies) and it is government guaranteed.

Like an inheritance tax

With many families with limited cash resources, the interest on any unpaid RAD is progressively taken out of the paid RAD, effectively reducing any inheritance from the eventual return of it. To that extent, it operates like an inheritance tax.

In addition to the RAD – earnings on paid or interest on unpaid – the operator gets the following payments: A daily care fee (DCF) which is currently $58.98, set at 85 per cent of a single aged pension, excluding supplements; plus an “extra service fee” depending on what extra services might be provided; plus a means-tested Centrelink fee which is capped at $31,700 a year and $76,100 over a lifetime (which is two and a half years, after which it stops), plus a Commonwealth government subsidy.

That subsidy is set according to the level of care the patient is assessed to require, and the current funding model (called AN-ACC) was introduced in October. Under this model, the maximum daily funding rate is $358.41 with the average amount expected to be $225 per resident.

The government picks up the bill for this funding but deducts any means-tested fee paid by the resident. If the resident has paid their lifetime cap, the government picks up the full bill.

So a normal aged-care operator can make $58.98 plus, say, $20 for extra service (Foxtel, etc) plus $102 in RAD interest, plus $225 a day from a combination of the means tested fee and the Commonwealth subsidy.

Total – about $405 a day per resident. And by the way, all of those figures are tightly government-regulated.

It’s an expensive, dystopian nightmare that might have been created by Margaret Atwood working with Heath Robinson.

And the paradox?

If there’s so much money going in from all directions, how come the operators are all struggling, with declining margins and share prices? (Apart from when there’s a takeover offer, as there was for Estia Health a week ago).

AVERAGE AGED CARE MARGIN

Source: Macquarie

It’s simply because costs have been rising faster than revenue, and $400 a day is no longer enough.

Some 70 per cent of aged-care costs are staff, and costs must keep rising because the sector is struggling with staff shortages because they don’t pay enough.

Pay rise for workers

The Fair Work Commission has awarded aged-care workers a 15 per cent pay rise from July 1 this year. Prime Minister Anthony Albanese has said the government will pick up 10 per cent of that, and the industry is now lobbying the government to also pick up the other 5 per cent, desperately hoping it will.

These places are basically hotels with more, better-qualified staff, including nurses and carers, and with all meals provided, plus entertainment, so they are a lot more expensive to run than hotels.

But if you look on Tripadvisor you’ll find that a decent metropolitan hotel – not luxury – is priced about the same as the all-up cost of an aged-care room – $400 a day.

That’s why horror stories frequently emerge in the media, like those that led to the Aged Care Royal Commission: Costs are cut and staff are either thin on the ground or incompetent, or both.

In general, this is a private care industry that is simply not profitable enough, which means the care being provided can never be good enough. That’s partly because, unlike with private hospitals, there’s no specific insurance available that would allow the costs to be shared and equalised.

What’s the solution? Well, obviously someone has to pay more – either the families or the government, but both say they can’t, or won’t.

The government has so many pressures on spending, especially now that it’s spending $368 billion on submarines and the NDIS is blowing out, that there’s no way aged-care subsidies will be increased much, if at all, apart from the 10 per cent promised for the July 1 wage increase.

And the daily care fee paid by families will not go above the pension, in my view, so that families have to chip in with cash from their other income. Some children might be able to do that, but not all, especially at the moment with other cost-of-living pressures.

The only room to move, it seems to me, is the Centrelink means-tested fee, which would apply only to those who can afford it: The means test could be loosened, the annual cap of $34,000 lifted or removed and the lifetime cap of $76,100 removed so the time made unlimited.

Another possibility might be to make the RAD non-refundable, so it becomes a kind of inheritance tax, paid early. I wouldn’t have a problem with that, in principle, but there would have to be a lot of regulation put around it if it’s a tax that goes to private companies.

A final solution

A final solution, of course, would be to simply nationalise aged care.

After all, this is such a tightly regulated and subsidised industry that it’s basically a government-supplied service that uses private capital.

And the capital has to be serviced from profits, raising the cost and therefore the price.

But the idea of having nothing but public nursing homes, with no choice or variety, run by a vast government bureaucracy fills me with dread.

The horror, the horror!

Anyway it will never happen because it would be prohibitively expensive, not to mention prohibitively controversial, to buy all the nursing homes in the country.

But the truth is that nobody is going to pay much more for old people sitting largely unseen in nursing homes watching TV.

So here’s my dismal prediction for the future of aged care: It will keep muddling miserably along, punctuated by lurches of bad publicity and national hand-wringing, with no solution.

(I’m indebted to Rodney Horin and John Rawling of Joseph Palmer & Sons, a Melbourne financial advisory firm specialising in aged-care advice, for help with this column).

Alan Kohler is founder of Eureka Report and finance presenter on ABC news. He writes twice a week for The New Daily

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