Aged care prices sink as nursing home losses mount during pandemic

Importantly, aged-care providers only receive funding from the government when rooms are occupied, so for them occupancy rates are crucial.

The COVID-19 pandemic has dramatically altered the landscape in aged care.

From a financial perspective, there are two key development: The prices charged have been cut by about half and the majority of facilities are now making losses.

Many people are delaying entry to aged care until the pandemic is under control, while some families are removing loved ones from aged-care facilities. Tragically, many people in aged-care facilities have died. 

But the fundamentals in terms of demand remain. People are still ageing and many will eventually need to move into aged care.

It pays to shop around and it pays to negotiate.

Many aged-care facilities have empty rooms they wish to fill. Many have lowered the Refundable Accommodation Deposits (RADS, formerly known as accommodation bonds) that they ask for a room — this is where prices have dropped dramatically. 

Falling property prices are also having an impact. As property prices fall, so do RADs. 

The financial worry for many aged-care providers is a net outflow of RADs (mainly refunds to estates) that are not being replaced. Beds are staying empty for longer and vacancy rates are up. 

As a consequence, many aged-care providers are suffering short-term liquidity crises.

It doesn’t help that they are having to pay for the additional unfunded costs associated with the effects of COVID-19, balancing the moral hazards and legal obligations of keeping residents safe without going insolvent.

Aged-care facilities are also charging lower extra services fees because they are unable to deliver services which they committed to in contracts, including outings and many activities.

Complying with the new COVID-19 rules is another added cost. Significant uncertainty will most likely remain in the industry until a vaccine is developed.

Importantly, aged-care providers only receive funding from the government when rooms are occupied, so for them occupancy rates are crucial.

Government funding by way of subsidies and supplements is determined by an assessment of each resident’s ongoing care needs.

This agreement between the government and the aged care facilities is known as the ACFI (Aged Care Funding Instrument) with facilities paid up to $255.72 a day ($93,338 per year) for each high-care resident, up to $149.87 a day ($93,703 per year) for each medium-care resident and $64.01 a day ($23,364 per year) for each low-care resident. 

All residents pay $52.25 a day for a room, which is 85 per cent of the full daily age pension.

They are also asked to contribute to the cost of their care by paying a means-tested care fee; residents are assessed by Centrelink based upon their assets and income to see how much they will pay, with an annual cap of $28,087 and a lifetime cap of $67,410.

Any means-tested care fee paid by a resident is deducted from the government funding for the resident. In the end, the government ends up paying for the vast majority of aged care. 

Aged-care providers receive nothing for empty beds, so they are desperate to fill them. Like other businesses, aged-care providers are adapting, and many are now willing do deals to fill beds.

Earlier this month we found rooms for a husband and wife for a total RAD of $675,000. A year ago this would have paid the RAD for one person. Other groups are offering DAP-free periods.

Daily Accommodation Payments (DAPs) are another way of paying for aged care, where residents pay a daily fee instead of paying a lump sum RAD when they move into aged care. There is a noticeable trend towards residents electing to pay DAPS rather than RADS. Aged Care providers, particularly those that are growing, much prefer RADs than DAPS. 

In addition to falling RADs, another thing in the residents’ favour occurred on 1 July, when the aged-care interest rate — otherwise known as the Maximum Permissible Interest Rate (MPIR) — reduced from 4.89 per cent to 4.10 per cent. The MPIR is reassessed every quarter based upon movements in bank bill interest rates. After hitting a high of 11.75 per cent in September 2008, it has been drifting down ever since. 

The MPIR is the current interest rate used to calculate Daily Accommodation Payments (DAPs). A resident who entered permanent aged care before June 30 who agreed to pay a DAP instead of a RAD of $750,000 is paying $100.48 a day ($36,675 per year). A resident who entering permanent aged care after June 30 is paying DAP of $84.25 a day ($30,750 per year). So the cut in the MPIR means a saving of $5925 per year. 

John Rawling is an aged-care consultant at Joseph Palmer & Sons.