With costs of aged care rising, someone will have to pay more

Remarkably low aged care caps are clearly ripe for examination by Treasury in seeking revenue raising opportunities.

For the past few years, financial statistics for the industry have highlighted a steady decline in the profitability of many aged care providers.

The word is out that this year’s federal budget will promise a further $10bn over four years for aged care on top of the $24.5bn funding for 2021-22 included in last year’s forward estimates.

Details are slowly emerging about which recommendations will be the focus of the funding initiatives and we can be sure that growing the skilled aged-care workforce will be one.

So who will pay for the inevitable increases in aged care costs, particularly improving staff-to-resident ratios and improving training?

Staffing costs already comprise more than 70 per cent of operating costs for the aged care industry. These costs will only become greater with called-for pay increases needed to retain existing workers and to attract new workers into the industry.

For the past few years, financial statistics for the industry have highlighted a steady decline in the profitability of many aged care providers.

So they have little capacity to fund the extra costs. It is also unrealistic to think that the burden of funding will fall solely on the government.

At some point, you can expect that residents will be asked to bear their share.

While the current low interest rates have provided the government with the opportunity to increase spending at a relatively low cost, many commentators are speculating as to how the government may attempt to recover some of this expenditure: will it be an increase in the Medicare Levy, a separate levy or some other tax measure? To date, the government has ruled out increasing taxes to fund meaningful reform of the funding burden.

The current aged care funding model was implemented on July 1, 2014. As anyone who has had exposure to the system will tell you, it is very difficult to understand the complexities from a financial perspective.

The means-tested care fee is a fee that many residents pay towards the cost of their personal and clinical care. The amount you pay is determined by an assessment of your assets and income, with the government paying the remaining cost of care.

Currently there are three caps which apply to this fee: the capped home asset value; the annual cap for the fee and the lifetime cap for the fee.

Many in the industry would consider all three artificially low, and they also predominantly benefit well-off residents.

The home valuation cap, no matter how you look at it, has clearly lost touch with reality. Currently, no matter how much a person’s home is actually worth, its assessed value is capped at $173,000 in the means test calculation.

This valuation is completely unrealistic when one considers the average home prices in Australian capital cities are more than $1.2m in Sydney, Melbourne $900,000, Canberra $850,000, Brisbane $600,000, Adelaide $570,000, Perth $560,000, Hobart $530,000 and Darwin $530,000.

People at the lower end of the socio-economic ladder get little value from this cap but people who own valuable houses benefit substantially. A person who owns a multimillion-dollar house and has very few other assets could theoretically be assessed for a very low daily means-tested fee, leaving the government to pick up the majority of the cost.

The annual and lifetime caps that apply to what residents pay for aged care could also be revisited.

Currently the annual cap is $28,338. This means that once a resident has paid that amount during a year, the government pays the balance of the cost of care for the rest of the year. The lifetime cap — $68,013 — represents just over two years of fees at the maximum rate.

Once a resident has paid their lifetime cap for this fee, they will no longer be charged for it and the government picks up the tab from then on, regardless of the resident’s wealth or ability to pay. This can be up to $256.44 a day for a resident with high-care needs ($93,600 a year). Some people live in aged care for many years.

Clearly the government could either adjust these caps to more realistic levels or introduce bands like the personal income tax rates. However, changes to these caps would represent a bold step by the government.

In particular, changing the capped home asset value is something likely to cause much angst with many seniors. But it would buy some time for the government to explore a completely new funding model that would satisfy the needs identified by the recent royal commission.

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