Small steps in the right direction, but not a solution

THE Gillard government's aged-care package contains many desirable initiatives.

A greater emphasis on care at home makes sense, as does the proposed means-testing of home care packages.

Increasing the amount the government pays residential care providers for those residents who cannot meet all of their own accommodation costs is long overdue.

So, too, is the move to abolish the distinction between low- and high-care residential facilities, to harmonise the charging and subsidy arrangements between them and to provide greater support for dementia sufferers, both in residential and home care.

As for allowing all those in residential care the option of buying "extra service", in the form of better meals or more comfortable accommodation, that will eliminate the anomalies that have arisen from the current, rigid distinction between ordinary care facilities and those classified as extra service.

And establishing an independent authority to advise government on subsidies, and to regulate the fees providers can charge, should bring needed transparency and accountability.

There are, however, also important question marks. The Productivity Commission recommended entirely removing entry restrictions (other than those related to service quality), and allowing competition to determine charges. The government has not embraced that and, indeed, is extending price regulation to residential bonds. While it makes sense to regulate bonds for so long as entry restrictions persist, it would have been better to announce a transition to full liberalisation, removing the constraints that have given rise to waiting lists and, in some places, to price gouging.

It is also difficult to justify the priorities the government has set. By far the largest upfront spending will go on aged-care workers, rather than on care itself. While there is a case for increasing pay in aged care, it needs to be linked more closely to real improvements in skills.

Moreover, it would be far more efficient to provide the funding to aged-care providers, as part of the government's daily payments, and let them choose whether to spend it on staff, on labour-saving technology or on improved facilities.

The government's approach will win it plaudits from aged-care unions, and may ease immediate labour force pressures on providers, but comes at the expense of innovation and efficient use of inputs. Ultimately, a large part of the package is about increasing the contribution care recipients make to the cost of their care. As the package provides very little net increase in public spending, most of the planned increase in care will have to be paid for by care recipients, who face increased co-contributions and higher fees and charges.

With a rapidly growing number of couples living into their 90s, a family's aged-care costs, even with the caps the government has announced on recipient payments, could well exceed $100,000 for care alone, with any accommodation outlays on top of that.

That is not inherently undesirable. But it is undesirable that people cannot insure against the risk of having to incur those outlays. With these new co-contributions in place, the rising incidence of dementia, and of other chronic conditions that require prolonged care, exposes us all to the random risk of very high aged-care outlays.

We should be able to insure against that risk, just as we can insure against healthcare costs. Moreover, that insurance could provide a means of ensuring the longer-term fiscal sustainability of aged-care costs, which this package addresses to only a very limited extent. And in the absence of that insurance, differences in co-payments will create incentives for cost-shifting as between the health and aged-care systems.

The proposed reforms make those cost-shifting incentives all the stronger, while doing nothing to facilitate the provision and take-up of aged-care insurance. Yes, they are mainly a step in the right direction, but they are very far from solving the problems.