The primary objective of the aged care reforms that commenced on 1 July 2014 was to “create a better system to give older people more choice, more control and easier access to a full range of aged care services”. From a financial perspective the two major changes were that aged care operators would be required to set and publish the price for every bed in their facilities and the government would conduct a comprehensive means test of aged care residents to determine their capacity to contribute towards their cost of accommodation and care.
Just to recap, the comprehensive means test formula is:
50c per dollar of income above $25,264 per annum (single) or $24,796 per annum each (couple) plus
17.5% of assets between $46,000 – $157,051 plus
1% of assets between $157,051 – $379,154 plus
2% of assets above $379,154.
Where the outcome is less than $53.39 per day the person is classified as low means and the calculated amount is their contribution towards their accommodation. Where the amount is greater, the person needs to pay the facility’s market price and the amount above $53.39 per day is their means tested care fee.
The means tested care fee is capped at $25,529 per annum or the cost of care. There is also a lifetime limit of $61,269 across both home and residential aged care.
Is the new system really fairer?
More than nine months into the new world order we can clearly see what choice and fairer means testing have amounted to. Let’s start with the people the government considers financially disadvantaged, known as low means residents, who have their assets and income assessed based on the following formula:
50c per dollar of income above $25,264 (single) or $24,796 each (couple) plus
17.5% of assets between $46,000 – $157,051
While it may seem fair, let’s look at the financial outcomes of this means testing.
Shirley is a full pensioner with $50,000 in the bank and $1,000 worth of personal effects. As her income is below the threshold Shirley’s Daily Accommodation Contribution is calculated on her assets as follows:
$51,000 – $46,000 x 17.5% = $875 per annum or $2.40 per day
Because all residents have the choice of paying for their cost of accommodation by a lump sum, daily charge or a combination, Shirley can choose to convert her daily charge to a lump sum, known as a Refundable Accommodation Contribution or RAC.
The formula for this is:
$875/6.75% = RAC of $12,963
So even though Shirley’s assessable assets are $5,000 ($51,000 – $46,000) the means testing will say that she can afford to pay almost $13,000.
Let’s look at another example. Jeff is a full pensioner with $140,000 in the bank and $10,000 in personal effects including a car. Jeff is also below the income threshold and so would only have his accommodation contribution calculated based on his assets.
Jeff’s Daily Accommodation Contribution would be $50 per day and the equivalent Refundable Accommodation Contribution would be $269,630! At least Shirley has enough money in the bank, unlike Jeff.
Doubtful consumer protection
The market price obligations have not proven to be the consumer protection measure many people expected either. In a nutshell it’s as simple as ‘if no-one can pay more, no-one can pay less’. Prior to the aged care reforms people could only pay an amount up to their total assessable assets, being left with $45,000. Since the reforms, anyone who is not considered a low means resident needs to pay the market price.
Consider the following example. Jack is a full pensioner living in a retirement village, he will receive $150,000 from the sale of his unit and he has $45,000 in the bank and $5,000 in personal effects. Because Jack’s assets exceed the $157,051 cap he needs to pay the market price.
Jack wants to move to the aged care facility on the same site as the retirement village to remain close to his friends, the market price is $450,000 by Refundable Accommodation Deposit (RAD) or $83.22 per day by Daily Accommodation Payment (DAP).
While in theory Jack has the ‘choice’ of paying by lump sum, daily charge or combination, in reality Jack cannot afford to pay by lump sum alone as he has insufficient assets, he also cannot afford to pay solely by daily charge as his income is not great enough to meet the expense. Jack will need to pay by combination.
If Jack pays a RAD of $154,000 his adjusted DAP will be $54.74 per day, Jack’s cost of care will be:
Basic Daily Fee $47.49 per day
Daily Accommodation Payment $54.74 per day
Means Tested Care Fee $1.18 per day
Out of Pockets $10
Giving a total cost of $41,395 per annum
Jack’s income will be his pension entitlement of $22,365 per annum and interest on his bank accounts (at 3%) of $1,230. Jack will have a cash flow shortfall of around $17,800 per annum.
Jack could elect to have his DAP deducted from his RAD to ease his cash flow shortfall. However, it is important to be aware that when choosing to have the DAP deducted from the RAD a recalculation of the RAD balance and new DAP amount is performed each month, it is like a reverse mortgage in that it is a compound interest debt.
If Jack elected to have his DAP deducted from his RAD his ongoing cost of care would reduce to $21,415 per annum. Now let’s look at what would happen to Jack’s RAD balance. At the end of Year 1 Jack’s RAD balance would be $133,390, at the end of year 3 $87,765 and by the end of year 5 $35,566. As Jack’s assets are depleted his cost of care reduces marginally as his means tested care fee reduces from $1.18 per day to zero.
Prior to 1 July, the aged care facility could have charged a resident with higher means more to enable Jack to pay what he can afford, but like I said earlier, with the market price ‘protection measures’ no-one can pay less because no-one can pay more. The true ‘protection’ that is really being afforded is to people who have assets above the market price, because the market price is a cap that protects them from paying what they can afford.
I don’t think these consequences were an intention of the aged care reforms. The reforms were designed by the Labor Gillard government. But now that we can clearly see the consequences perhaps it is time for the Liberal Abbott government to reform the reforms.
Rachel Lane is the Principal of Aged Care Gurus and oversees a national network of financial advisers dedicated to providing quality advice to older Australians and their families. Read more about aged care facilities in the book ‘Aged Care, Who Cares; Where, How and How Much’ by Rachel Lane and Noel Whittaker. This article is for general educational purposes and does not address anyone’s specific needs.