The Royal Commission into Aged Care will resolve once and for all the debate about staffing ratios. It is imperative that the Commission identifies appropriate minimum standards of care. It is equally imperative to broaden their scope to identify who pays what for care now, and who should pay what in the future.
Resident contributions system is broken
The current means testing arrangements use a complex formula combining an income and asset test to determine the resident’s liability to contribute to the cost of their accommodation and care. While on the surface this seems fair, the reality is that the current means test protects the very poor and the very wealthy, leaving those in the middle to pay the most.
The formula used to calculate someone’s liability to contribute towards their cost of accommodation and care involves a combination of an income test and an asset test:
- 50c per dollar of income above $26,985 (single) $26,465 (couple), plus
- 5% of assets between $49,000 – $166,707, plus
- 1% of assets between $166,707 – $402,122, plus
- 2% of assets above $402,122
A few important aspects of the means test are:
- The former home is exempt if a protected person is living there.
- When the former home is assessed, it is assessed up to a capped value of $166,707.
- Any amount the resident pays as a lump sum accommodation payment is included in the asset test.
- The resident cannot pay more than their cost of care.
- There is an indexed Annual Cap of $27,232 and a Lifetime Cap of $65,357 (which includes any amount paid as an Income Tested Care Fee in a Home Care Package).
How the means test works
Every resident can pay the basic daily fee, set at 85% of the age pension, currently $51/day. In addition to the cost of care, residents still have personal expenses including telephone, medications, clothing and travel, as well as any extra or additional services provided by the facility.
At the fully subsidised end is Tom, a full pensioner with $40,000 of assets. Tom pays the Basic Daily Fee and the government pays the facility an accommodation supplement up to $57/day to cover the cost of his care.
Three examples of means testing
1. At the low means end, Shirley is a full pensioner with $90,000 in the bank and $5,000 of personal assets.
Based on Shirley’s assets, her Daily Accommodation Contribution (DAC) is $22.11/day. The lump sum equivalent (Refundable Accommodation Contribution or RAC) is $135,067. The RAC is calculated at the government-set interest rate, currently 5.96%/year. With $95,000 of assets, Shirley cannot afford to pay by RAC alone but she can pay by combination. If she pays $40,000 towards her RAC, her DAC will reduce to $15/day. After meeting her cost of care, she has less than $2/day for personal expenses or will need to dip into her $50,000 of remaining capital.
2. Don is a part pensioner. He has $190,000 of investments and $10,000 of personal assets. Because his assets exceed $166,707, his accommodation payment is based on the market price set by the aged care facility. If Don lives in a capital city, the Refundable Accommodation Deposit (RAD) could easily be $500,000 or more.
If Don moves to a facility with a RAD of $500,000, paying $100,000 towards his RAD, his daily accommodation payment (DAP) will be $65.31/day. Combined with the basic daily fee, his cost of care will be over $42,000/year. Don’s income is just $26,000/year so he will either dip into his remaining investments to meet his cash flow or deduct his DAP from his RAD (an option available to all residents). If Don chooses this option, which would ease the pressure on his cash flow, his DAP will increase each month as his RAD reduces and in less than 5 years his RAD will be exhausted.
3. At the other end of the spectrum is Dot, a self-funded retiree with a home worth $1 million, $1.5 million of investments and $50,000 of personal assets. She is also moving to a facility where the RAD is $500,000. She pays her RAD in full, from her investments.
If Dot keeps her home, it will be assessed at the capped value of $166,707 and she will pay a means tested care fee of $85/day. After 320 days, she will reach her annual cap and stop paying this fee for the remainder of the year and in 2.5 years she will reach her lifetime limit of $65,000.
By keeping her home Dot’s Means Tested Care Fee is around $90/day less than if she sold it.
If all three retirees live out their lives in aged care, Shirley, as a low means resident, will have just $2/day to cover her living expenses or will need to dip into her limited capital. Dot will keep her $1 million home, $1 million of investments and $50,000 of assets, and her $500,000 RAD will be refunded after she leaves care. She will pay the lifetime limit of $65,000 toward her cost of care. Don, meanwhile, will have lost the entire $100,000 of his RAD within five years. He may still have some investments left, but like Shirley he has needed to draw on his assets to meet his cost of care.
The outcome of the Royal Commission will undoubtedly recommend changes to the cost of providing aged care. The next step will be to ensure that the means testing arrangements share that cost in a way that is equitable.