Unfair and inefficient: how Australia funds residential aged care
Published in John Menadue, 13 October 2020
The Royal Commission into Aged Care Quality and Safety has highlighted the tragic weakness of residential aged care throughout Australia. Hundreds of older Australians have died prematurely during the COVID pandemic. For their sake, and ours, this tragedy must prove to be the wake-up call that prompts a major shakeup of the industry.
Some facilities support their residents in an exemplary way, going above and beyond the minimum standards expected of them by the regulator. However, if a US five-star ranking system, based on staffing ratios, was applied in Australia, a minuscule 1.4 per cent of our facilities would get five stars and only another 14.1 per cent would get four. This poor staffing is the underlying cause of many of the terrible stories we have heard via the Royal Commission over the past 12 months.
The Royal Commission has also highlighted another weakness: inequity in the way residential care capital – land and buildings – is funded.
Capital funding for residential aged care is a deceptive game where residents are enticed into giving cheap money to providers, who can then use it to borrow to expand into new facilities and then get more money to expand again.
It’s an inefficient vicious cycle that enables unscrupulous providers to prey on people at their most vulnerable – when a health event, such as a stroke, might mean they fear they have no choice but to enter residential aged care quickly. With no time to shop around, they fall victim to those unscrupulous proprietors’ unctuous blandishments.
This shell game goes by the innocuous title of Refundable Accommodation Deposits, or RADs.
What are RADs and why are they so bad?
RADs are inequitable and inefficient.
Of course, new residential care facilities need to be paid for. The proprietor has stumped up equity or borrowed money to buy the land and buildings. The interest on any borrowing needs to be paid. In other accommodation settings, this would be done through rent. The nursing home equivalent of rent is a government-regulated Daily Accommodation Payment (DAP), which is set based on an assumed interest rate.
Residents can reduce their DAP by depositing a RAD with the proprietor and, as its name implies, this is refundable to the resident or their estate at the end of their time in the facility. However, what is refunded is what was deposited – there is no capital growth so, unlike most other investments, there is no increase over time. Furthermore, the amount offset against the DAP is a mere 4.1 per cent – substantially less than the hapless resident could have earned if they left their money in their superannuation fund or invested it themselves.
The proprietor, on the other hand, can invest the money at a higher return. This gives the proprietor a windfall, and an incentive to exploit a new resident’s vulnerability to maximise the RAD and minimise the DAP component. The scheme is generous to the provider and exposes residents to exploitation.
The provider is not entirely at fault here. The fault lies with government regulating a rate of return for the DAPs and RADs. It becomes an arbitrage game – exploiting differences in the market rates and the regulated rates using financial advisers at 10 paces. The inevitable losers are consumers who have never played in financial markets.
The proprietor can also use RADs as collateral to build more facilities. This encourages more and more residential care, at a time when 100,000 people are waiting for home-care packages. The sector should meet that urgent need, not build more and more COVID-traps.
RADs should be abolished. All residents should pay rent for residential aged care rather than be exposed to this complex, inequitable, and inefficient scheme.
Government should support people with limited means and assets, as it does now. For older Australians with more assets, government should ease the transition into residential care through a HECS-type arrangement, as recently proposed by former Prime Minister Paul Keating, where rental payments can be made by government and recouped from the estate. Government should introduce a scheme to support investment in residential care when necessary through loan guarantees – but guarantees should be available only when the service is needed and the capital proposal involves provision of accommodation for low-income residents.