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What to consider when paying for a nursing home

Moving yourself or a loved one to a nursing home can be emotional and difficult. While some have their nursing home accommodation costs fully covered by the government (based on a means test), most will have to pay their own way.

The average lump sum room value is A$334,000. Choosing how to pay can make this time even more challenging, particularly for those with low financial literacy.

This is an important and complex decision. It can affect your income, wealth, means-tested aged care fee, and bequests. Here are some things to consider before you decide.

Three ways to pay

You can pay for a nursing home room in three ways.

You can pay the entire room price as a one-off, refundable lump sum (a “refundable accommodation deposit”, sometimes shortened to RAD). This lump sum is refunded to the resident or their estate when the person leaves the nursing home (if they move or pass away).

The refund is guaranteed by the government, even if a provider goes bankrupt.

People who don’t want to pay a lump sum can instead choose rent-style, “daily accommodation payments” (sometimes shortened to DAP).

These are fixed, daily interest-only payments calculated on the total room price. The rate at which they are calculated is known as the “maximum permissible interest rate” or MPIR.

The maximum permissible interest rate is set by the government and is currently 7.9% per annum. The formula for a daily accommodation payment is (RAD × MPIR) ÷ 365.

Unlike lump sums, daily accommodation payments are not refunded.

The third option is a combination payment. This means paying part of the room price as a lump sum, with daily payments calculated on the remaining room amount. On leaving the home, the part lump sum is refunded to the resident or their estate.

With a combination payment, the consumer can choose to pay whatever amount they like for the lump sum.

The table below shows three different ways someone could pay for a room priced at $400,000.

So which is best? It’s impossible to say. It depends on a person’s circumstances, family situation, finances, preferences and expected length of stay.

Why do some people choose a lump sum?

One downside of a lump sum (or part lump sum) is that choosing this option means this money is not invested elsewhere.

By handing over the lump sum, for example, you forgo returns you could have made by investing this same money into property or stocks over the period of your nursing home stay.

On the other hand, paying lump sum means you get to avoid the daily interest payments (the 7.9% in the table above).

So you could potentially be better off paying a lump sum if you think there’s no way you could make investment returns on that money that are substantially higher than the interest you’d be charged through daily payments.

One advantage of choosing a lump sum is it’s considered an exempt asset for pension purposes; some people may get more pension if they pay the lump sum.

The lump sum, however, does count as an asset in determining the means-tested care fee.

And if you sell your house, remember any money leftover after you pay the lump sum will be counted as assets when you’re means-tested for the pension and means-tested care fee.

Why might some people prefer daily payments?

Not everyone can can afford a lump sum. Some may not want to sell their home to pay one. Some may want to hold onto their house if they think property prices may increase in the future.

Daily payments have recently overtaken lump sums as the most popular payment option, with 43% of people paying this way. However, recent interest rate rises may slow or reverse this trend.

And if a spouse or “protected person” – such as a dependant or relative that meets certain criteria – is still living in the house, it’s also exempt from assets tests for the pension and other aged care fees.

If the home is vacated by a protected person, its value is still excluded from the pension means test for two years (although rental income is still assessed).

If you do not anticipate a lengthy nursing home stay, daily payments may potentially be the easiest option. But it’s best to consult a financial adviser.

What does the research say?

My research with colleagues found many people choose the lump sum option simply because they can afford to.

Those owning residential property are more likely to pay a lump sum, mostly because they can sell a house to get the money.

People who consult financial advisers are also more likely to choose lump sums. This may be due to financial advice suggesting it’s tough to earn investment returns higher than what you’d save by avoiding the interest charged in the daily payment option.

Some aged care providers prefer lump sum payment since they use these to renovate or refurbish their facilities. But providers are not allowed to influence or control your decision on how to pay.

The recent Royal Commission into Aged Care recommended phasing out lump sums as a payment option, leaving only daily payments. While that would reduce the complexity of the payment decision and remove the incentive for providers to sway decisions, it would also reduce consumer choice.

Is there anything else I should know?

Some 60% of people we surveyed found the decision complex, while 54% said it was stressful.

It is best to seek professional financial advice before you decide.

Services Australia also runs a free Financial Information Service that can help you better understand your finances and the payment decision. But it does not give financial advice or prepare plans.

You have 28 days to choose a payment method after admission, and six months to pay if you choose a lump-sum payment.

In the interim, you will be charged daily interest payments on the room price.The Conversation


Anam Bilgrami, Research Fellow, Macquarie University Centre for the Health Economy, Macquarie University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

August 16, 2023

I've waited almost a week to see there is no comment re meals in nursing homes from commentors. That would the first thing I'd investigate-- the quality of. Three meals/day is big proportion of a day's interest for residents. I write as worked as trained cook in 2 different level homes, the first was a happy no -holds- barred in Surrey with everything from lobster to strawberries available daily with super happy residents up & about & eating at table, menu & wine choice like an hotel or served like guests in bed at a 5 star hotel. I've commented before re pureed smoked salmon sandwiches for afternoon tea every bit as good as sandwich you eat as I had to puree and thus tasted. In a lower level home in Sydney I was sacked within 24hrs by Nursing Manager after suggesting I could provide proper home cooked meal at same cost instead of party pies & sausage rolls for dinner 3 nights per week. I kid you not, I was sacked with no notice even though they had no full time day cook I was supposed to cover the next week so that must have meant convenience food meals for at least a week. Suggesting fresh food on same budget for the dinner shifts I worked was my death knell. So I suggest you add asking to stay for a meal before you commit a relative to the home. If they baulk at that, then run. This is from someone who sent fresh Wye salmon weekly to a care home for 2 years as Mother's favourite meal and the home's cook cooked it every Friday for lunch and rang me weekly overseas to say Mother loved it. That is care- home service no matter what the daily cost.

August 16, 2023

"party pies & sausage rolls ... fresh food on same budget":

Difficult finding staff for age care, bottle washers or chef.

Meals are prepared in bulk and sent hundreds of kilometers.

Perhaps you could make a living by developing labour saving, nutritious, affordable meal plans / systems which can adapt to food availability?

August 15, 2023

This is an interesting article. However it only discusses one of possibly three or four different fees payable when a person enters a residential age care facility. Everyone also pays a basic daily fee that is currently $58.98 a day. Most people will also pay a means tested fee, based on their income and assets, and possibly an extra services fee for additional services.

August 14, 2023

John Howard and the Libs made the nursing home industry a big profit seeking venture that drains Australians of their hard earnt savings and nothing left to pass to their children. Nursing homes are now profiteering with cheap overseas third world labour brought in to lower costs and boost profits.

George Hamor
August 14, 2023

Are you suggesting that the taxpayer should pay for your nursing home accomodation so that your children can have access to your assets?

August 16, 2023

George, don't be quick re this when one thinks of those who are cared for in nursing homes with no assets at all. There is no barrier of lack of assets for those who need help in our country. Be grateful we live somewhere that cares no matter what & sometimes the taxpayer does pay but that is what makes us good and hopefully a better place to live. Those who have money pay taxes and it all evens out in the end. L

Philip Rix
August 12, 2023

I enjoyed the way this important issue was explained in the article. I recently navigated this landscape for each of my wife’s’ parents.

Two additional points came to mind. Firstly, when the resident has passed away the retirement home is required to pay YOU (technically the estate) this higher interest rate (MPIR) on the accommodation bond from the date of death up until it is paid out. This is a lot higher than what you could earn on a TD.

Secondly, and I think this is the most important point, in addition to daily care fees there are also additional charges for ‘extra services’ if you agree to these. Who wouldn’t want their parent to get the newspaper, wine with dinner or grooming so they feel better. The big problem I found is that these are charged REGARDLESS whether the person was receiving them. Shortly after my mother in law gained entry to a nursing home, she fell ill and spent considerable time in hospital. Notwithstanding, the nursing home continued to charge her for ‘extra services’ even though she wasn’t even there! In my mind this was akin to findings in the Hayne Royal commission where financial institutions were found to have continued to have charged dead people for advice they never received.

Think about this for a moment… by its very nature nursing homes look after older people. A very large portion are going to spend some time in hospital. If they are also paying for ‘extra services’ that amounts to a significant windfall to the operator if they continue to be charged.

As a post script, I complained (in writing) several times about this financial rort all the way to senior management in HO and eventually had this refunded….. but how many others ‘let it go’?

August 10, 2023

Wow so cheap compared to my July 2019 thru Dec 2020 experience in Melbourne's East! In my case (for my wife with advanced Alzheimers) for a facility I and my consultant felt was acceptable (clean, well presented, caring and capable staff, accessible garden, activities, physio and more) the room lump sum quote from memory was near $700,000 and the Daily Payments option I chose worked out to a total monthly bill that varied from about $4,600 to $5,300 a month ($153 to $177 a day) over this period. Some lower cost facilities I and my consultant guide looked at before making my choice unfortunately had appalling deficiencies which I suppose explained the price difference. Overall I and my extended family was very pleased with how my wife was looked after not withstanding some big issues with management changes over this period.


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