Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 280

Royal Commission must remove aged care anomalies

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.

Inequitable outcomes

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.

 

Rachel Lane is the Principal of Aged Care Gurus and has co-authored a number of books including ‘Aged Care, Who Cares?’ with Noel Whittaker. This article is for general information only.

 

RELATED ARTICLES

What the RC, Budget and Keating mean for aged care

Family home no longer the sacred cow

Why the poor will pay more for aged care next year

banner

Most viewed in recent weeks

24 hot stocks and funds for 2021

Many investors use the new year to review their portfolios, and in this free ebook, two dozen fund managers and product providers give their best ideas for 2021 - some stocks, some funds, some sectors.

The hazards of asset allocation in a late-stage major bubble

The Grantham article everyone is quoting, in full. "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble ... this could very well be the most important event of your investing lives."

10 key themes for 2021

A summary of 10 investing themes for 2021 including early-cycle opportunities, populism, digital transformation and supply chains, plus the outlook for equities, fixed interest and alternatives.

Seven steps to easier management of your estate

Don't make life difficult for the person trusted to manage your estate. Find the time to arrange your documents, contacts, online accounts and files in a convenient place, including giving them some cash.

Five reasons Australian small companies are compelling investments

Many investors focus primarily on the big listed companies but the smaller end in tech, mining and healthcare outperforms through innovation. Many Australian companies are world-leaders in their speciality.

Retirement changes everything: a post-retirement investing framework

Categorising post-retirement needs – living, lifestyle, legacy and contingency – creates a framework for retirees. Advisers can translate these needs into investment goals and portfolios.

Latest Updates

Alternative investments

What to do when your collectibles become collapsibles

Collectibles are everywhere, from old cars, to sneakers, to wine, to cards and anything old and prized. But even if a collectible once attracted thousands of followers, what happens when the fans lose interest?

Financial planning

Compound interest rewards patience in an impatient world

Let compounding do its work. It starts slowly. This is why many of those who start an investment programme (or fitness programme, dietary change, sport, or business) give up in the early stages.

Shares

How did you go? Australian and global stockmarket winners and losers

The Australian market overall finished flat for calendar 2020, but the pandemic delivered big wins and losses. The companies, sectors and companies you invested in delivered vastly different results.

Investment strategies

What is endowment-style investing and who should use it?

For investors who have the scale, long-term investment horizon and lack of liquidity requirements, it makes sense to implement an asset allocation that can take advantage of a lack of constraints.

Investment strategies

Five ways to build investment portfolios amid growing inequality

At the start of the 20th century, a 'Gilded Age' for plutocrats created vast fortunes and economic inequality surged. COVID is having the same impact now, but portfolios can be adapted to respond to the opportunities.

Investment strategies

The hazards of asset allocation in a late-stage major bubble

The Grantham article everyone is quoting, in full. "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble ... this could very well be the most important event of your investing lives."

Investment strategies

Best and worst performing equity funds of 2020

Growth was the place to be through the pandemic while value managers couldn't catch a break. It's the long run that matters but 2020 delivered pleasure or pain for many managers.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.