Although we have not yet seen a significant change in how residents pay their fees, we are expecting a shift in the short term and potentially a major change in the future, writes Martin Jones.
Significant change for aged care has been underway since 1 July 2014 with the implementation of the latest reforms to the sector.
Months on from the introduction of the completely new pricing structure, now is an ideal time to review what impact these changes may have had on the way people finance their entry to residential aged care.
There was a general fear among aged care providers and the banking sector that there would be a huge trend towards families paying their accommodation costs on a daily basis rather than the traditional lump sum payment.
Under previous legislation, payments such as accommodation bonds were payable in either low care or extra service high care and were then subsequently used by some providers to retire debt. The aged care industry feared a potential preference for a ‘drip feed’ style of payment from residents, which would have reduced access to the opportunities lump sum payments offer providers.
Why was change expected?
With the option for residents to now choose between a lump sum amount (refundable accommodation deposit, known as RAD) or a daily interest only amount (the daily accommodation payment, or DAP) or a combination of the two, it has become even more important for residents and families to not only choose the right option that suits their current financial position, but will also provide the best financial outcome into the future.
Further signs of a new payment trend came when changes to legislation indicated that “if a single aged care resident chooses to retain their former primary residence, only the first $155,823* will be used to calculate the new means tested care fee”; therefore protecting the balance of the home against additional fees while potentially allowing for growth in the property. This was regarded by the industry to be an opportunity for families to protect themselves against additional fees that may occur if the home was sold and the proceeds were used to invest or pay for their accommodation as a lump sum. This further enhanced the belief that residents were now more likely to choose to pay by DAP only – to protect the family home and potentially reduce the amount of means tested care fee payable.
Did the expected change occur?
Our experience has shown that the main question for families to consider is affordability. Can a resident afford to pay interest only against the lump sum accommodation amount (RAD) with the high interest rate the department sets for the aged care industry – currently 6.75%*, known as the maximum permissible interest rate (MPIR).
The case study (right) highlights this situation using an average aged care resident.
This example does not account for any additional costs associated with renting the home, periods of no rent, improvements to the home to bring it to a rentable condition – potentially adding thousands of dollars to the shortfall.
So far we have not seen a major change in the way people pay for the accommodation going in to aged care.
For the majority of people, affordability may result in them selling the family home to pay for their accommodation in full as a RAD.
Obviously this depends on many factors including the value of the home, possible rent, value of the RAD going in to care and amount of assets outside the family home.
This example highlights a shortfall in cash flow for the resident that may compound as other costs increase. It also does not allow for any other unexpected events that may incur additional expenses.
From our experience, families do not like seeing a shortfall, particularly if other options are available. This is one of the key reasons there is still a preference for residents to choose the RAD option.
Future of payments in residential care
Although we have not identified any significant change at this time in how residents pay their fees, we do anticipate a shift in the short term and potentially a major change in the future.
The anticipated short-term change comes from the fact that there is another payment opportunity for families looking to enter aged care. Many people are not aware of this additional option, and the potential benefits are not well understood.
This additional choice is referred to by the industry as the ‘draw-down’ option. This option allows residents to pay part of the applicable RAD by lump sum and have the remaining DAP drawn-down on a monthly basis. Disclosure of this payment method is not mandatory for providers to discuss with residents, nor do they need to publish information or provide detail to prospective residents and families. This option can work very well for those families having additional assets outside the family home and wanting to maintain the home rather than sell it.
Generally this is an option that families only select after seeking financial advice from a specialist adviser with an understanding of the legislation and options available when entering aged care. It can be a complex strategy that may also have a limited duration if the part RAD is consumed fully by growing DAP payments. It is therefore important that families understand that the RAD is reducing and the amount will not be a ‘fully refundable accommodation deposit’ in these circumstances. Benefits of this option can come through increases in the value of the family home and removing the need for higher levels of cash flow to cover a potential full DAP payment.
Even further into the future, we may experience more interest in a full DAP payment in preference to full RAD or part RAD/part DAP payments. This could be expected if we see families looking to enter aged care with higher levels of assets or prospective residents with higher levels of superannuation/income streams. Families may be more inclined to use their monthly cash flow to cover the cost of accommodation and protect the home by retaining and renting it out.
This potential change may be seen as a negative by providers as they seek to expand, extend debt and rely on a higher percentage of lump sum payments. Changes may impact the way providers set their prices and future strategy with policies and agreements on entry.
* indexed amounts
Martin Jones is senior business development manager with ipac financial care.