Growing disquiet over aged care fee testing

Implementing the Productivity Commission’s proposed equity release scheme and equal treatment of assets in means testing would remove inequities surrounding selling the family home to pay for aged care, stakeholders have reiterated following fresh media coverage in the lead up to 1 July changes.

An ABC report on Tuesday highlighted how a wealthier aged care resident who did not need to sell their home to pay aged care costs could pay over $6,000 less in annual care fees than someone with less means who was forced to sell their home.

The home will be included in the means test for aged care from 1 July if it is not occupied by a spouse or dependent. However, its value will be capped at around $154,000 unless the person needs to sell their home to pay their aged care costs, in which case the full value would be counted.

The Productivity Commission recommended counting the home but offering an equity release option for those without a sufficient income to pay their aged care costs.

HammondCare CEO Stephen Judd told the ABC that it was an inequity that needed to be ironed out.

Council on the Ageing (COTA) chief executive Ian Yates agreed and said they would continue to push for the PC’s recommendation.

“The homeowner is advantaged because they are not having to carry the same responsibility and what the PC said was that everyone should be treated the same,” Mr Yates told Australian Ageing Agenda.

He said while COTA fully supported the reform measures already legislated, it wanted to move as soon as possible to the PC’s recommendation.

“We continue to believe that all assets should be regarded equally and that the government should facilitate an equity release,” Mr Yates said.

He likened a government-backed equity release to a HECS style scheme, pegged to the CPI, where a person could access a line of credit on an ongoing basis.

“Essentially what you are doing is borrowing for your aged care costs against the value of the house. It doesn’t have to be physically done by government, it could be done by contract to government, [which] could set the terms,” he said.

Minister rules it out

However, in an interview with Australian Ageing Agenda (to be published in our upcoming July-August issue) Assistant Minister for Social Services Mitch Fifield ruled out a government-backed equity release scheme. “It’s not something I’m currently examining. There may well be particular products that the private financial services sector look to develop, but that’s a matter for them,” Senator Fifield said.

Echoing Mr Yates’ comments, Aged Care Gurus principal Rachel Lane said part of the problem with the reforms was that it was 80 per cent of what the PC recommended.

“We didn’t get the bells and whistles that almost enabled these reforms to be facilitated in a fairer way but the equity release would then enable a pensioner to draw on the equity in their home to meet a DAP [daily accommodation payment],” Ms Lane said.

She said from 1 July the issue would affect people who didn’t have the “financial flexibility” to use assets outside their house.

“If you take money from outside your house and put it in your RAD [refundable accommodation deposit] and you keep your house, you get a double exemption,” Ms Lane said.

The double exemption occurs because the full value of the house is exempt from the means test and while any amount put in the RAD is counted as an asset for calculating the care contribution, it is an exempt asset for the pension, Ms Lane said.

She offers the following case study example:

Fred is currently a part pensioner. He has a house worth $850,000, $500,000 of investments and $10,000 in personal effects. The aged care facility Fred wants to move to has a price of $450,000 RAD or $81.74 DAP. Fred’s family have received an estimated market rent for his house of $350p.w (net).

If Fred chooses to pay for his cost of accommodation by DAP, his total cost of care contribution will be $55,111 p.a and his pension entitlement of $372.92pfn together with his rent ($18,200) and interest ($20,000) would leave him with a cash flow shortfall of around $7,200p.a.

If Fred instead used $440,000 to pay towards his RAD, paying $10,000 by DAP, his ongoing cost of care would reduce to $25,674 and his pension entitlement would increase by $12,216.88p.a. Fred’s cash flow would now have a surplus of around $16,800p.a.

Ms Lane said this demonstrated a massive difference all because of the double exemption.

“A person who doesn’t have the financial flexibility is stuck in scenario one where your cost of care is $55,000 and you can’t meet it,” she said.

Levelling the playing field

Ms Lane said allowing the proceeds from the sale of the family home to be treated the same as the mean-tested value of the home, so capped at $154,000, would make it more equitable.

However, Mr Yates said moving to fully implement the PC proposal is preferred to tinkering further with the current arrangements and would put more money into the system.

“No more patches because we have known this is coming, there is some inequity that is really you are leaving money on the table that you could be putting into the system because some people who have still got the house are exempt,” he said.

“The simplest thing really is to do what the PC recommended.”