The PC report pitfall

The PC did well to ask the baby boomers to foot their own care bill but it failed to suggest a more sustainable long-term solution, a leading economist believes.


Above: Deloitte economist, Professor Henry Ergas, at the Australia’s Ageing Population Summit.

By Stephen Easton

The Productivity Commission’s (PC) recommendations on how to fund Australia’s aged care system will make it more sustainable in the short-term but won’t stand the test of time, renowned economist Professor Henry Ergas told the 7th Annual Australia’s Ageing Population Summit yesterday.

Prof Ergas, Deloitte’s senior economic advisor, told delegates a long-term care (LTC) insurance scheme was a more sustainable way of dealing with a future in which nearly all of the population needs some aged care, with the cost of caring for each individual varying widely.

The PC, he said, had done a “fantastic job” of looking at a wide range of issues, including “how you finance the tsunami hitting the aged care system” – a tsunami made up of a large cohort of baby boomers needing aged care within a short period of time, against the background of a constantly ageing population caused by increasing life expectancy which has so far shown no sign of approaching a biological limit.

“I think at the moment we have a very good aged care system,” Prof Ergas said.

“But clearly if it’s to survive being hit by this tsunami, it’s got to be made more sustainable.

“I think the PC makes some very good recommendations which make it very sustainable in the short-term, but which leave a lot of risk with consumers, and so the fundamental question is whether looking to the longer term, we can find better, more equitable and more efficient ways of managing those risks.”

The highly experienced economist, who has worked for the Trade Practices Commission (now the Australian Competition and Consumer Commission) and the Organisation for Economic Cooperation and Development (OECD) and writes regularly for The Australian, said that one simple but undesirable way of dealing with the increasing costs of the aged care system would be to continually raise taxes.

Another method, which had been preferred over the past 10 to 15 years, was to keep increasing the co-contributions paid by aged care clients, with increasing uncertainty as to how much the increases would amount to.

“[…] The PC tries to deal with this through a range of safety nets, and I think those safety nets make some sense,” he said.

“They also try to deal with it though an equity release scheme, which facilitates people financing aged care, but at the end of the day what you would think is that if people were exposed to potentially very high, but uncertain costs they would want to be insured against them.

“[…] So the question then becomes whether in the long run, we should move for some kind of insurance arrangement for aged care. If we did, for it to work … it would have to be a compulsory insurance scheme, but one where people could have the choice of insurer within that scheme.”

Prof Ergas likened such a scheme, with subsidies to allow low income earners to purchase cover from the insurer of their choice, to the way higher income earners are currently compelled to take out private health insurance by increases to the Medicare Levy surcharge.

“And that is very similar to what the National Health and Hospitals Reform Commission (NHHRC) has recommended for the long term future of Medicare … The benefit of that scheme is you would then have the insurers who would act as buyers’ agents in the long term health care market and offer comprehensive packages to everyone in the population.

“Another benefit of it is that it would then bring aged care insurance more totally into line with what needs to be the long term future of the health insurance system, somewhat breaking down the silos which currently exist, and that was the long term direction recommended by the NHHRC but that, so far, has not had much traction.

“Broadly I think it’s a better way of doing things.”

In 2009, the NHHRC proposed a new compulsory social health insurance scheme, which it called Medicare Select.

Making the baby boomers pay

In answering a question from the audience, Prof Ergas explained why, in his opinion, the PC had not recommended a long-term care insurance scheme, as the NHHRC essentially did.

The answer, he said, lay in reducing the amount of government spending it would take to move to such a comprehensive aged care, healthcare and disability support system, by placing more of this burden on the baby boomer cohort.

“I think [government officials] have a sense that the sensible way to do this in the long run is to merge [the two reports] – and what’s happening in healthcare – into some kind of national insurance scheme that would be universal and comprehensive, and involve a co-contribution on a means tested basis.

“So, those people who could afford to buy the insurance would buy it, and those people who could not would be subsidised, and it would have some element of risk adjustment, in the sense that people who are at high risk would be subsidised by people who are at low risk.

“The difficult thing is how you get from where we now are, with an aged care system which is over there, a healthcare system which is over here, and a disability system that everyone agrees is a problem and doesn’t meet our legitimate expectations … to that point.

“That tsunami of the baby boomers is very important to that calculation, because if the PC had recommended an insurance scheme now for aged care, then the baby boomers would not have contributed to it enough, by the time they got to aged care, to cover their own costs.

“So the only way you can make them cover their own costs is if you force them to sell their homes, which is basically what the logic is about.”
 

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