Opinion: Too much choice can be a risky business

The Productivity Commission’s goals and recommendations are generally laudable but there is some important work to do around understanding the relationship between choice and risk, says a UNSW academic

Above: Laurel Hixon, Australian Institute for Population Ageing Research, UNSW

By Laurel Hixon

In its boldest recommendation on the future financing of aged care, the Productivity Commission proposes that housing and related living expenses be “unbundled” from the care costs and become the responsibility of the individual. 

That makes economic and social sense, but also comes with a set or risks both for public sector funding and also for the individual which need to be navigated carefully.

Among the extensive recommendations included in its recent report “Caring for Older Australians,” the Productivity Commission has attracted attention for recommending that relatively sophisticated financial instruments—equity release schemes or reverse mortgages—can help people pay those reasonably predictable living expenses while the government continues its commitment to the more health-related costs of care. This explicitly acknowledges the need for combining private responsibility and public risk-sharing in the most sensible way. 

Tapping into the equity in the family home presents a practical and viable solution to at least part of the aged care dilemma for some Australians. Housing wealth in Australia represents about half of total private assets, and using part of that wealth to fund care is a solution to two issues: the very real desire of people to stay in their homes and the wider public policy issue of transferring some of the cost of care to the private sector. Nearly 78 percent of older Australians own their homes outright, without mortgages.  

Economic theory supports this approach as well. In health care, it has been well demonstrated that, if a person does not know when or whether they will need care, and the cost of that care is expensive, then insurance is needed to spread the risk over people. The private market does not work well in these situations. On the other hand, the housing and living costs, which are more predictable, are efficiently and equitably distributed in the private market and with greater consumer choice.

The Productivity Commission is especially committed to making greater choice available to aged care consumers in terms of the mix of services they receive, where they receive services (at home, in “age-friendly housing” or in a residential care facility), and from whom they receive those services. They have put forth a number of recommendations related to this goal. 

In particular, they wisely recognise that these choices often change over time and have recommended that the Government remove a major financial disincentive to selling one’s home when the choice is to move to a more supportive care environment.  Rather than have the proceeds from the sale of a home result in the loss of eligibility for the Age Pension, people may invest those proceeds in a government-run savings account. 

Taken together, these initiatives work both on a human level and also on a financial level. For Governments, there is a looming financial imperative. According to the latest Intergenerational Report, the share of the budget committed to aged care will increase from 3 percent in 2009/2010 to 6.6 percent of total Government spending, or 1.8 percent of national GDP, by 2049/50.  The central theme of the Productivity Commission report is a discussion of the relative roles that the public and private sectors should play in aged care financing.

With regard to both health care and retirement income, the Australian government has taken the approach of moving greater responsibility “off budget” and on to the individual and private sectors through private health insurance subsidies and mandatory superannuation schemes. As aged care services interface with the health care system and aged care financing is closed linked to aged pensions, it follows then that Government will seriously consider the same strategy for addressing the future growth associated with services needed to care for an ageing population. 

Already, Australia has a strong public policy commitment to retirement savings through the compulsory superannuation scheme. Increasingly, superannuation and equity in the family home will become the basis for individual wealth in Australia and the Productivity Commission focuses on these as the source of individual funding to help the increased cost of aged care. But, as we transition to any new system of shared responsibility we need to understand better the parameters around these. 

Understanding choice
Finally, if there is any weakness in The Productivity Commission’s report it is this: the central assumption that more choice is better is not necessarily backed up by data and up to date research. Recent academic work (see reference below) has shown that people’s actual choices often do not reflect their true preferences and best interests. Choice reflecting personal preference is a laudable goal but, operationally, this is not easy to implement. 

Without making choices easy-to-understand through better information and research, we open up a whole new world of risk we can ill-afford.

Emphasising the desire for choice has several risks. On the side of the government payer, there is a risk that, by putting choice in the hands of the consumer, public dollars will not be spent in a way that creates the largest public benefit. 

On the side – of the older person and their family – they may become overwhelmed and frustrated by the responsibility of making meaningful choice out of a large number of options. Or, in the case of rural and remote communities, the consumer may realise that meaningful choice simply isn’t available. Neither of these situations makes anyone better off.

Laurel Hixon is a Senior Lecturer and Research Associate at the Australian Institute for Population Ageing Research at the University of New South Wales

She has over two decades of experience in aged and community care policy, planning and evaluation experience in Australia and the US. She has written extensively about reforming the delivery and financing of aged care and is currently investigating what factors drive innovative service delivery in community aged care.

For further research see:

K. Harris & M. Keane (1999) “A Model of Health Plan Choice: Inferring Preferences and Perceptions from a Combination of Revealed Preference and Attitudinal Data,” Journal of Econometrics, 89: 131-157.

D, McFadden, F. Heiss and J. Winter (2007) “Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans” (Working paper)

R. Thaler (2008) Commentary–Mental Accounting and Consumer Choice: Anatomy of a Failure.” Marketing Science, 2008, 27(1), pp. 12-14

Tags: caring-for-older-australians, intergenerational-report, laurel-hixon, population-ageing, productivity-commission, senior-lecturer, university-of-new-south-wales, unsw,

3 thoughts on “Opinion: Too much choice can be a risky business

  1. Lauren thankyou it is good to hear sensible debate on the value of choice. The productivity commissions report on ageing and the current policy environment in aged service care is quite dependant on the idea that older vulnerable people in crisis will be able to assess their options and choose the option which best suits them. I am afraid that young people struggle with this when it comes to more simplistic concetps of telephony and banking. I do pity the older person having to make these choices on health and aged care services.

  2. The question is ‘which is the bigger risk: giving older people real choice in how they want to live and how they would like to be cared for, or having other people making those decisions for them.’

    I don’t think anyone could sensibly argue that this is a simple set of questions but, if you take them away from the person they affect the most, the chances of hastening a decline into institutional dependency are greatly increased.

  3. Lauren, I believe we have had a system that has been too dominated by risk management. A good life is not a life without risk.Without having read your references you give, I wonder if your assertion”that people’s actual choices often do not reflect their true preferences and best interests”does not challenge the whole basis of how we aspire to live. To say that it is a”laudable goal but, operationally, … not easy to implement” does not invalidate the goal. We currently have a funding system that dictates how we live in residential aged care – size of building, number of residents, staffing modules, etc. I think there should be better ways to determine how we live when we get older.

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