In May, whatever government wins the upcoming Federal election faces a considerable challenge: developing a sustainable financing system for Australia’s aged care needs. Battered by the coronavirus pandemic, the government-funded aged care services currently include in-home care (care in your home), residential care in aged care homes, and short-term care such as respite care. But within these services, there is a myriad of systemic issues uncovered in the Final Report of the Royal Commission into Aged Care Quality and Safety (2021).
The Commission compiled exhaustive evidence of systematic failures in the aged care system, identifying inadequate government funding, undervalued and precarious employment arrangements, and the conflicted incentives of private for-profit providers in causing a crisis in care. The report showed at least one in three people accessing residential aged care and home care services have experienced substandard care, often due to overworked providers. In addition, the data revealed 50 per cent of the aged care facilities have inadequate health professional staffing levels.
The final report recommended comprehensive reform of the aged care system, one that would:
- Develop a new aged care Act using a rights-based approach
- Enhance aged care governance, including new independent oversight
- Ensure care is safe and of high quality
- Finance an entitlement to high-quality care based on need
The final point outlined the need for additional funding in the short term and long term to provide an adequate level of aged care quality for older Australians. But where exactly will this funding come from?
A balance between public and private funding
Sustainable financing of aged care requires a balance between government tax-based financing, individual contributions during working life through an aged care levy, co-payments for aged care costs for those receiving aged care, and means-testing for these co-payments, according to Michael Sherris, Professor in the School of Risk and Actuarial Studies at UNSW Business School. But importantly, he said there also needs to be a role for private market insurance and financing to supplement government-financed aged care support.
Prof. Sherris recently outlined his considerations for a more sustainable aged care future at the 29th Colloquium on Pensions and Retirement Research, co-hosted by the Centre of Excellence in Population Ageing Research (CEPAR) and the School of Risk & Actuarial Studies.
“Obviously, we're all familiar with the sustainability issues that have already been mentioned. We expect aged care costs to increase just as the population ages,” he said. “Even in the current climate, we have constraints on the financing of aged care from the government.”
While the government is one year into a five-year $18.8 billion aged care reform program – which includes the new Australian National Aged Care Classification (AN-ACC) to replace the Aged Care Funding Instrument (ACFI) from 1 October 2022 – there is also scope to fundamentally change the way aged care services are acquired and provided. So whichever government takes the reigns, there is a chance to fundamentally change the future for millions of Australians, hopefully for the better.
Aged care is under-researched and poorly understood
Aged care is often required at a time of stress, high emotion, and uncertainty. It is a challenging and emotional time, whether for the person receiving care at home or in a nursing home, but also for their family, friends, and carers. But in many ways, it is the system that is letting people down. For example, one of the key findings from the Royal Commission was that total care hours provided across all Home Care Package levels have declined; over a decade ago, more than double the current amount of care was possible from the funding provided.
This happened because the government today is providing less funding for care (in real terms) at a time when older people who access aged care from home are becoming increasingly frail with higher rates of comorbidities. But the solution isn’t as simple as just injecting more money into the sector, as there are several unique challenges that the government must overcome. One of them is indexation – the indexation arrangements applied to aged care payments over the last twenty years have systematically reduced the real value of funding.
Another big challenge is that the current system is also mainly failing Australians it identifies as having ‘special needs’, including those living in regional areas which have significantly less access to aged care than people living in major cities and Aboriginal and Torres Strait Islander people.
Aged care is also generally under-researched. As a result, it continues to be poorly understood. The Royal Commission recommended universal entitlement without the need for co-payments. But what Prof. Sherris argues is there needs to be a balance of individual contributions, government contributions, and co-payments when receiving aged care subject to means-testing.
But the funding recommendations from the Royal Commission have yet to be adopted by the government. “Obviously, they are still under consideration, but these are critical for improving aged care quality but under-researched and not well understood,” said Prof. Sherris.
Seven considerations for a sustainable aged care financing model
1. Firstly, Prof. Sherris proposed an integrated insurance-based model – for the assessment of, and payments made to, fund home care needs – while recognising the importance of different mixed means of care support (the mix between home care and residential care).
2. He has argued for co-payments and incentives to limit moral hazard (or the incentive for individuals to seek higher amounts of care than they actually need) with a lifetime cap. Means-tested co-payments increase the individual funding available to support improved aged care, increase the equity in funding and limit moral hazard. Lifetime caps, at higher levels than currently, limit the impact of catastrophic care costs when individuals contribute through co-payments, explained Prof. Sherris.
3. Equitable and sustainable means-testing for co-payments while receiving aged care integrated with the age pension should also play an important role in Australia's future aged care funding models. Currently, asset tests are inconsistent and too confusing for the age pension and the aged care system, said Prof. Sherris.
4. Integrated aged care financing with retirement income and health financing should also be present. Currently, retirement products like account-based pensions are projected to run out before a person even reaches the point when they need aged care. “There are products such as life care annuities that can be designed to better capture the risks in retirement income products, including additional funding when you need home care,” explained Prof. Sherris.
5. There is also a need for balancing intergenerational equity with government PAYG financing from consolidated revenue, contributions from individuals during their working lives, and means-tested co-payments from individuals for care costs. Sustainability of funding requires a balance between contributions from either PAYG taxes or individual contributions from an Aged Care levy during working life and any means-tested co-payments, to recognize intergenerational equity, explained Prof. Sherris.
6. Actuarially based funding with regular actuarial reviews. This would mean having a regular actuarial assessment of long-term costs and sustainability of funding provides an assessment of risks and alternative financing for the aged care system.
7. Finally, there should be an option for private market insurance and financing mechanisms for individual co-payments and aged care costs, including living accommodation during residential care. “There is a potentially large and undeveloped opportunity to allow individuals to provide additional funding and certainty for their aged care risks through innovations in private market products,” said Prof. Sherris.
But private aged care insurance can only assist individuals who have the resources to plan their care and provide for co-payments in a well-balanced system – individuals with significant levels of wealth who can usually self-insure these risks, particularly if they have housing and other forms of retirement savings. So what about those who cannot afford private insurance?
“Obviously, these products will only be sold to those hitting retirement who meet healthy underwriting standards, and the payment triggers often differ a little bit from the way the aged care system works… and obviously, these are not going to be for individuals who are not in good health and not wealthy enough to afford the premiums,” explained Prof. Sherris. That is why a well-financed and sustainable government aged care scheme is also critical for most Australians.
Products that provide cost-effective solutions – an area that Prof. Sherris has been researching – could include innovations like mutual risk-sharing pools, life care annuities, and government-provided products, which build on the existing Home Equity Access Scheme. But importantly, such products (which are already provided in other countries) would mean that Australia's retirement financing system would be improved.
Michael Sherris is a CEPAR Chief Investigator, Director of Industry Engagement, and a part-time Professor of Actuarial Studies at UNSW Business School. His research sits at the intersection of actuarial science and financial economics and has attracted several international and Australian best paper awards. For more information, please contact Prof. Sherris directly.