Protection of residential aged care lump sum accommodation payments

CPSA's comments on the Aged Care Funding Authority's public discussion paper on the protection of residential aged care lump sum accommodation payments.

CPSA's position on guarantee schemes for residential aged care lump sum payments is that the current scheme works is effective, efficient, equitable and cheap and that it should be retained and continued without change.

Arguably, the fact that the Australian Government is the guarantor of residential aged care lump sum payments and it has been apparently too hard to impose a levy following provider failures may contribute to its zeal in monitoring prudential performance of providers. By removing the risk to Government of having to compensate consumers for the loss of their lump sum payment, a framework may be created that allows the Government to relax its prudential monitoring efforts, thus increasing the risk of providers failing.

In fact, by imposing a levy – whether retrospective or prospective – prudential risk will increase, as providers will have the sense that they are insured for their main class of liabilities (lump sum accommodation payments).

From a consumer protection point of view, the current guarantee scheme for lump sum payments has the important advantage that it does not give aged care providers a reason or pretext to impose additional charges on residents who pay for their accommodation through a lump sum. Any levies raised would be retrospective and, as a consequence, providers have no up-front costs to pass on to consumers and a retrospective levy has as yet not been imposed.

Of the main alternatives to the status quo, therefore, retaining the existing Scheme but with a retrospective levy following default events is to be preferred to the creation of a guarantee fund pool with a prospective annual provider levy.

The probability of providers passing on the cost of a prospective levy to consumers in a separate charge additional to the lump sum payment would be very high as the raising of an additional charge on Refundable Accommodation Deposits (RADs) illustrates. This additional daily fee has various names, depending on the provider, but is explicitly linked to a consumer's choice to pay for their accommodation in the form of a RAD.

While the Aged Care Act 1997 provides a step by step calculation mechanism to ensure that the Daily Accommodation Payment (DAP) is at parity with the RAD and while the Department of Health has clarified that, in its view, raising such additional daily fees is inconsistent with the legislation, numerous providers have chosen to ignore this advice. The Department of Health has as yet to challenge this practice.

Clearly, if a prospective levy to fund a lump sum guarantee scheme were to be imposed, providers would waste no time in raising a charge on residents to pass on the cost of that levy. This would further compromise the parity principle that governs the pricing of RADs and DAPs.

If a retrospective or prospective levy were introduced to fund a guarantee scheme for lump sum payments, no risk rating of providers and facilities should, in CPSA's view, be applied. The administrative cost of rating the thousand or so residential aged care providers for prudential risk would be recovered through the levy, thereby increasing it.

You can download a copy of the discussion paper and read more about the Aged Care Funding Authority on the Department of Health website.