The Royal Commission into Aged Care Quality and Safety queried the funding of aged care and recommended the Refundable Accommodation Deposit (RAD) be phased out. YourLifeChoices member Richard Burrell wrote ‘that day couldn’t come quickly enough’ and queried the basis for the charge. We asked an expert in the sector, Aged Care Steps director Louise Biti, to explain.
“The aged care royal commission recommended the Refundable Accommodation Deposit be phased out,” wrote YourLifeChoices member Richard Burrell.
“It was recommended this process start from 1 July 2025, but will probably take some time. In the meantime, these sometimes eye-watering amounts continue to be charged by aged care facilities.
“I’m told the RAD is used to provide security for the borrowings that fund the enterprise. Why? Other projects are funded and built without this puzzling anomaly!
“Why are they so expensive, and how are they calculated?
“The RADs cost many thousands of dollars – $500,000 is common. There is a facility in Seaforth (Sydney) that costs $900,000! Based on what?
“Leaving aside the billions of dollars the RAD provides interest-free to the facilities, this outdated fee has two big consequences:
- It forces people to sell the family home. This is cruel and wrong.
- So instead, people opt for in-home care. Of course, there is a backlog.
“Oh dear, July 2025 will be too late for many.”
In response to Mr Burrell’s concerns, Ms Biti gave YourLifeChoices this detailed explanation.
One of the myths about aged care is the perception that it is a healthcare service. It is true that in recent years, the health needs of people entering care are increasing and greater specialist healthcare is needed, but the purpose of aged care is to provide a new home – one that is more suitable for managing increasing frailty and keeping a person safe and well. As such, they do provide some health support.
Very few residential services are run by government, with most run by charities, churches, not-for-profit organisations and for-profit businesses. But the government does pay substantial subsidies to help make care affordable. An average of $65,000 per year is paid by taxpayers for every resident in aged care.
What are the fees?
When unravelling the costs, the first thing to understand is that there are four categories of fees, and each pays for a different component of living expenses. This is not dissimilar to the costs you incur while living in the community. The table below provides a summary.
|Accommodation payment||Pays for right to occupy a room and use the amenities.||Price is set by the provider, but the resident has the option to pay a lump sum (refundable accommodation deposit or RAD) that ‘buys’ the right to live there or a daily fee (daily accommodation payment or DAP) to ‘rent’ the room.|
|Basic daily fee||Contribution towards living needs, including food, electricity, heating/cooling, laundry and linen and cleaning.||Flat fee (currently $53.56 per day) paid by most residents.|
|Means-tested care fee||Contribution towards care needs, including staff and equipment.||The annual cost can be up to $94,630, but this is subsidised by government. A financial assessment for each person determines their contribution up to $28,792 per year (with a lifetime cap of $69,102).|
|Additional services fee||Pays for additional services that add to quality of lifestyle through convenience, choices or higher quality of lifestyle.||Fee is set by the care provider based on agreed services.|
Note: rates are current to 19 March 2022.
How are accommodation prices set?
As with any property transaction, the property owner sets the price at which they wish to sell. This takes into account market forces, including location and view, quality of build, available amenities and buyer demand.
When setting the price for residential care services, the care provider can set a price, but if the price is too far above the market, they may lose out to their competition unless they can demonstrate value for money. To keep prices in check and affordable, if the provider wants to charge more than $550,000 for a room, they need to submit a business case to the Aged Care Pricing Commissioner and gain approval.
Building a new aged care facility for 50 beds can easily cost $10 million to $15 million or more plus the cost of land, so they are not cheap to build. Regardless of whether the operator is running for profit or not, the provider needs to decide how to raise the required capital. Investors will want a return for their money and banks charge interest.
Collecting a refundable accommodation deposit (RAD) from a resident provides free capital, but this is capital that must be returned when the resident departs. As such, the provider only gains the use of the money, or the interest offset that it can provide in the interim.
Let’s take a very simplistic approach to consider why room prices might be set at the levels they are. Assume the build cost for each room averages $250,000. If a $500,000 RAD is charged, it can offset the need to borrow that room’s build cost. If the remaining $250,000 is invested to earn 2 per cent, an additional $5000 is generated in earnings. At this rate, it would take 50 years to pay off the cost of the room.
The resident choice
Room prices in aged care are set as a lump sum, but this does not mean a resident has to hand over this amount. Residents have a choice to pay the lump sum or to convert it into a daily fee and effectively pay rent.
This choice means people are not forced to sell their former home. People who can’t, or don’t wish to sell their home could instead pay the daily fee or use other assets to pay for their room.
For example, Bert agrees to a $500,000 accommodation payment. As he does not wish to sell his former home, he chooses to pay the daily payment of $54.93 per day ($20,050 per year). If he does not have enough cashflow, he could consider an option to borrow from the equity in his home using the government’s Pension Loan Scheme or a reverse mortgage loan or rent out his former home.
Choosing home care
More people are choosing to age at home. This might prevent or delay a move into residential care, but often it is suitable only for those who have family members who can help to provide support when carers are not there.
As at 31 March 2021, 167,124 people were receiving support through a Home Care Package. In the 2021 Federal Budget, the government announced the release of an additional 80,000 packages over this financial year and next. In addition, more than 800,000 people received support through the Commonwealth Home Support Program.
The waiting time to receive a package has been long, and continues to be a concern. But the increasing number of Home Care Packages is reducing the waiting time.
Louise Biti is director Aged Care Steps, a leader in the provision of aged care support to advise professionals, including financial advisers, accountants and lawyers.
Disclaimer: The information in this article is general and does not take into account your particular circumstances. We recommend specific financial tax or legal advice be sought before any action is taken to apply the rules to your specific circumstances. Aged Care Steps ABN 42 156 656 843 is holder of AFSL 486723. Current as at 27 September 2021.
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