Who pays for nursing home care? And why is the cost linked to real estate values?

If our government tells us it will be reforming something in order to make it sustainable, improve access, provide more choice and improve quality – be afraid.

No- this is not a piece about higher education “reform”; it is about who pays for nursing home care.

The nursing home “reforms” that began in July are straight from the neo-liberal playbook.

  • “Marketise” the commodity, and segment the market by cost.
  • If possible, include the word “better” in your reform: in this case Living Longer Living Better
  • Outsource what you can.
  • Shift the costs to the “consumer” as far as the electorate will stomach.
  • Set up an independent auditing authority to monitor quality and punish providers that fall below standard.

The financial effects of these changes are far from transparent, but reading the Productivity Commission 2011, Caring for Older Australians, the Aged Care Financing Authority Report, (ACFA) the KPMG report to ACFA, reveals some of the story.

The number of Australians aged 85 and over is projected to increase from 0.4 million in 2010 to 1.8 million (5.1 per cent of the population) by 2050.

Until now, aged care facilities were classified as high or low care. High care facilities used to be called nursing homes; low care facilities were described as hostels. There are over 2,700 aged care facilities in Australia. 74% are exclusively high care.  The Australian Government pays about 71% of the cost of residential aged care.

The Productivity Commission noted that,

While the majority of older Australians receive either a full or part Age Pension, even by 2050, a large proportion of these pensioners are expected to have considerable wealth, with the principal residence making up most of this wealth. Currently, the median household of those aged 65 to 74 holds around 79 per cent of their net worth in their principal residence, rising to 90 per cent for the median household of those aged 75 and over.

The Commission proposes that a person’s capacity to contribute to aged care be based on an assessment of both their income and their assets (my emphasis)

The Commission recognises that the new arrangement will require some older people, whose wealth is in assets rather than income, to draw down on those assets. (my emphasis)

And so the Government has now begun the process of “re-balancing” the proportion of public to private funding. This re-balancing includes paying a hefty sum of money as a bond, which aged care providers can use to fund capital works.

Although there are universal systems of publically funded nursing home care; either tax based (Denmark, Sweden and Scotland) or insurance based (Germany, Japan and the Netherlands), these options have been summarily dismissed by our government.

According to KPMG, funding from government comes at an awful cost. It includes the expense of collecting the revenue, and other “deadweight” losses such as fees and charges to generate the revenue. Such waste can be afforded in Denmark, but apparently not here.

How much will the government save over time with these measures, and how much more of a proportion of the total cost will be met by consumers? Digging for the answers unearths plenty of spin and not much fact. These numbers are nowhere to be found.

What is the Aged Care Financing Authority’s (ACFA) justification for getting its hands on the family home?

  • Co-contributions provide a test of how much people value particular services, and encourage people to save for aged care costs.  Never mind that no one ever anticipates the need to enter a nursing home- or that if the need arises, the “consumer” actually has no choice- probably because they can no longer make it to the toilet on their own.
  • Living in a nursing home is largely “board and lodging”, and the grounds for subsidizing these costs is “weak”, except for those of limited means. Again, many of the elderly have saved all their lives to buy their own home (their lodging) – and the last thing they would ever choose to do is change their “lodging” to a nursing home. The “board and lodging” argument applies equally to hospital care. Hospitals built on prime real estate ought to be able to charge a hefty amount for accommodation component of care, because they occupy such expensive land.
  • Aged care facility providers may find it difficult to raise the capital to build more nursing homes as they are needed. Let’s unpack this argument.  As soon as government “outsources” a service it creates more opportunities for business to make profit out of what was previously considered a public good.  It also fuels further business for the finance industry. In this instance 60% of the providers are charities, 30% are for profit and 10% are state government owned. All groups make a “profit”, (thanks to huge government subsidies) but interestingly, for profit providers make a greater profit.  What is the rationale for even allowing for profit providers into this industry?

Let’s examine how the new rules operate in practice with a couple of worked examples.

Billy Battler and Carl Comfortable are both aged 72. Both own their own homes. Both are widowers. For the past 4 years, both had had their daughter living with them, because they are becoming frail and a bit forgetful. Both daughters have paid work, but do all the cooking, and most of the housework . The daughters pay minimal rent.

Billy Battler lives in Penrith, a western suburb of Sydney, in a 3 bedroom house valued at $390,500. Carl Comfortable lives in a 3 bedroom house in Mosman, one of Sydney’s wealthiest suburbs. His home is valued at $1,701,900.(These are both average values according to realestate.com)

Billy and Carl have strokes and end up spending ten weeks in hospital. Neither recover sufficiently to go home, and have no choice but to spend the rest of their lives in a nursing home. This is a time of upheaval and distress as they come to terms with never being able to return home.

At this point Centrelink will assess their income and assets to work out how much they will pay for nursing home care. In both cases the family home will be regarded as an asset.  It could only be excluded if Billy or Carl had had a “protected person” living with them.

A protected person is,

  • a partner or dependent child,
  • a carer who has lived with them in the home for the past two years and is eligible for an income support payment
  • or a close relation, such as a sister, brother, parent, child or grandchild who has lived with them in the home for the past five years and is eligible for an income support payment.

Because Carl and Billy’s daughters have not lived with them for at least five years, nor are they eligible for income support, they are not deemed protected persons.

Billy’s annual income is (his pension) $20,000. He has other assets totaling $20,000, and household contents and personal effects to the value of $10,000.

Carl’s annual income is $20,000. He has other assets totaling $40,000, and household contents and personal effects to the value of $40,000.

Both Billy’s and Carl’s daughters face the stress of organizing nursing home care for their respective fathers.

After getting financial advice, they both realize they will have to move out of the family home, so that it can be sold or made a “performing” asset.

Both Billy and Carl are liable for fees made up of three components;

1)   A basic daily fee of $46.50 a day, which comes to $16,926 pa, and is meant to comprise 85% of the aged pension,

2)   A means tested care fee which is capped annually at $25,000 and has a lifetime cap of $60,000,

3)   An accommodation payment that can be paid as a lump sum refundable deposit. This money is treated by the proprietor as an interest free loan.

Both families discover that the accommodation bond is hefty. The payment is also clearly linked to the real estate values of surrounding suburbs.

Billy and Carl would both like a single room with ensuite facilities. Around the area where Billy lives the bond range for a single room with ensuite is $220,000 to $473,000, with the median being around $270,000.  In Carl’s area the range is $186,000 to $950,000 with the median being around $550,000.

Prospective residents also have the option of paying a non-refundable daily payment instead of a refundable bond- or a combination of the two. Carl settles on a nursing home with requires a bond of $550,000. If he preferred, he could instead make a daily payment of $100.80. Carl could also negotiate to pay a proportion as a daily payment and a proportion as a bond. For example if half were bond and half a daily payment, the sums would be $225,000 and $50.40 daily.

The daily payment is roughly 6.7% pa of the bond amount. And this happens to be the going rate for a reverse mortgage.

Let us assume that Billy and Carl both ask their daughters to move so that they can rent their homes. They will then borrow the amount needed (possibly via a reverse mortgage) to finance the accommodation bond. For Billy this will be $270,000 and for Carl it will be $550,000. It would be unlikely that Billy could borrow the full amount as banks will usually only reverse mortgage up to 30% of the house value. Carl will not have that problem.

The average rent for a 3 bedroom house in Mosman is $1250. In Penrith it is $370. (see real estate.com)

Entering this data into the residential care fee estimator provided by the government, and assuming their respective choice of nursing home bonds of $270,000 and $550,000 respectively, produces the following.

Basic Daily Fee Means Tested Care Fee Accommodation Payment % of home value needed for accommodation payment
Billy   $46.50 per day $18.57 per day A  refundable deposit of $270,000 or daily payments of $49.48 69%
Carl $46.50 per day $85.94 per day A  refundable deposit of $550,000 or daily payments of $100.80 32%


Assuming both live for 5 years, this is their income and expenditure position

Income at 5 yrs Expenditure at 5 yrs Result
Billy $196,200 $208,877 -$12,677
Carl $425,000 $328,880 $96,120


Why the discrepancy?

Firstly the means tested care fee is not as progressive as it looks. It has an annual cap of $25,000 and a lifetime cap of $60,000. It looks like Billy is only paying 20% of what Carl pays on a daily basis – but in 5 years it climbs to 56%.  It they both live 10 years they end up paying the same amount.

Secondly Carl has far more choice. He can “shop” in the middle of the market for a single ensuite. But for Billy there is hardly anything available at $220,000, and at $270,000 he has maxed out his income.

Billy might just manage to hang on to his capital if he can find $12,000 over 5 years. Carl does it in a canter, without dipping into his assets and with plenty to spare if his family should need support.

Of course both are lucky that they can afford to buy into a single ensuite.

Pensioners with no assets or other income will inevitably end up in shared dormitories with shared bathrooms, no matter how much they enjoyed their privacy before they needed 24/7 care.

It would not be hard to guess that Carl’s family has much more chance than Billy’s of maintaining or improving their social standing. There are many factors that affect variation in social mobility, including intergenerational transfers of capital, income inequality and access to good education. Australia is a middling performer social mobility rankings, but the Abbott Government is making a concerted effort with a range of policies to make sure that if you are poor, your kids will also be poor.

A recent book by economist Thomas Picketty, “Capital in the Twenty-first Century” charts in detail the rise of global inequality. Picketty’s contention is simple; when the rate of return on capital – the annual income it generates divided by its market value – is higher than the economy’s growth rate, capital income will tend to rise faster than wages and salaries. Over time rich people earn a lot of money from accumulated capital in the form of dividends, interest payments, profits and rents. (Confirming with data what the Billy Battlers have always known!).

Picketty is so worried about the social implication of this data that he is proposing…. wait for it… more progressive taxes on the super-rich. The picture below adds to the story.

social mobility

Sadly, the aged care “reforms” were actually conceived by the previous Labor government. There is a consensus in the ruling oligarchy that “marketising” everything is… well.. just a good thing, despite all the global evidence to the contrary. In fact, both Liberal and Labor politicians think that America is a wonderful model.

You will not be surprised to know that the biggest corporate donors to the Liberal Party are the banking and finance industries. But heaven forbid that they might be buying influence….these guys just love democracy.




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