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Living Longer. Living Better.

Advice on Accommodation Payments and Equivalence of Lump Sum and Periodic Payments

The Aged Care Financing Authority will provide independent advice to the Government on pricing and financing issues, informed by consultation with consumers, and the aged care and finance sectors.

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Introduction
Draft Recommendations
Executive summary

Introduction

As part of the Living Longer, Living Better package, from 1 July 2014, the distinction between high and low care will be removed, allowing consistent accommodation payment arrangements to apply for all new residents. All new residents will have greater choice in how they pay for their accommodation, with the option of paying either a lump sum payment, a periodic payment, or combination of both.

The Minister for Mental Health and Ageing has requested that the Aged Care Financing Authority (the Authority) provide him with recommendations on:

• the methodology to govern the level (or levels) of accommodation payments that an Approved Provider can levy on care recipients for entry to an aged care home from 1 July 2014; and
• The appropriate methodology to ensure Lump Sum Accommodation Payments and Periodic Accommodation Payments are financially equivalent for providers.

Draft Recommendations

The Authority recommends that, from 1 July 2014:

1. A single maximum lump sum apply to new bonds unless higher prices have been approved by the relevant Government authority

That approved providers are not able to require a Lump Sum Accommodation Payment (bond), or equivalent Periodic Payment determined in accordance with Draft Recommendation 6, from a resident that exceeds the maximum amount determined annually by the Minister, unless the provider has sought approval to require a higher price and that higher price has been approved by the relevant Government authority;

2. The maximum be set at the 95th percentile of bonds

That, in making the determination the Minister set the maximum amount at the 95th percentile of all accommodation bonds for the most recently available year of data (the Authority notes that based on current data this would equate to approximately $500,000);

3. That all prices that providers propose to charge be published in advance

That approved providers be required to publish the level of accommodation payments they propose to charge, both lump sum and periodic payments, for different levels of accommodation they offer and that this information be readily available over the internet and in documentation provided to prospective residents and their families. That approved providers be encouraged to adopt this approach early on a voluntary basis from 1 July 2013.
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4. That guidelines apply for approving amounts above the maximum

That guidelines should be developed for the relevant Government authority to assess requests for approval for higher prices above the maximum, and that providers would have to justify higher prices at the aged care home level, based on a set of criteria including the quality of the accommodation offered, location, construction cost relevant to the facility and other relevant factors.

5. A complaints system for dealing with unreasonable pricing below the maximum

That residents be able to lodge a complaint about unreasonable pricing to the relevant Government authority for amounts charged below the maximum amount, and that guidelines be developed for assessing complaints based on a similar set of criteria of quality, location, cost of construction and other relevant factors. The provider would be required to adjust its price where it was found to be unreasonable based on the relevant criteria.

6. That the current method for determining the equivalence of lump sum and periodic payments be maintained.

That providers be required to determine an amount of periodic payment that the resident can choose to pay instead of a lump sum amount, and that amount be determined by using the current method for determining equivalence under the Aged Care legislation (involving conversion of a lump sum to a periodic payment using the Maximum Permissible Interest Rate defined in subsection 23.3(2) of the User Rights Principles 1997), noting that the formula would be amended to no longer refer to retention amounts and the periodic payment would not include any amount included in the lump sum in relation to bond insurance.

Executive summary

Setting accommodation payments

The Authority considers its draft recommendations allow for an efficient, sustainable and equitable system to develop which provides appropriate safeguards while limiting regulatory costs.

The Authority considers there are grounds for placing appropriate price safeguards on the system to protect residents, especially while constraints on the supply of aged care services remain in place. The Authority considers that a system of transparent pricing supported by a maximum price (with flexibility to seek approval for higher prices) and a complaints system would provide appropriate safeguards for consumers.

The Authority considers that applying a maximum price limits the risks of excessive prices being charged while the discretionary ability to approve higher prices allows specific circumstances to be taken into account where justified.

The Authority considers that the current method for determining equivalence of lump sum and periodic payments is appropriate, as it broadly reflects the treatment of a lump sum payment as unsecured finance which it considers is the most appropriate treatment.
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Advice on the impact of removing retention amounts, insurance and cooling off period

The Authority notes the feedback from consultation that the removal of retention amounts will result in providers increasing the amount of lump sum accommodation payments to compensate and that imposing insurance requirements on lump sum accommodation payments will result in providers seeking to recover the cost of insurance from residents. The Authority also notes that the broad reforms proposed under the Living Longer Living Better reforms and the regime for accommodation payments proposed by the Authority provide scope for industry to adjust for these impacts.

The Authority considers there is substance to industry concerns that the new requirements for insurance may impose costs on industry and consumers that could perhaps be reduced and that there is benefit in exploring alternative mechanisms which may mitigate these concerns while still meeting policy objectives.

The Authority considers the impact of the ‘cooling off’ provisions on accommodation payments will be limited, but does suggest the ‘cooling off’ period be renamed the ‘choice of payment method period’ to better reflect its objective and be limited to 28 days.

Advice on rates of return and efficiency

The Authority notes that comments received from the consultation process highlight the difficulty in determining what would be an appropriate rate of return and how to assess efficiency across the industry as a whole, given the diverse structures, location and services provided by the industry. The Authority intends to examine these issues further in the context of providing its general advice on such issues to the Minister in May 2013, as required under the Authority’s Operating Framework.

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Introduction
Background
Advice required from the authority
Consultation Process
Considerations
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Introduction

As part of the Living Longer, Living Better package, from 1 July 2014, the distinction between high and low care will be removed, allowing consistent accommodation payment arrangements to apply for all new residents. All new residents will have greater choice in how they pay for their accommodation, with the option of paying either a lump sum payment, a periodic payment, or combination of both.

The Minister for Mental Health and Ageing has requested that the Aged Care Financing Authority (the Authority) provide him with recommendations on a methodology for setting the maximum level(s) of accommodation payment a provider can charge and ensuring lump sum and periodic payments are financially equivalent for providers.

Background

On 20 April 2012, the Prime Minister, the Hon Julia Gillard MP, and the Minister for Mental Health and Ageing, the Hon Mark Butler MP unveiled a comprehensive 10 year package to reshape aged care. The objective of the package is to build a better, fairer, sustainable and nationally consistent aged care system to meet the social and economic challenges of the nation’s ageing population. The Government recognises the need for fundamental reform of the aged care system in order to ensure that it continues to provide high quality care and can respond to future challenges. Information on the comprehensive reform package can be found on the “Living Longer, Living Better.” website at www.livinglongerlivingbetter.gov.au.

As part of the Living Longer, Living Better package, from 1 July 2014, the distinction between high and low care will be removed, allowing consistent accommodation payment arrangements to apply for all new residents. New residents will have greater choice in how they pay for their accommodation, with the option of paying either a fully refundable lump sum payment, a periodic payment, or combination of both. Also from 1 July 2014, the Australian Government will significantly increase the maximum level of the accommodation supplement it pays in respect of care recipients who cannot meet their own accommodation costs. This will apply to aged care homes that were built or significantly refurbished since the announcement of the aged care reforms on 20 April 2012. The maximum level of the accommodation supplement will increase from $32.76 per day (currently) to an estimated $52.84 per day.

Current Situation

In low care and extra service care the level of accommodation payments is negotiated between providers and residents. Regulation is limited to requiring that any bond charged leaves the resident with at least approximately $40,000 in assets. Bonds are refundable but providers are able to deduct retention amounts of up to $3,876 per annum.

In high care, bonds cannot be charged. A periodic accommodation charge can be levied but this must not exceed the maximum level of accommodation supplement (currently approximately $32 per day).

The Government pays an accommodation supplement for those with low means of up to approximately $32 per day.

Under the Living Longer Living Better reforms

The high care / low care distinction will be removed, allowing lump sums and equivalent periodic payments to be charged for all new residents with Government continuing to pay an accommodation supplement for those with limited means. ACFA is charged with providing advice to Government on how accommodation payments should be set.
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Advice required from the authority

The Authority is required to provide recommendations to the Government on:

• the methodology to govern the level (or levels) of the accommodation payments that an Approved Provider can levy on care recipients for entry to an aged care home from 1 July 2014, including advice on:
  • the Rate of Return on Equity for efficient providers in the residential aged care sector necessary to ensure that investment will continue to be made in the aged care industry at the rate needed to meet the demand for services;
  • the Rate of Return on Operations for efficient providers in the residential aged care sector necessary to ensure Approved Providers are appropriately rewarded for the operational risks inherent in operating an aged care business;
  • how ‘efficiency’ should be defined and determined, to take account of the unavoidably higher cost structures faced by some aged care providers;
  • how the level (or levels) of accommodation payments for aged care homes should be set – for example, by establishing benchmarks and bands for different sorts of aged care home with applications for variation on an exception basis – and whether these issues should be considered at the provider or at the aged care home level;
  • the impact of removing retention amounts on accommodation bonds, the cooling off period for a resident to decide the method for paying their accommodation payment, and the requirement to insure lump sum accommodation payments; and
• the appropriate methodology to ensure Lump Sum Accommodation Payments and Periodic Accommodation Payments are financially equivalent for providers.

Consultation Process

In order to inform itself of the views of the sector and to assist in its deliberations the Authority distributed a discussion paper to relevant stakeholders.

Discussion Paper

The ‘Discussion Paper: Accommodation Payments’ was distributed by email on
1 September 2012 and uploaded onto the Authority’s webpage located on the Department of Health and Ageing website on 6 September 2012. Feedback was requested by 24 September 2012.

The groups that the discussion paper was distributed to were:

• aged care homes;
• approved providers of residential care (for profit and not for profit);
• aged care stakeholders (peaks and industry groups);
• religious and charitable organisations;
• consultants;
• government departments; and
• financiers with ongoing involvement in the aged care industry.

In addition, independent professional consultants were engaged to provide advice on an appropriate methodology for setting accommodation payments and financial equivalence of lump sum and periodic payments, and on issues relating to appropriate rates of return for providers and efficiency. The feedback received from the consultation and reports from consultants were considered by the Authority when formulating its draft recommendations. The consultation process was coordinated by the Authority’s Secretariat based in the Department of Health and Ageing.

There were 38 unique responses received in response to the discussion paper.
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Views from consultation

A predominant theme from submissions was that Government should not have a detailed role in setting accommodation payments and that the approved provider is best placed to determine the level of accommodation payments, as they can best take into account a range of factors including the facility’s location, amenities and condition alongside factors relating to the resident’s individual circumstances and preferences. Submissions predominantly put forward the view that market forces should play the key role in determining the level of accommodation payment with prices accordingly negotiated between the provider and resident.

A number of submissions noted that if price controls are to apply they should do so only while administrative constraints on the supply of age care services are in place.

More specific issues raised in consultation included the difficulties in setting accommodation payments in isolation without also taking into account other issues that affect industry financing and funding (such as insurance, ACFI, accommodation supplement eligibility).
In addition, feedback included that pricing frameworks should be published, easily accessible and understandable by the public and that systems for accepting and processing consumer concerns and complaints be upgraded.

Options put forward for setting accommodation payments

While submissions generally did not support detailed Government involvement in the setting of prices, the most common suggestions if the Government was to be involved was to set a maximum level only with the ability to apply (to Government) for approval for higher prices and/or to link the accommodation payment level to median house prices.

It was also suggested that a number of other factors could be taken into account, such as:

• building costs (and how they vary with location);
• the amenities and condition of the facility;
• the type of room offered (ensuite, number of beds);
• the resident’s capacity to pay;
• how the resident wishes to pay (e.g. drawdown of periodic payments from a lump sum paid in advance);
• the mix of supported and non-supported residents in the facility;
• allowing continuation of cross-subsidisation; and

regional factors.

Retention amounts, cooling off and insurance

Consultation feedback was that removing retention amounts and imposing the requirement to insure lump sum accommodation payments will increase the costs of providing aged care services and that such increases are likely to be transferred to residents.

Feedback on the cooling off period focussed on the resultant commercial uncertainty and possible bad debt risks of long payment decision periods.

Method for determining equivalence

Consultation favoured the continuation of the current methodology of determining equivalence of periodic and lump sum accommodation payments (LSAP).
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Considerations

The Authority considered all submissions on the matter. In undertaking its deliberations the Authority had regard to a number of key factors including:

• encouraging continued investment in the aged care sector;
• allowing flexibility in accommodation payments to account for the diversity in type of accommodation, location and structure of approved providers, and issues such as the loss of retentions and the introduction of insurance requirements;
• providing appropriate consumer protection;
• simplicity for both providers and residents; and
• keeping regulatory and compliance costs to a minimum.

Methodology to govern the level of accommodation payments that an Approved Provider can levy on residents for entry to an aged care home

The majority of submissions advocated simplicity in the governance of LSAP, suggesting a single maximum lump sum, with a process for providers to apply for exemptions for a higher LSAP.

In addition to a single maximum LSAP model and variants (including median house prices and percentile of bonds), the consultant’s report proposed a reference price model in which a geographic market-specific ‘reference’ price to guide consumers (rather than a legislated maximum) is calculated, based on the efficient costs of building an aged care facility, and a competitive return on capital, at a given standard for two types of room. In areas where there may not be a competitive market, the reference price would form the regulated price.

Taking into account the considerations outlined in the dot points above, the Authority determined that the single maximum lump sum model, with a process for exemptions and complaints, provides the most appropriate outcome.

The Authority also considers there may be merit in further exploring whether a reference price model would be practical and cost efficient to establish, noting that it could also provide an additional useful source of information, including to inform the setting of accommodation prices for supported residents and underpin decision making with respect to submissions for exemption from the maximum lump sum level and complaints from residents regarding lump sum or periodic payments.

Setting the maximum lump sum amount

The Authority was guided by the distribution of bonds in 2010/11, which showed that only 5% of bonds exceeded $500,000. This level would allow for the vast majority of lump sum payments to be agreed between provider and resident, with the process for both approval of higher amounts and complaints of unreasonable pricing below the maximum to be considered against criteria including location, quality, costs etc.

If in the future the restriction on the supply of aged care services is reconsidered, this would also necessitate a review of the regulation of accommodation prices for non-supported residents.
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Consumer protection measures

Additional consumer protection would be provided by requiring public disclosure by approved providers of the prices that they charge for their various types of accommodation and introducing a complaints system where consumers could lodge complaints to Government over unreasonable pricing. The provider would be required to adjust its price if it was found to be unreasonable based on relevant criteria.

The appropriate methodology to ensure Lump Sum Accommodation Payments and Periodic Accommodation Payments are financially equivalent for providers

Submissions highlighted the importance of achieving financial equivalence for providers in accepting lump sum payments or periodic payments. They also noted the need to consider the effect on providers of a potential increase in the number and/or proportion of residents choosing periodic payments. The Authority notes, however, that there will also be a larger pool of potential lump sums.

A number of submissions supported using the existing method of determining equivalence through the Maximum Permissible Interest Rate (MPIR), while others proposed using an interest rate specifically applicable to provider debt or the pre-tax Weighted Average Cost of Capital (WACC) instead.

There was a wide range of views in submissions from industry in relation to the appropriate rate to use when calculating equivalence of payments. On balance, the Authority felt that the existing method provided the most appropriate and simplest outcome and is broadly reflective of LSAP treatment as unsecured finance.

Impact on Accommodation Payments of retention amounts, cooling off and insurance

Submissions from industry overwhelmingly identified that the loss of retention amounts and imposition of insurance requirements on LSAP will result in providers increasing the amount of lump sum accommodation payments to compensate and recovering the cost of insurance from the resident.

The Authority considers there is substance to industry concerns that the new requirements for insurance may impose costs on industry and consumers that could perhaps be reduced and that there is benefit in exploring alternative mechanisms which may mitigate these concerns while still meeting policy objectives.

The term ‘cooling off period’ does not accurately reflect the true purpose of that period and would be better renamed to ‘choice of payment method period’. That is, the parties would agree the prices under the payment options before entry, with the resident having the flexibility to make a choice of preferred payment option during the period. The Authority noted that while this period allows for residents to make informed choices, it also provides a degree of uncertainty around levels of capital for providers. The Authority further noted that until a decision is made by the resident, the equivalent periodic payment must be paid.

The Authority considers that the choice of payment method period should be 28 days.

Rates of return on equity and operations, and efficiency:

Industry submissions and consultants’ reports highlighted the difficulty in determining rates of return and efficiency across an industry with diverse structures, locations and services tailored to the needs of distinct populations. Submissions provided a number of different methodologies incorporating both financial and non-financial factors and a wide range of required rates of return.

The Authority will examine this matter further in the context of its May advice to Government on broader financing issues for the sector.
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