Modelling on the Financial Impacts of the Living Longer Living Better Reforms.

Page last updated: 23 May 2013

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The Hon Mark Butler MP
Minister for Mental Health and Ageing
Minister for Social Inclusion
Minister Assisting the Prime Minister on Mental Health Reform
Minister for Housing and Homelessness
Parliament House
CANBERRA ACT 2600

Dear Minister

To assist in the development of its first report on financing and funding issues in the aged care sector, the Aged Care Financing Authority (ACFA) commissioned modelling from KPMG on the potential impacts of some of the key elements of the Living Longer Living Better (LLLB) reforms. The analysis looks at the impact of a range of the refoms on both the profitability and balance sheets of residential aged care providers at an aggregate level.

The attached report sets out KPMG’s modelling analysis and findings.

The KPMG analysis examines:
    • the possible choice an individual may make to pay either a daily accommodation payment (DAP) or refundable accommodation deposit (RAD) based on the impact of the choice on the individual’s wealth;
    • the subsequent impact of that choice on providers;
    • the impact on providers of the removal of legislated retention amounts;
    • the impact of the removal of the current cap on accommodation prices in high care; and
    • the impact of extending the ability to pay lump sums (RADs) to high care.
The models incorporated the impacts of the means testing arrangements proposed in the LLLB legislation currently before Parliament.

The analysis assumes that a resident’s choice between a RAD or DAP is based solely on financial considerations, whereby a person entering residential aged care would make a decision that would maximise their net financial wealth, subject to their own budget constraints.

The report recognises that, as currently, there are non-financial considerations that will continue to influence a person’s decisions and behaviours after the reforms commence. These include estate planning considerations as well as the desire to simplify arrangements and personal affairs. However, the models make no attempt to quantify the impact of these.

Approach

The approach taken by KPMG illustrated in Figure 2 (page 29) has three areas of focus:
    1. To model the decision an individual might make between paying a DAP or a RAD based solely on financial criteria with the benefit of full information and choice as defined by the LLLB reforms including:
        • transparent pricing and equivalent payment modes – accessed through publicly available published reference materials; and
        • total choice as to method of payment which may be made separately to choice of facility (ie within 28 days of entering).
    2. To model the impact of such residents’ decisions on Low Care and Extra Services places on each of Revenue and Balance Sheet (funding) including the impact of removal of prescribed retentions.
    3. To model the impact of such residents’ decisions on High Care places on each of Revenue and Balance Sheet (funding) recognising that LLLB reforms impact differently to Low Care by:
        • changing the pricing of Accommodation Payments – effectively removing the cap; and
        • introducing the same pricing and funding options (as for Low Care) – thereby allowing for the introduction of RADs.

Methodology

The methodology involved the creation of three separate models, as represented in Figure 2:
1. Input Model:
    This modelled an individual’s likely decision making process which incorporates a range of personal financial inputs that might motivate and fully inform an individual’s decision in the context of their location, asset and income circumstances.
2. Low Care and Extra Services Model:
    Application of the decision outputs from the Input Model to the 19,519 individuals who entered Low Care and Extra Services in 2011-12 to assess the impact of their possible decision as to DAP/RAD on each of Revenue and Balance Sheet.
3. High Care Services Model:
    Application of the decision outputs from the Input Model to the 20,166 individuals who entered High Care Services in 2011-12 to assess the impact of their possible decision as to DAP/RAD on each of Revenue and Balance Sheet.
Models 2 and 3 scaled the impact for the first year of the reforms, 2014-15. However, such impacts will continue in subsequent years until the current cohort of residents has left aged care.

Findings for the 2014-15 Financial Year

For High Care Services (other than Extra Services) the model estimates that in the first year of the reforms there will be an increase of $3.4 billion in new RADs from new residents. There is also estimated to be a $93.5 million increase in provider income, reflecting the removal of the capping arrangements in High Care.

For Low Care and Extra Services the model estimates that in the first year of the reforms there will be a decrease in the number of new RADs of $402.8 million from new residents. There is also an estimated decrease in income of $68.4 million in the first year reflecting the removal of retention amounts1, but not accounting for a potential offsetting increase in revenue that may arise if residents choose to make combination payments under the new arrangements, including draw downs from lump sum payments.

The model found that based solely on maximising wealth, the majority of new entrants in Low Care and Extra Services would choose to pay a DAP except that in the majority of cases the income earned from renting out the home would not be sufficient to pay the estimated DAP.

A summary of the impact of these changes in the first year of the LLLB reforms at the aggregate industry level is set out below.
Balance Sheet impact
$m
Profit and Loss impact
$m
High Care
3,400
93.5
Low and Extra Service
-402.8
-68.4
The value of new RADs for new High Care (other than Extra Services) residents entering aged care will be slightly offset by the small reduction in new RADs for Low Care and Extra Service residents entering care who elect to pay by a DAP.

The KPMG analysis is based on a number of key assumptions and, as noted in the report, there are some limitations to the findings (see page 44 of the full report). As noted by KPMG, the estimated shift from RADs to DAPs in Low Care may be over estimated for low value bonds as it is based on the assumption that all new entrants own a home and are single2. In addition the estimated reduction in income associated with the removal of retentions represents the upper limit as it does not take into account the draw down facility which will be available under the new arrangements.

1. This represents a first year reduction of income from retention amounts from a total annual income of $200 million.

2. Due to data limitations, the model has assumed that all residents are single and that they have a house which can be rented out. Under the model residents who have paid a low value RAD would elect to pay a DAP. It is unlikely that a single person paying a low value RAD has a house. It is more likely that this person has other assets which would provide a better return paid as a RAD than held as an asset. A member of a couple entering care would not be able to rent out their house. This type of resident would also be unlikely to pay a DAP and is more likely to pay a RAD from the other assets held by the couple other than the house.


Conclusion

ACFA supports the overall findings of the analysis that the reforms can be expected to have a significant positive impact on the overall level of refundable accommodation deposits (bonds) and revenue for the industry.

However, ACFA acknowledges that the LLLB reforms may impact residential aged care providers differently given the variability in provider characteristics. The precise impact on all providers will depend on their individual capital structures, their profitability, their business models and their capacity to adapt to changes within the sector. It would also appear that certain Low Care providers may feel a greater negative impact from the reforms.

Subject to the passage of the legislation, ACFA will monitor the impacts of the reforms as they are implemented and regularly report to you. This will include consideration of how the reforms impact on different providers with different funding and operational structures.

Yours sincerely



Lynda O’Grady
Chair

22 May 2013
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