Associate Justin Hall discusses the complexities of a growing industry – Aged Care.
Recently, I was asked by a colleague: ‘so how much does aged care cost?’ To be honest I was taken aback by such a direct question and after some consideration, I responded with the safest answer I knew. ‘It’s complicated’
There are approximately 2,000 Aged care providers in Australia and about the same number for retirement villages however they both operate very differently. Aged care providers operate under the Age Care Act 2014 and Retirement Villages are governed under State retirement village Acts which vary from State to State.
Notwithstanding the legislative issues, the aging population is one of the fastest growing segments in our society with people growing older for longer. Projections indicate that those currently aged in their 70’s are likely to live past their 90’s and 4 out of 5 of us will require some form of care in the future, either in a retirement home or an aged care facility.
Considering these projections and the spiraling cost associated with aged care, governments were keen to shift the cost of supporting residents back to the user and introduced reforms to the 1997 Age Care Act in 2014. Many believe these changes have provided more flexibility for the residents, but also a greater degree of complexity in an already complicated sector – a sector that most families and individuals are required to navigate under significant emotional and financial difficulties.
Part of the changes introduced in 2014, was the substitution of the term ‘Bond’ with a new term known as ‘RAD’ (Refundable Accommodation Deposit). The RAD operates a similar function to its predecessor and can vary depending upon the age of the facility, location and demand in the area. The average RAD in Australia is approximately $400,000 and like it sounds, is refundable to the family once the resident has completed their tenure within the facility. In addition to the RAD, another form of payment was introduced called the Daily Accommodation Payment (DAP). This payment option was aimed at giving residents and families a greater level of flexibility for payment rather than committing the capital required to pay the RAD. Depending on the facility, residents can either pay the RAD or DAP, or a combination of both. The DAP is calculated based on a floating interest rate and updated every quarter.
In addition to the costs for securing accommodation in an aged care facility, other costs include a basic daily care fee around $40-$50 per day and a means-tested care fee which can range from $0 – $220 per day depending on your situation. The means tested fee is based on income and assets. Part of the changes introduced in 2014 meant that the home was included as legislated capped value in the amount of $145,000. The same capped value applies regardless of the value of the home i.e. a $200,000 apartment is treated the same as a $6M mansion. The home can only be exempt as an asset if a dependent child or carer is in the home on income support.
These are just some of the basic costs for residents within an aged care facility. Depending on the provider there will be additional costs incurred by the user for premium services including excursions, entertainment and if you want a glass of wine with dinner then its probably going to cost extra.
This is all great stuff, but what does it mean? And how does it affect the construction industry?
Well with a greater degree of flexibility brought about by legislative change, many residents are opting to pay for the daily accommodation payment (DAP) in lieu of the RAD, which is great for the user because it allows them to maintain their existing assets without having to make the capital contribution to fund the RAD.
The problem encountered by providers is that in the past the BOND, (now the RAD) was used as capital to help fund future aged care developments or refurbishment of existing facilities. With more and more residents opting to pay the DAP, or part DAP and RAD, there is limited capital to fund these projects creating a potential problem in the market.
Over the last few years, and primarily due to the lack of capital we have witnessed providers place future development programs on hold until they can confirm their financial positions. Many long-established providers have been forced to seek external funding to support future developments and given many of these providers have never required funding before, they turn to WT for professional advice regarding this process. External funding also comes at an additional cost to the project including line fees, interest payments, land holding costs and often stringent requirements from the financial institutions contributing to further cost pressures to projects.
The landscape of the aged care sector is changing and the traditional method of care is constantly being challenged by providers and consultancy teams. We have witnessed many providers engage in home care services due to rising construction cost pressures. Other providers have embraced an ageing-in-place model and the rise of vertical aged care in higher urban density areas due to the shortage of land available. Many of these mixed-use developments combine retirement living, aged care, retail and community services in a single development. Typically, these types of developments provide some significant challenges however offer an alternative level of accommodation and the opportunity for residents to take up occupancy earlier than they would in an aged care facility.
One of the difficulties providers are faced with is that there are few models to adopt in the current economic climate and embracing a user pays system is potentially unsustainable for future generations of ageing. It’s complicated.
For further insight with regard to Aged Care, please don’t hesitate to contact Justin Hall, Associate.