Aged care finances: understanding the new order

With providers and consumers getting used to the 1 July changes, analysts are determining the new lay of the land in aged care finances. Ruth Callaghan reports.

Almost 60 per cent of aged care residents who have entered care since July’s radical changes to pricing structures have chosen a refundable accommodation deposit (RAD) over a daily charge.

And while there had been fears providers who had relied on bonds under the old system might see a destablising flight to rental-style daily accommodation payments (DAP), that hasn’t been seen in figures to date.

Industry analysts Mirus Australia has compiled prices for RADs and DAPs listed on the My Aged Care website and analysed figures in their own data warehouse, which captures about a quarter of industry beds.

That data shows 59 per cent of new residents are choosing to pay RADs, said Mirus managing director James Price.

A further 35 per cent of residents are choosing DAPs and about 6 per cent have taken up a combination of the two payments. That’s despite the My Aged Care website showing an average RAD asking price for a single room with a private ensuite of $413,625.

Mr Price cautioned that the reforms were still being bedded down, and said it will take until the end of the financial year before providers understand the comparative impact of a RAD over a DAP.

“At this point facilities are still dipping their toe in the water and working out how much people will pay,” he told Australian Ageing Agenda.

The picture you see on My Aged Care today in terms of prices is not necessarily how it is going to translate in the market over time, he said.

“It’s still early days and providers will continually be evaluating their position as more RADs and DAPs come through.”

Mirus figures show the lowest asking price for a RAD in Australia is just $100,000, while the highest is $2.6 million.

In NSW, the most common RAD is set at $550,000 — the maximum amount that can be set without seeking government approval. In South Australia it is $400,000; in Tasmania $395,000. In Victoria and Queensland it is $350,000 and just $300,000 in WA.

RSM Bird Cameron director Bruce Bailey said providers were feeling more confident now the changes are in place. “We have not had a Henny Penny event,” he told AAA. “The sky has not fallen in.”

However, he warned that providers were still feeling their way in the new system, as they addressed the financial situations of new residents, liquidity and potential market value of homes. “It is very early, it is a new system and there’s not a lot of knowledge,” Mr Bailey said.

Providers repositioning

Stewart Brown director David Sinclair said he expects new transparency around prices will lead to repositioning as providers see what competitors are doing.

“When people were initially putting their prices up some providers just put up the $550,000 and thought they would negotiate downwards,” Mr Sinclair said. “But the problem is nowhere on the My Aged Care website does it say clients can negotiate downwards, so if your competitor down the road has gone up at $330,000, in a side-by-side comparison you might not even get the chance to negotiate.”

Ansell Strategic managing director Cam Ansell said he had already spoken to one provider who has had that problem, listing RADs at $550,000 when a facility nearby listed rooms at varying price points.

“It is dangerous just putting down the max and assuming people will know they can negotiate backwards,” Mr Ansell told AAA.

“I’ve asked my clients to move to stratifying the prices. There’s also a lot of refurbishment going on and I’d really like to see people stratify their pricing not around a physical room but the characteristics of a room. That way if you upgrade, renovate, change furniture, as it takes on the characteristics of a premium room or a super-premium room you are not locked into a certain room being a certain price,” said Ansell.

Mr Price said that as providers get more detail about RADs and DAPs in their area and factors influencing families, more will apply to exceed to $550,000 threshold.

“I fully expect more providers will go above the $550,000 level. Some were on the front foot for the changes and were very precise on how they priced, some were on the back foot. People will get more sophisticated as they learn the relationship between the median house prices in their areas and the willingness of people to pay,” he said.

Consumer behaviour

Analysts say the consumer market is still immature and clients remain unsure how the new system affects them.

Under the rules, the choice of paying a RAD or DAP is should lie entirely with the client, who has 28 days to decide (paying the daily amount in the interim.) If the client chooses a RAD, there is a further three-month period to pay.

“I think the financial planning industry is one of the winners out of this,” Mr Sinclair said. “There are going to be a lot of people requiring advice and lots of aged care providers will be saying to people go get a financial planner.”

Anecdotally, that advice may be encouraging some residents to pay a RAD rather than a DAP, given the low rate of return on offer from cash funds. Although the daily payment is calculated as a fixed proportion of the lump sum, additional interest is charged to the resident if they choose the DAP. The DAP is calculated by multiplying the RAD by a maximum interest rate (formerly 6.69 per cent now 6.63 per cent) then dividing that total by 365. This means a resident offered a $500,000 RAD would pay about $91 a day if the amount was converted to a DAP or $33,150 a year. The same money left in a savings account at 3 per cent would earn only about $15,000.

“What we are hearing is that in some instances, because they are going and getting the financial advice, and because the RAD-DAP equivalent carries an implicit 6.5 per cent or thereabouts, it is better for them to pay the lump sum and pay it quickly,” Mr Bailey said. “That’s a good thing as the industry was concerned that there could have been a delay in not knowing what the consumer wanted to pay.”

Mr Ansell said those of his providers who had mainly taken bonds in the past have tended to get clients choosing RADs; those formerly receiving daily payments received more DAPs.

“I don’t know that the consumer choice angle of this has really manifested yet,” he said. “People who were bonded providers suddenly converting to getting mainly DAPs was a worry for me but early feedback is that people are still happy at this point to pay a bond. What I don’t know is the science of that — whether it is that rich people are happy to pay a RAD or whether it is the way the home is approaching the families when they are negotiating.”

But Mr Ansell said providers should also think about the interest rate bonus built into the RAD-DAP conversion, and explore combined or pure cash payments.

“The conversion of your RADs into DAPs takes place at a much better price than when it is sitting in the bank. If the RAD is sitting in the bank I can get 2.5 per cent but if I can get a DAP which is a conversion of my RAD plus 6.63 per cent, I’d rather have that. Groups that are not dependent on bonds are really quite happy to have the cash,” Mr Ansell said.

Mr Sinclair predicted there might be moves by some providers to smaller RADs that provide a buffer against bad debts that are drawn down on by the provider as daily payments. “The perfect situation — if you are a provider with lots of cash who doesn’t need RADs to refinance cash reserves or spend cash reserves any time soon on capital expenditure — is getting a DAP or combination. They are going to get a better return on the DAP proportion of that than they will on the RAD proportion sitting in the bank.”

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