Aged care providers should explore higher bond s for income: StewartBrown
With a growing difference between the average refundable accommodation deposit (RAD) and median house prices in Australia, aged care providers are being advised to consider increasing their bonds.
The average RAD last financial year was $298,627, which is $360,000 below the national median house price of $660,000, highlighting that RAD pricing is an area of income “that remains to be fully explored,” said Patrick Reid, the firm’s director of aged Care, community and disability.
“In real terms it could be said that aged care accommodation is too cheap, leading to pressure on other parts of the business where costs outstrip income, which should push management and boards towards re-pricing their accommodation,” said Mr Reid.
Providers need to be “more strategic and a little more courageous” in setting their RAD and combination pricing higher before exploring “more exotic fees and charges such as asset replacement charges,” he said.
As providers struggle to find efficiencies in the face of “a weakening government income stream” it is likely that a more pragmatic view of accommodation prices will be required, Mr Reid said.
However, any moves by providers to substantially increase their RAD prices will be closely watched by government, which has already flagged it is concerned by the increasing value of the total bond pool (read AAA’s coverage of that here and here).
Mr Reid pointed out that last year just 33 per cent of all houses and 40 per cent of apartments sold for less than $400,000, illustrating that the majority of real estate market is currently valued well above the average RAD.
Hobart, which has the lowest median house price of $382,500, is still far higher than the average RAD received in Australia, he said.
“Of course, there are exceptions at both ends of the market – with the lowest RAD in Australia being $34,000 and the highest $2.7 million – but generally there is scope for a more progressive RAD price growth.”
The analysis by StewartBrown also showed that less than 1.8 per cent of the beds in the sector last financial year were re-priced above the $550,000 mark at which permission must be sought from government.
Means testing changes having an impact
Rachel Lane, principal of Aged Care Gurus, said that perceived competition among residential providers was prompting facilities to publish RAD prices that were often lower than what consumers were prepared or wanted to pay.
This push to publish lower RADs also removed the flexibility for providers to subsequently charge a higher RAD, even if consumers wanted to pay a greater deposit, Ms Lane said.
Recent changes to means testing for both aged care and the pension were putting increased pressure on seniors to sell their houses in order to fund residential care, as the new arrangements meant that keeping and renting out the home was no longer viable, she said.
“The government is now including rent in the calculation of pension entitlement which means renting the house to meet the cost of care reduces your pension. We’re seeing significant cash-flow deficits and people saying it’s unaffordable to go with that strategy,” she said.
Seniors were now inclined to pay a RAD because they were effectively trying to swap one pension exempt asset – their house – for another pension exempt asset – a RAD, Ms Lane said.
She agreed with StewartBrown’s analysis in that a major disincentive currently was where house prices were way above the RADs being charged. See case study: