Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F7. Funding aged care

F7–1 Funding and charging for access, equity and efficiency

Access to adequate aged care services is a key component of the wellbeing of older Australians. A key reason for government funding of aged care is to ensure that older people of limited means can access these services.37

Aged care spending is projected to grow rapidly — from 0.8 per cent of GDP in 2008–09 to 1.9 per cent of GDP in 2048–49 — and was the fastest-growing component of government expenditure identified in the Intergenerational Report 2007 (Australian Government 2007a). This growth is driven largely by demographic changes, with the number of people aged 85 and over projected to increase from 378,000 at 30 June 2009 to 1.8 million by 2049 — a more than four-fold increase. The life expectancies of older Australians are also projected to rise, and care needs tend to increase with age. In 2003, 32 per cent of those aged 65 to 74 required assistance, while this number increased to 86 per cent of those aged 85 and above (Productivity Commission 2008b).

Demand for aged care services is also expected to become more varied in the future. Aged care recipients are likely to have a wider range of complex or high-level care needs, as advances in treatment enable people with chronic diseases to live longer. Increasing affluence and ethnic diversity are also expected to lead to a wider range of client preferences. In particular, demand for care provided at home will increase, due to strong preferences for independent living among the baby boomer generation. Common to all these factors is recipients' desire to exercise greater choice about the care they receive, greater capacity to 'age in place' and better continuity of care.

Features of the current aged care sector are significant regulation of supply and pricing, together with limited choice for recipients. These features restrict the delivery of care consistent with recipients' preferences. The Productivity Commission is expected to examine the aged care sector in detail in its inquiry during 2010. Accordingly, this Review focuses on the funding and charging arrangements for aged care. Charges for aged care affect the incentive for people to save for retirement and the adequacy of their income during retirement. Public financing of the sector represents a growing pressure on the taxation system. While funding from the public purse is necessary for some older Australians, those with sufficient means should be responsible for contributing to the costs of their own care.

What is aged care?

Aged care services are actually one or more of a number of different services that can be used by older Australians, including personal care, health care, assistance with everyday living and, in residential aged care, accommodation.38

Personal care

Personal care services include assistance in eating and drinking, personal hygiene, managing bodily functions and minor medical treatments. Many older Australians have diminished capacity to perform such functions by themselves because of frailty or disability.

Personal care services are generally the most expensive of the range of services provided in aged care, accounting for half to three-quarters of total residential aged care costs (Productivity Commission 2003). There is a wide spectrum of personal care depending on individual needs, ranging from low levels of episodic assistance to high levels of ongoing assistance. The variation in care costs is substantial. For example, care costs can range from less than $1000 a year for occasional assistance to perhaps more than $50,000 a year for a people with dementia, whose care need can continue for a number of years.

Addressing personal care needs provides the major rationale for government intervention in aged care. For an aged care system to provide an adequate level of personal care, this care must reflect the particular needs of individuals, which can be highly variable. As the cost of these services can also be very large, it would not be effective to fund them through regular transfer payments to recipients. Instead, specific assistance for personal care should be targeted to the needs of individuals.

Adequacy depends not only on the degree of financial support, but also on aged care services reflecting the needs and preferences of recipients (see Section F6 Transfers tied to goods and services). Facilitating consumer choice ensures that the services people use are the ones they value most, leading to greater satisfaction and sense of autonomy among users. Choice can also improve the efficiency of provision, as providers will receive funding only when they deliver services that are valued by users. And choice puts competitive pressure on providers to reduce unnecessary costs.

Health care

Aged care can involve a range of health services similar to those provided through the health care system. These include access to nurses to administer injections, or to allied health professionals such as physiotherapists. Providing health care services through the aged care system can reflect the overlap in skills needed by providers of personal care services and allows coordination of recipients' care needs.

Assistance with everyday living

Aged care services can include assistance with a range of 'everyday living' expenses, including food or laundry expenses.


'Residential aged care' facilities can provide personal care, health care and assistance with everyday living, along with accommodation. When these services are instead provided in a recipient's house, they are referred to as 'community care'.

'Unbundling' aged care to assign funding responsibilities

For each of the different services available through the aged care system, the provision of assistance and the assignment of funding responsibilities are best considered separately, as these services can be provided both inside and outside the system. By 'unbundling' services and responsibilities in each component, assistance for aged care can be targeted most effectively. In particular, unbundling funding for care (both personal and health care) reduces the potential for cross-subsidies across different care types or between different users. Cross-subsidies in funding arrangements can lead to inefficient provision, encouraging people to use one type of service just to gain access to the service they really want. Care assistance that is not linked to accommodation can enable people to 'age in place' in their homes, which can improve their wellbeing by providing care where they are comfortable and allowing them to maintain their links with the community.

A system that involves cross-subsidies is also likely to be inequitable. For example, people whose means enable them to cross-subsidise other aspects of their own care (or even others' care) may receive preferential treatment from aged care providers. To prevent this, the prices received by providers should reflect the cost of providing care, rather than the means of recipients. Unbundling allows providers to charge prices in line with costs, while recipients' means determine their level of financial support.

Individuals should finance the costs of everyday living and accommodation, just as they do outside the aged care system. Assistance for these services is provided on a means tested basis through the income support system. Accommodation and everyday living costs are fairly predictable expenses and not exclusively associated with increasing frailty or disability. As such, these costs should be a private responsibility inside the aged care system, with the recipient paying the full cost of their provision. This would remove incentives for people to change their living arrangements to access aged care, potentially harming living standards in retirement.

To ensure that all Australians can access aged care, people with limited private means should be provided with assistance so they can receive an adequate level of care at no financial cost to them. Ensuring access to an adequate level of care irrespective of means is a 'public good' similar to other aspects of the redistributive system, such as income support, and should be funded by the community through general taxation. Where people do have means, they should be user charged for the services they receive. A particular personal care service is a 'private good' in that the greatest benefit from its use accrues to the care recipient, rather than the community as a whole. Charges for care should be set with reference to both a person's means and the cost of their care. Means testing should have regard to the impact of means testing undertaken in the broader income support system (see Section F2 Means testing).

It is an underlying principle of Australia's transfer system that the Australian government helps to support those with limited means while the remainder of the community supports itself. Reliance solely on taxpayer funding would most likely undermine the sustainability of the aged care system. The absence of any price signals could also reduce the efficiency and raise the cost of providing the service.

Governments need to finance the health care-related elements of aged care. Health care provided through aged care should be subject to similar charging arrangements as occurs in the health care system. This means that the health care component should generally be free or accompanied by modest co-payments. However, this general approach would need to be balanced by practical considerations, as the distinction between health care and personal care can be difficult to draw in aged care.

Ensuring access to an adequate standard of services should not preclude people from purchasing a higher standard of service, provided they pay the full additional cost. The existence of additional services does not, of itself, reduce the standard of care for those who receive no more than the adequate level. Preventing the purchase of a high standard not only denies access to care that people value, but is also likely to stifle the delivery of higher-quality care. Access to higher-quality services would also provide an additional reason for potential recipients to retain their assets into retirement.


Equitable provision of assistance for aged care would ensure that recipients of limited means can access an adequate standard of care. To ensure that aged care services meet the needs and preferences of users, funding should be tailored to the needs of users and directed in line with choices. As care may often be delivered effectively in both recipients' homes and aged care facilities, assistance for care should generally not be tied to a particular care setting.

Recipients should generally pay for accommodation and living costs provided through aged care with user charges equal to the cost of their provision, as these costs are personal responsibilities outside the aged care system.

Recipients with sufficient means should contribute to the cost of their care, which should result in more efficient provision of care and reduced cost on taxpayers. Means testing of aged care assistance should be consistent between residential and community care options while taking into account other taxes and means tests applying to older Australians.

The provision of means tested care should not preclude the provision of aged care beyond the adequate standard of service. Recipients should be fully user-charged for such care.

37 The government also has a role in other aspects of the aged care sector, including addressing failures likely to occur in market provision, such as exploitation arising from lack of information by care users.

38 Considering aged care in its various components is common to most studies, such as Hogan (2003).