Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F7. Funding aged care

F7–3 Reform directions

Recommendation 109:

There is considerable scope to align aged care assistance with the principles of user-directed funding to provide assistance in line with recipients' needs, enable their choice of care and support the fiscal sustainability of the aged care sector. However, effective user-directed funding is significantly limited by regulations that govern supply and price, reforms to which would have complex sequencing and transition issues. The Productivity Commission should consider this potential reform direction in its upcoming inquiry into aged care.

Recommendation 110:

It is important for governments to determine what an adequate level of aged care should be, the necessary pricing and regulatory arrangements to deliver it, and the most sustainable funding arrangement to ensure access by those who cannot afford it. Given this, and noting that the Productivity Commission will be inquiring into the disability insurance scheme, its consideration of aged care should include the potential for insurance to play a role in helping to fund aged care as Australia's population ages.

Potential reform to financing arrangements

The Review has considered the funding and means testing arrangements for aged care in the context of growing need for high-quality care and fiscal pressure that flow from satisfying the needs of an ageing population. There is some potential for reforms to financing arrangements, particular user-directed funding, to further these objectives.

The Review supports the recommendations in the final report of the National Health and Hospitals Reform Commission that:

  • government subsidies for aged care should be directly linked to people rather than places;
  • there should be a more flexible range of care subsidies for people receiving community care packages, determined in a way that is compatible with care subsidies for residential care;
  • people supported to receive care in the community should be given the option to determine how the resources allocated for their care and support are used; and
  • care subsidies and user payments should be aligned across community care packages and residential care, and older people should be given greater scope to choose for themselves between using their care subsidy for community or for residential care.

The application of consistent means testing arrangements across aged care programs would also support choice for consumers of aged care services. In line with unbundling of care funding, there is some scope for more targeted means testing of care, which would improve the fiscal sustainability of the care system.

However, in light of the existing supply and price regulations, the benefits of reform to the financing arrangements of aged care would be limited. Further, changes to the financing and regulatory framework of aged care would require careful sequencing to ensure that access to care is not harmed during any transition. The potential for user-directed and consistent means testing should be considered as part of the Productivity Commission's inquiry into the aged care sector (see Recommendation 109).

Long-term sustainability of funding arrangements

Reforms to facilitate user-directed funding and ensure recipients with sufficient means finance their own care costs would improve the fiscal sustainability of aged care. However, several factors limit the scope for greater user funding of the system through means tested user charges.

As the superannuation guarantee scheme matures, cohorts of older people should have larger assets balances available to them at retirement. However, these assets will need to provide an adequate stream of income over a person's retirement, the duration of which is uncertain for individuals. The expected increase in average life expectancy is likely to add to this risk. Further, the use of aged care services is particularly intensive for people aged 85 and upwards, once many have been retirement for 20 years or more.

As is discussed in greater detail in Section A2 (Retirement incomes), wider availability of products that can insure against longevity risk would give greater certainty around income over a long retirement. This would facilitate a more dependable income stream on which users of aged care services could draw to pay for the costs of their care. It is also possible that moves towards a universal levy on taxable income could be used to offset future fiscal risks of government financing aged care.

The uncertain and potentially high costs of aged care mean that many people would not be able to provide for their care costs out of their savings. When insufficient provision for the costs of aged care results in inadequate access to care, the wellbeing of older Australians is significantly harmed. The introduction of a compulsory insurance scheme should be considered as a way to deliver a funding source to ensure that all individuals can access an adequate standard of care.

Currently, insurance companies are prohibited from offering voluntary insurance products for aged care costs. Further, the current restrictions on the supply of aged care would likely limit the use of insurance, even if it were available.

The Review supports consideration by the Productivity Commission of the potential for insurance, whether compulsory or voluntary, to assist in the task of funding aged care as Australia's population ages (see Recommendation 110). Further, aged care insurance would have many of the social insurance attributes of broader disability insurance, which is also the subject of a Productivity Commission inquiry.