Ageing Australians increase demand for aged care services

As Australians are living longer than ever before, they are likely to experience greater frailty and more complex care needs requiring more aged care services.

Following the Royal Commission into Aged Care Quality and Safety report in 2021, it advised there was a need to significantly improve the quality of both residential and home care, exacerbated by chronic workforce shortages leading to substandard care. In 2023 the Aged Care Taskforce (the Taskforce) was established to advise on funding arrangements, including:

  • a fair and equitable approach to assessing the means of older people;
  • participant contributions for home care;
  • reforms to arrangements for funding of hotel and accommodation costs in residential aged care, including the phasing out of Refundable Accommodation Deposits (RADs);
  • services for inclusion and exclusion in the new home aged care program;
  • funding and contribution approaches to support innovation in the delivery of care.

Issues affecting the aged care sector

The Taskforce identified the following issues affecting the aged care sector:

  • demographic change means demand for aged care services will continue to grow;
  • current and future generations of aged care participants have high expectations of what quality aged care looks like;
  • generally older people are wealthier than previous generations and the taxpayer base is declining as a proportion of the population.

Demographic changes
The size of the population aged 65 and over is growing faster than the working age population. Over the next 40 years, the number of people over 80 years of age is expected to triple to more than 3.5 million. These demographic shifts have two critical implications:
• the taxation burden for funding aged care services grows for a segment of the population that is becoming proportionally smaller;
• gaps in the aged care workforce increase, creating significant ongoing challenges to delivering quality care.

Additional funding is needed to meet future demand and deliver quality improvements, but structural issues mean the sector’s financial viability is poor.

Superannuation shortfall
Income from superannuation should be drawn down in retirement to cover health, lifestyle, other living expenses and aged care costs. Superannuation, combined with high asset wealth through the family home and other investments, mean more people have accumulated wealth and income streams when they need to access aged care services. As a result, there is more scope for older people to contribute to their aged care costs by using their accumulated wealth than in previous generations.

It is important to note that, while the asset wealth of many older people has increased, there will be a group of people with less means. Even with the maturing superannuation system, over half of older people will continue to receive some Age Pension either at retirement or as they draw down on their superannuation. Past workforce participation rates also mean women are more likely to have less means in retirement, as are those who do not own their home.

Increase in demand for home care services
It is estimated that there will be almost 2 million older people using home care by 2042, compared with around 1 million currently. Consequently, the demand for home care has been rising sharply and is projected to continue growing well into the future. As a result, government spending on aged care as a proportion of gross domestic product (GDP) is projected to grow from 1.1% in 2021–22 to 2.5% in 2062–63.
More broadly, society is demanding higher quality aged care services for all, including participants supported by government. For example, research on public understanding and perception of co-contributions in aged care showed people are willing to pay more for home care services that are essential and increase quality of life and dignity.
Additional funding is needed to meet future demand and deliver quality improvements, but structural issues mean the sector’s financial viability is poor.

Aged care funding principles
Principle 1: The aged care system should support older people to live at home for as long as they wish and can do so safely.
Principle 2: Aged care funding should be equitable, easy to understand and sustainable.
Principle 3: Government is and will continue to be the major funder of aged care. Government funding should be focused on care costs as well as delivering services in thin markets. Personal co-contributions should be focused on accommodation and everyday living costs with a sufficient safety net.
Principle 4: The residential sector should have access to sufficient capital to develop and upgrade accommodation, including in rural and remote areas and First Nations communities.
Principle 5: Aged care funding should be sufficient to deliver person-centred, quality care by a skilled workforce.
Principle 6: Aged care funding should support innovation to improve aged care services and their relationship with the health and hospital systems.
Principle 7: There should be transparency and accountability for how aged care funding is received and spent while minimising regulatory burden.

Proposed changes

Home care funding
The new Support at Home Program will be implemented in 2 stages, replacing the current Home Care Packages Program from 1 July 2025 and then rolling in the Commonwealth Home Support Programme from no sooner than 1 July 2027.

Capital funding
Over the next decade to 2030, additional investment of approximately $5.5 billion would be required to refurbish and upgrade existing aged care rooms, increasing to $19 billion by 2050.7 Current funding arrangements will not deliver the required amount of capital funding.

Funding arrangements – reforming co-contributions
While the Taskforce supports government maintaining its central role in funding aged care, it does not support a specific increase to tax rates to fund future rises to aged care funding. There are substantial intergenerational equity issues in asking the working age population, which is becoming proportionally smaller to pay for these services. Moreover, superannuation has been designed to support people to grow their wealth and fund the costs associated with retirement including aged care.

There is a strong case to increase participant co‑contributions for those with the means to contribute, noting that there will always be a group of participants who need more government support.

Reforming co-contributions would also provide an opportunity to create a simpler and fairer system by addressing current inequities. The Taskforce suggests the Age Pension status of the participant, with some additional tiers for part-pensioners and non-pensioners, would be a fair and simple way to determine participant co-contributions for aged care services.

Phasing out Refundable Accommodation Deposits (RAD)
The Royal Commission (Commissioner Briggs) recommended phasing out of RADs over time and replacing them with income through a ‘rental model’, where everyone pays with non-refundable periodic payments, from July 2025.

The Royal Commission identified several issues with the RAD system that led to this recommendation:
• RADs and DAPs are not economically equivalent, which creates incentives for providers and older people to prefer one over the other.
• Use of RADs creates liquidity risks for providers, as the RAD must be refunded within 14 days of the resident leaving care. There is no guarantee the resident will be replaced by another RAD payer and, with falling occupancy rates, there is a risk they will not be replaced at all.
• The presence of RADs distorts access to finance towards providers better able to attract RADs.
• RADs are not a reliable capital financing mechanism for particular segments, such as providers in rural and remote areas.
Paying more towards accommodation will improve sustainability. This will attract increased investment into the sector to upgrade existing homes and build new homes with high quality, modern facilities.

Protections for low-income residents
Older people with limited means need to be protected. While the residential care proposals outlined above would improve the viability of the sector through improved co-contributions, they may make it more attractive for providers to seek out prospective non-supported residents in favour of government-supported residents.

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