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Who pays?

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The confusion over changes to the daily accommodation charge continues, but the real story is, there are likely to be high increases in the cost of care. 

From July 1, 2014, the payment made in lieu of a daily fee will be known as a “refundable accommodation deposit”, and providers will have greater flexibility in setting these charges for other than supported residents. While you may think this is essentially a change in name, the reality is very much more than this.

As the RSM Bird Cameron aged care team worked through the proposals to understand the new daily accommodation charge and the lump sum equivalent rules, it soon became evident that the new system will be as difficult to understand as the current one and there is a real risk that this will cause accommodation charges to increase. In the example below the increase could be as much as 74 per cent.

The money or the box

Subject to the residents’ preference operators can either have the money (daily fee) or the box (lump sum). Where the lump sum applies to beds currently not bonded, it is essential that operators understand the impact of this choice on the operating surplus of their facility.

If you take a lump sum and the money is invested (under the permitted use rules) the operator will earn an investment return (say 4 per cent). So the first issue is to consider the investment return relative to the forgone current accommodation fee (accommodation charge).

Currently, the maximum daily accommodation charge is $33.29 ($12,150 p.a). At 4 per cent, this is equivalent to a lump sum of $303,780. If the money is used to reduce debt with an interest rate of 6 per cent, the bond equivalent would be $202,500.

In order not to see pressure on operating surplus, operators will need to fully understand the use to which they will put lump sums and the return that is appropriate from aged care facility as a rental stream.

Setting a daily accommodation charge

$33.29 per day may convert to $303,780 but for a provider lump sums are a function of daily charge and the maximum permitted interest rate (MPIR).

This means that providers need to set their accommodation charge based on the notional income they expect to derive from the invested lump sum. In the above example, and using the current maximum permissible interest rate, the operator has to set a daily accommodation charge at $58.00 to achieve a lump sum of $303,750 or $38.64 to achieve a lump sum of $202,500. Therefore, to be sure of replacing the lost daily accommodation charge of $33.29 an operator has to set a new daily charge at $58.00 which is a 74 per cent increase.

Of course, the new fees will also replace existing bonds and the retentions the operator was entitled to. Looking only at the impact of the loss of retention demonstrates a further complexity. The present retention is $323 per month. Using rates of 4 per cent for investments and 6 per cent for borrowings to replace this income requires a bond increase of between $64,600 and $96,900.

The actual rate is dependent on the liquidity ratio maintained by the operator. The new daily charge to replace the lost retention is between $12.33 and $18.50.

The numbers just keep changing

Another challenge for operators arises because the lump sum is based on the maximum permissible interest rate; these amounts are interest rate sensitive in a way that the existing bonds were not. As the MPIR declines, the bond goes up unless the operator drops the daily charge and as the MPIR rises, the bond comes down unless the daily charge is increased. The MPIR has changed every quarter since March 2008 ranging from 11.75 per cent to its current rate of 6.95 per cent so this is another significant issue to be considered.

Pensions with limited means

Currently, a pensioner with their own home and no other income is a supported resident and the operator receives the maximum daily accommodation fee of $33.29. Under the new means test arrangements, this person will now be asked to contribute $49.86 to the cost of their accommodation. However, with no income other than the pension they will be unable to do this until they sell their home, so this raises the prospect of increased bad debts to operators.

Conclusion

While sustainability in aged care requires a move to a ‘user pays’ system there are many traps for unwary or unprepared operators as they seek to develop their pricing models. Not only are they faced with changing the system for existing bonded places they also have to introduce a lump sum alternative on places that were not previously involved in those payments. This all adds to the complexity and risk: operators who fail to prepare for the change will ultimately see higher costs for residents’ accommodation or an increase in financial pressure on their operations.

RSM Bird Cameron has been working with clients to assist them in developing pricing models that ensure they are not disadvantaged by the changes. We often recommend operators look at airlines as an example. By having flexible pricing to suit both the needs of residents and operators, they end up with average accommodation revenue per bed equivalent to the current combination of resident fees investment income and interest savings.

Bruce Bailey is a director of aged care for RSM Bird Cameron.

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