Aged care reforms

Almost a year after the Government announced its response to the Productivity Commission Report on aged care reform legislation has been introduced into Parliament to effect the proposals.

Five Bills were introduced on 13 March which will impact residents who enter residential aged care from 1 July 2014. Residents in care before this date will continue to be assessed under the old rules. If they move services, they can choose to have the new rules apply or continue to be assessed under the old rules.

The reforms will impact both residential and at-home care, with an increasing focus on providing sustainable and accessible at home services. The number of home care places will increase to almost 100,000 over the next five years with four levels of care. This is in line with many people’s desire to stay in their own homes and the difficulty with bringing new residential facilities to market.

The key areas of reform include:

• Removal of the distinction between low care and high care.
• The income-tested daily care fee will change to a means-tested care fee using both assets and income testing. These fees will be capped at the current level of $25,000 (indexed) per year and $60,000 (indexed) over a lifetime. This fee continues to be in addition to the basic daily care fee (which is set at 85% of the basic single age pension).
• Entry fees for residential care will be calculated as a fully refundable lump sum (with no retention amount) and residents will have 28 days after moving in to decide whether to pay a lump sum, periodic interest payments or a combination.
• Facilities will have greater ability to offer extra-service packages for an additional fee. These packages can be made available to all residents and residents can choose to opt-in or opt-out of these services.
• Increased funding to care for dementia patients.
• Introduce home care as a new care type to replace the current at-home packages (currently the Community Aged Care Packages (CACP) and Extended Aged Care at Home (EACH) packages).
• Home care recipients will be asked to pay a basic daily fee of up to 17.5% of the single basic age pension and may also have to pay an income-tested fee (based on income only, not assets). The income-tested fee is capped at $5,000 or $10,000 a year (depending on resident’s income) with a lifetime cap of $60,000 (indexed).
• If an aged care facility becomes insolvent and is unable to repay a bond to a departing resident the government will make the repayment. In this way, the government effectively guarantees repayment of the bonds.

New proposed legislation will allow the government to recover these amounts (plus administration costs) from aged care facilities through the charging of a levy. The levy could be charged over a number of years to minimise the impact on providers but would impose further burdens on the aged care industry.

A new Aged Care Pricing Commissioner will be established to make decisions on pricing issues for entry fees and extra-service fees. An independent review will also be schedule in 2016 with a report due on 30 June 2017 to review the effectiveness of the new rules.

A new Australian Aged Care Quality Agency will be introduced to replace the current Accreditation Agency. This new Quality Agency will be responsible for monitoring the quality of both residential and home care services.

Advice implications

• Some of these changes aim at creating better flexibility in aged care by removing complications and anomalies with the low care/high care assessment process.
• There is no reduction in care fees as daily care fee continues to apply and the means-tested care fee is capped at the current maximum limit for income-tested fees. However, residents with very long-term care needs may benefit from the lifetime cap.
• Some of the current opportunities for clients may no longer be effective for those entering care on or after 1 July 2014 due to the removal of the ability to negotiate higher bonds in exchange for fee reductions. Some income-test reduction strategies may also be less effective. At least the good news is that strategies put in place before 1 July 2014, should continue to be effective as these residents can choose to be assessed under current rules.
• Hopefully the changes provide greater clarity for residents around the negotiation of entry fees, but the full operation of this system and the impact is yet to be seen.

http://www.agedcaresteps.com.au/

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Clients are increasingly adopting a ‘Do-it-with-me’ rather than a ‘Do-it-for-me’ approach and want greater involvement and control of their finances and portfolio. This is best illustrated by the increasing dominance of the SMSF market.

Advisers are missing out on capturing these clients because the focus (perceived or real) on products rather than strategy has meant advisers have largely failed to satisfy the preferences and needs of SMSF clients. Clients have a shifting preference for direct and low cost assets that are transparent and accessible by the retail investor.

Managed funds may be considered expensive and in recent times, their average performance (relative to a benchmark) have not been sufficiently stellar to attract investors attention. Clients’ demand and appetite for advice is firmly grounded in strategic and tailored advice. The selection of product or platform is now three or four rungs down the ladder.

Clients at all levels along the wealth scale are increasingly looking for advice that deals with single issues that are currently at hand rather than holistic advice. Dealer groups that predominantly offer holistic advice risk bucking this trend and marginalising their business and client base.

Industry reforms
The Future of Financial Advice (FoFA) reforms are built on developing a greater level of professionalism and transparency in the advice provided. Advisers will have an obligation to provide appropriate advice and prioritise the interests of the client where there is a conflict with their own interests.

The regulators are stipulating very specifically what they expect from personal advice. ‘Quality advice’ is the new catch phrase and its components are clearly defined by the regulators.

The regulator’s view on what constitutes quality advice is summarised in the diagram below:

The ‘best interest ‘ guidelines place greater accountability on the individual adviser to ensure that the advice provided is tailored to the client’s specific circumstances and needs. This extends to requiring that the adviser research external suppliers like research houses for potential conflicts of interest and benchmark products considered for the client.

Dealer groups have a reduced ability to ‘centralise’ and control key compliance functions relating to recommendations made by their advisers, which can put their AFS License at greater risk. Furthermore, the legislation places greater onus on the dealer group and adviser to understand the limitations of the Approved Product List (APL) and the need to look at products that sit outside the APL to allow advisers to meet the best interests of the client.

Dealer groups need to equip their advisers with tools and processes to enable them to tailor strategy and product recommendations for clients as a means of protecting the dealer group’s license.

For the information pack, click here.

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Following the Productivity Commission report on aged care, the government set up the Aged Care Financing Authority (ACFA) to provide advice on reforms and monitor pricing in the aged care industry. Recommendations for reforms to entry fees which have been endorsed by government are outlined in the table below.

The aim of the proposed pricing tiers is to allow clients to have greater transparency and confidence in the bond negotiation process. The entry fee will be quoted as a lump sum (Refundable Accommodation Deposit) and will also be converted into a Daily Accommodation Payment using the current interest rate that applies for interest payments on bonds. For the December 2012 quarter this is 7.62% pa.

Based on 2012 levels the prices for each Tier are proposed to be:

• Tier 1 – up to $50 per day (equates to lump sums up to $238,845)
• Tier 2 – between $51 and $85 per day (equates to lump sums between $238,846 and $406,036)
• Tier 3 – over $85 per day (equates to lump sums of $406,037 or higher)

These thresholds will be indexed each year at a rate to be yet decided.

Residential care facilities that invest in significant upgrades will be eligible for higher government subsidies from the current rate of $32.76 per day up to $52.84 per day from 1 July 2014.

Advice tips

• Facilities will need to publish the entry fee for all room types. They can continue to charge varying prices for various rooms. While this may allow greater transparency for clients, it means clients will not be able to negotiate bonds higher than the published rates to improve age pension entitlements.
• Bonds paid from 1 July 2014 to secure a place in residential aged care will be fully refundable.
• Clients should not shop around for a facility just based on price. They need to also consider the quality and level of staff resourcing, the convenience of the location, reputation of facility, facilities and quality of accommodation as well as the social atmosphere.

Warning: These proposals are based on media releases issued by the government. Legislation has not yet been introduced to implement the changes. The final legislation is likely to contain further details and may include amendments from these announcements.

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