Noel Whittaker's Blog Australia is facing challenging times on all fronts, but one sector of the economy is facing particularly tough times. Since COVID-19 struck, the federal government has committed more than $545m in funding to support home care and residential aged care providers, and the government’s My Aged Care service. Unfortunately, even that is going to fall a long way short of what is really needed.
This is because COVID-19 represents a far greater cost to the industry than the obvious increased expenses of additional staff, training and personal protective equipment. There is potentially a huge credit crunch looming for the industry’s almost $30bn accommodation deposits. This is because the aged care industry works somewhat like a legal Ponzi scheme: incoming residents pay a bond, and when they leave, the bond is refunded to their estate. But there is no legal requirement for the aged care home to hold that money in trust for future withdrawals.
The system works as long as the funds paid to outgoing residents are matched by the funds received from incoming ones. And until recently, they were; there was a waiting list for aged care places. But now the landscape has changed. The number of people entering aged care is dropping, and the number who are dying is increasing. Furthermore, a weak property market, combined with favourable aged care and social security means testing of the former home, means that more and more incoming residents are choosing to pay by daily fee instead of by a one-off lump sum payment.
According to industry expert Cam Ansell, “If Australia follows the UK, we could expect to see $9.5bn of accommodation deposits needing to be refunded by Christmas.”
Aged Care Guru Rachel Lane spells it out. “Since July 2014, residents have had the choice of paying for the cost of their accommodation by a lump sum, a daily payment or a combination of the two. The trend has been that more people are choosing to pay by daily payment, or a combination of daily payment and lump sum, than to pay the lump sum in full. In the current COVID-19 crisis, aged care homes who have positive cases are not taking new residents, which means that as residents leave the lump sum is not being replaced. No lump sum, no partial lump sum payment, no daily payment. It’s not being replaced at all.”
Cam Ansell explains, “The situation we have in Australia, asking residents for deposits, is unique to us – it’s been essential because funding has been so lean. Accommodation deposits have funded 56% of the industry’s assets, and it’s worked until now because we have found that when a resident leaves, they are usually replaced with another resident paying a deposit. But with COVID-19 we think that replacement of capital is unlikely and providers will become insolvent unless the government acts.”
Accommodation deposits are guaranteed by the government, so don’t panic: residents (or their estates) will receive their deposit back. There is also a legislated timeframe, generally 14 days, within which providers must refund the deposit or pay the Maximum Permissible Interest Rate (MPIR) on the overdue amount, which is currently 4.1% p.a.
To date, the guarantee scheme has seen the government repay 260 accommodation deposits, totalling just over $43.5m. The legislation gives the Minister the right to levy residential aged care providers to recoup both the default and administrative costs, but to date this has never been imposed. And it is hard to see how the levy could work in the current situation without strong potential to create a domino effect and send even more providers to the wall. The bottom line for the government is that short term credit may be cheaper than long term collapse.