Noel Whittaker's Blog A major part of the current aged care system is the bond residents can choose to pay for their accommodation. It is known as a Refundable Accommodation Bond (RAD) and, as its name indicates, is refundable in full to the resident or their estate when they leave. The purpose of the bond is to provide working funds for the aged care operator, who has the use of the RAD money until it is repaid. Residents do not have to pay a RAD; they can choose alternative arrangements – opting for a daily payment instead of the bond, or a partial RAD and a lower daily payment.
A major recommendation in the Aged Care Royal Commission’s Final Report was to phase out RADs. The Commissioners point to aged care advocates who claim RAD’s are “unnecessarily complex, inequitable and cruel”. The Commissioners also highlight the very real liquidity issue for providers in refunding RADs as they fall due, an issue that was brought into focus last year due to COVID-19. The ultimate risk here lies with the government, who guarantee the almost $30.2 billion deposit pool.
While the statistics show that there is a growing trend towards paying by daily payment, with 41% of residents paying in this way in 2018–19 compared to 33% in 2014–15, the majority of residents still choose to pay a RAD.
It is simplistic to allege that aged care providers are hoodwinking more than 60% of residents. It is far more likely that those paying a RAD are doing so because they want to swap one pension-exempt asset (the home) for another (the RAD) and because the interest on any unpaid RAD, currently 4.01% per year, is greater than what they can earn in the bank.
Under the current legislation, residents do not even have to nominate their chosen payment method before they enter aged care. And if they do nominate to pay a RAD when they move in, but subsequently change their mind, they simply continue paying the daily payment.
Aged Care Guru Rachel Lane believes that phasing out RADs is likely to lead to a number of perverse outcomes. For starters, aged care residents will resist selling their former home, particularly within the first two years, when the home is proposed to be exempt from pension and aged care means testing. This will slash the number of established homes available to purchase.
Those who do sell their home and find their pension reduced will most likely find that returns from investments such as cash and fixed interest products won’t replace the lost pension. Those who lose their pension completely will also need to contribute more towards their cost of aged care through the proposed new means testing arrangements.
Without the option to pay by lump sum, residents will be forced to pay by daily payment. The current interest rate is 4.01% a year, but we shouldn’t bank on it staying that low – before the GFC the rate got as high as 11.75% a year. Whatever the rate, it is likely to put pressure on aged care residents’ cash flows.
It’s hard to see why the Commissioners have made this recommendation. Aged care providers are not able to insist on charging lump sums – it is currently the resident’s choice. A system built on “Care, Dignity and Respect” should be providing more choice, not less.
Taking away the ability to pay a RAD is likely to prove a triple whammy for many aged care residents: loss of pension, higher fees, and no lump sum available on departure. But it’s a trifecta worth billions for the government: lower pension payments, greater means tested aged care fees, and no need to guarantee a $30 billion pool of money.