As a community, we will need to spend more on aged care than we do today, with aged-care spending expected to more than double its share of gross domestic product by 2063.
Aged-care funding should include taxpayer-funded care and resident co-payments. But we need to ensure funding changes don’t reduce access for those on low incomes.
Most experts now accept the two main types of services older people receive in aged care facilities or in their home require different policy responses:
Medicare is now almost 40 years old. Australians long ago made the choice that hospital and medical care should be publicly funded – and people should not be forced to forgo necessary care because of cost. The same arguments apply to the aspects of aged care which look more like health care.
There is usually some form of health assessment for these services and so consumers don’t initiate these services themselves. Because of this gatekeeping, the arguments for people to pay out-of-pocket for aged care (other than ordinary costs of living) are weak.
It’s also hard for consumers to assess the quality of these services, and so one of the preconditions of a functioning market – the ability for consumers to make informed choices – does not exist.
In these circumstances, funding should come from the public purse. Governments should pay the full costs of care (other than ordinary costs of living) for all aged-care residents and those who receive care in their home.
Future funding requirements for care should be met through economic growth, or a specific adjustment to taxation revenue, such as increasing company or income tax payable, or reducing inequitable tax loopholes.
An “aged-care levy”, effectively an increase in income tax modelled on the Medicare levy is an alternative option. An aged-care levy might be specifically allocated – or “hypothecated” – to aged care or, as with the Medicare levy, just go into the total pot of Commonwealth revenue.
The downsides of hypothecated taxes are they potentially reduce government flexibility and make it harder for government to set priorities across all areas of government. Direction setting is even harder if the hypothecated tax generates more or less than expected. A focus on a special hypothecated tax creates blinkers, which may mean the full range of potential revenue sources aren’t considered.
However, an aged-care levy may be a politically palatable source of additional revenue. It’s the most equitable and efficient way of increasing Commonwealth revenue to pay for aged care. Its major downside is that it continues the current policy approach that today’s taxpayers pay for the aged-care needs of yesterday’s taxpayers, and this raises issues of “intergenerational equity”.
Most people meet the full cost of their meals, accommodation, cleaning and so on during their working life, so the normal expectation is that they would meet them later in life too.
However, there are a few reasonable exceptions to the rule:
All of this means that ordinary costs of living may need to be subsidised when they weren’t previously.
Currently there is a mish-mash of policies for consumer co-payments for the ordinary costs of living. People in residential aged-care facilities face income and assets tests which determine co-payments, but residents can pay more for additional amenities. Consumers face a bewildering array of choices for contributions toward accommodation (capital) costs.
Contributions to home care are less structured and providers have more leeway about consumer co-payment policies.
Issues relating to accommodation costs for residential care are very complex, as much of a homeowner’s capital is tied up in the family home. This creates transition issues, especially if one member of a couple needs to move to a different type of accommodation. A complex web of payment arrangements for accommodation costs in residential care has evolved, and a shake up of these arrangements is overdue.
Some form of means- and asset-tested co-payment must be part of the mix, with means and assets including superannuation balances and income streams.
There should also be more consistency across providers in the co-payments consumers have to pay.
Although aged-care policy must balance equity and financial sustainability, the full cost of aged care – including care costs and ordinary costs of living – cannot be met by recipients themselves, so we must be wary of the calls for massive increases in out-of-pocket payments.
Increased contributions from the public purse will be required through income tax, with an aged-care levy one option, or reduced tax loopholes.
Dr Stephen Duckett has recently concluded a decade as Director of Grattan Institute’s Health and Aged Care Program. He is an Honorary Enterprise Professor in the School of Population and Global Health and in the Department of General Practice at the University of Melbourne. He has held top health sector leadership positions in Australia and Canada and literally wrote the book on the Australian health care system (Oxford University Press, 6e, 2022). An economist, he is a Fellow of the Academy of the Social Sciences in Australia, and of the Australian Academy of Health and Medical Sciences.