Consider a hotel that guarantees you will pay no more than $25 000 a year for your room service.
The hotel manager then proceeds to charge you $240 a night for 3 months, with the rest of the year free.
This may not suit for 2 reasons:
- You may have planned to be spending $68.50 a night (this is the average of $25 000 over a year), and may not be ready to pay $240 a night, even though over a year its the same, and;
- If you leave after 3 months, you have effectively been paying staying at a rate of $87 600 per year - because all the cost for a year has been "front loaded" into these months.
What if the hotel gave you the chance to set a limit on the daily rate you would be charged for the room service by filling in some forms? It would not change your cost per year, but would help cashflow, and limit the cost if you did not stay for a full year.
This is like the choice older Australians have with the means tested care fees for residential aged care.
The way it used to be
Under the old system of aged care means testing, the part of aged care costs that was based on the resident's ability to pay had a daily maximum - and this was about $74. If the resident didn’t want to be assessed for fee support (normally under the assumption support was unlikely), they could choose not to apply and then be liable for the daily maximum of $74. This was as bad as it would get.
Then of course all the other components had to be considered - like the basic daily fee, accommodation costs, extra services fees and optional extras, as well as pharmacy costs, change in pension eligibility and the rules around the home (lets not forget all the other complex parts of this story!).
Under the new system, as implemented July 1 2014, things work a bit differently.
This new system is remarkably effective in getting older Australians to pay more for their cost of care.
In this article we look at how the means tested care fee is applied. It’s very interesting.
The old cap trick
The means tested care fee allows the government to assess how much you should contribute to the cost of care.
Older Australians in residential aged care can expect 3 things from this fee:
- There is an annual limit of what the resident will pay - up to $25k per year.
- There is a lifetime limit of what the resident will pay - a maximum of $60k.
- The resident is liable for the cost of care as assessed in the Schedule of Fees and Charges for Residential Aged Care, up to a daily limit as calculated by aged care means testing.
Now the calculation that the government does (based on the information the resident provides in the Combined Assets and Income Assessment ), determines this daily limit.
(Contact us for more detail on how the government makes this assessment.)
Let's take an example of someone considering the calculation of the means tested care fee.
If the means tested care fee cap is $25 000 per year, then this works out to be about $68.50 per day. If a single person had no other assets but $1.150m in cash, they would be right on the the cap of $68.50 per day (or $25 000 per year). So if someone had $1.2m in assessable cash assets, should they bother with the government testing, given the annual result is still going to be $25 000 per year?
Here is where it gets interesting.
If a resident doesn’t want to bother filling out the forms, they are still protected by an annual (and lifetime) limit. That means that they won’t pay more than $25 000 per year in means tested care fees.
However, they basically leave the daily limit up to the government.
What is the daily limit? Well it is the extent of the payments the government pays the aged care provider, and it can be substantial.
How high can this go? Let's find out.
Consider the situation where the resident has high level requirements for care. In these cases, the government's payment to the aged care facility for providing the care could be $208 per day, and even higher when taking into account other supplements, as outlined in Aged Care Subsidies and Supplements. (The Residential Care Fee Estimator maxes out at $240 per day).
What is the outcome? Well at a rate of $208 per day, the $25 000 cap would be reached in 4 months.
Now, if properly assessed by the government, a resident would need to have financial assets of $2.5m to be paying for the cost of care at this rate. (Try punching in $2.5m in financial assets in the Residential Care Fee Estimator).
If the resident stays at this level of care for a whole year, then the cap is reached early in the year, and for 2/3 of the year the resident would not be paying any means tested care fee.
Meanwhile, cash-flow has been high for one part of the year, then drops off.
However, If the resident had financial assets less than $2.5m, the government would assess they should not have to contribute the full $208 in care fees per day. This could make the overall cost of care be more evenly spread over the whole year. The resident with $1.2m in cash would be limited to paying $74 per day.
This story gets more important when the resident is not in care for a full year.
What if this resident is only in care for 4 month of the that year? Without the daily limit, they would pay $25 000 in this short period. The resident who went through the assessment and had a daily cap of $74, will only pay $8 880.
If a resident is requiring very high levels of care, and only for a part of the year, they may pay high levels of care fee without the benefit of a daily limit . If government means testing means these daily costs could have been reduced, the resident should make the most of this opportunity.
What does all this mean?
Think carefully about assuming the resident is too wealthy to benefit from government support. Even at high asset levels, there may still be the opportunity to limit the daily amount of the means tested care fee.
This daily limit will at least help smooth cash flows, and more importantly will limit costs when the resident is not in care for a whole year.
Persevering through the 32 page Combined Income and Assets Assessment may be worth the effort.
Here is a tip: If the aged care fee estimator produces a means tested care fee of more than $68.50 per day, then filling in the paperwork will help smooth resident payments, and allow some limit on payments if the resident is in care for less than a whole year. (This year does not have to be the first year either)
We can help.