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Recent reports reveal there are now across Australia and a facilities.

Figures like these suggest the aged care sector is overwhelmed by demand for services, as it continues to cope with understaffing and a lack of resources exacerbated by the COVID pandemic.

Pay levels across the sector have also been criticised. While a rise in the national minimum wage and the modern award minimum wage (of 5.2 per cent and 4.6 per cent respectively) will improve the base rate for some , there are still significant challenges ahead.

The Australian government is tasked with delivering a sustainable aged care funding model. Australian government-funded aged care services include in-home care, residential care in nursing homes, and short-term care (such as respite care). But within all of these models, there is a myriad of systemic issues, uncovered in the  of the Royal Commission into Aged Care Quality and Safety (2021).

“The current government commits to improving aged care quality and financing, along with other government-provided services including health and child care,” says Michael Sherris, Professor in the School of Risk and Actuarial Studies at �鶹��madou Business School and Chief Investigator and Director of Industry Engagement at the .

“At the same time, it must address the massive deficit from the COVID pandemic, as well as the impact of increasing inflation and interest rates. There is no question that the current approach to aged care financing is resulting in rationing and neglect in the aged care sector,” he says.

Prof. Sherris is a leading expert in this field, having been appointed Head of Actuarial Studies at �鶹��madou Sydney in 1998 to establish the program. While he officially retired in 2016, he continues to research, as well as supervise and mentor other researchers. 

While the Aged Care Royal Commission made recommendations to improve the financing of aged care including an aged care levy, Prof. Sherris says the increased resources will require a significant change to aged care financing in Australia. Areas like intergenerational equity will need careful consideration, along with the structure of care payments and incentives to limit moral hazard. 

A balance between financing sources and integration with retirement income financing is needed to fund a more sustainable aged care model in Australia, says �鶹��madou Business School's Michael Sherris. Photo: Supplied

Put simply, additional funding for care services is required, and one way to achieve this is through the private insurance market, says Prof. Sherris.

Additional funding measures could include government financing from consolidated revenue, contributions from individuals during their working lives, and means-tested co-payments from individuals for care costs. But to do this adequately, a balance between financing sources and integration with retirement income financing is needed.

“The development of private market insurance to finance individual co-payments and contribute to aged care costs such as living and accommodation during residential care will, therefore, be worth exploring,” says Prof. Sherris.

But how might Australia achieve such funding? Is private market insurance just a way for the government to offload its responsibility to ensure quality aged care options for seniors?

Private insurance, which differs from Australia’s current private health insurance market, can certainly help, but there are several important considerations. Prof. Sherris explains:

How does private insurance for aged care differ from private health insurance?

Prof. Sherris: Private insurance for aged care is usually referred to as long-term care insurance. In return for a premium, it provides specified payments when an individual becomes functionally disabled and needs care. It differs from private health insurance, where, in Australia, some private health policies cover care needs after a hospital stay or in some cases palliative care.

Long-term care insurance makes payment usually when an individual has difficulties in carrying out a specified number of activities of daily living (ADLs) that relate to self-care (like eating, dressing, getting in to or out of a bed or chair, taking a bath or shower, and using the toilet) or suffers cognitive decline (impacting memory, language, thinking or judgement) and requires care to function, referred to as BEING functionally disabled.

Private long-term care insurance most often uses difficulties in ADLs, usually, two or more, to determine when payments are made. These difficulties are usually certified by a physician. There is usually a maximum benefit period and a waiting period before benefits are paid. Policies can pay cash benefits, regardless of costs expended, or pay amounts based on the cost of care required, referred to as indemnity or reimbursement policies.

Long-term care insurance is also often provided as riders to other insurance products such as life insurance, retirement life annuities or variable annuities.

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How could private long-term care insurance benefit aged care in practice?

Prof. Sherris: In practice, individuals would first need to consider their aged care needs and the finance they have in retirement including superannuation and home ownership as well as the Australian government aged care funding. They would need to consider the means-testing for government aged care funding and the annual and lifetime caps on individual contributions to care costs. If they then decided they wanted to provide additional funds to pay for care, say if they were to become functionally disabled, then they would purchase long-term care insurance for either a single up-front premium or a regular monthly premium for a specified amount of regular care payment when functionally disabled.

But long-term care insurance is not for everyone. They would need to decide to purchase long-term care insurance early on in retirement, or preferably before retirement while in good health, since insurance premiums increase with age and insurers usually do not offer long-term care insurance to individuals not in good health.

It could, however, be designed to fund care requirements during waiting periods for a government aged care package, pay for additional care, meet co-payments, or fund the higher level of co-payments or daily accommodation costs required for residential care.

Is long-term care insurance available in Australia?

Prof. Sherris: Currently, there are several countries where private long-term care insurance is available including the UK, USA, and France. But there is no private insurer offering long-term care insurance in Australia. The Australian government provides aged care home packages and provides funds to residential care providers to finance aged care needs based on an Aged Care Assessment. 

In Australia, the Retirement Income Covenant for Superannuation funds is placing an increased focus on risks and income needs of members in retirement. A major risk is needing aged care, and with the rationing and funding issues of the government aged care financing leading to a system of neglect and long waiting periods for home packages, there is likely to be an increased focus on aged care financing needs and how they link with superannuation and retirement income needs and risks in the future.

Given the issues with government-provided aged care highlighted by the recent Aged Care Royal Commission, additional funding through private long-term care insurance can provide cash when needed and is not available from the government aged care financing. As with all insurance, there can be significant benefits to paying premiums. For example, individuals can have more certainty about their future retirement risks and finances.

Long-term care insurance comes with a premium price tag, which means it is more likely to be of interest to couples with significant financial resources who want to protect an inheritance. Photo: Shutterstock