The aged care payment system should be re-designed to support quality

May 31, 2023
Female doctor or nurse and patient.

The aged care payment system currently requires providers wishing to make a profit to do so by skimping on care and services. A new payment structure is needed to reverse the incentives, and link higher profits to better care.

In several recent articles in The Guardian Henry Belot has highlighted the alleged practice of the residential aged care sector – assisted by consultants – of gaming the care classification of residents to maximise profitability.

This is not a new problem. Under the ACFI (Aged Care Funding Instrument) used for many years to calculate care funding for aged care residents, an ACFI maximisation industry emerged. “ACFI co-ordinators” were employed across the sector, and external consultants proliferated. Those resources are now being redeployed to assist providers to maintain profitability under the recently introduced AN-ACC (Australian National Aged Care Classification) funding model.

At least under the new system resident evaluations are independent of the aged care provider (under ACFI the providers carried out the assessment). And over time the work of the Independent Hospital and Aged Care Pricing Authority should ensure that the funding attached to different classifications reflects as accurately as possible the relative cost of providing the mandated level of care for residents in those categories.

However, this will not address the fundamental issue: the system of aged care funding means that providers can only make a profit by delivering aged care services at a lower cost than the funding they receive to provide them.

In most areas of the economy the incentive to increase profits by reducing costs drives productivity. A biscuit maker that can use more efficient ovens, reduce wastage through better handling, and use lower cost green packaging, will be able to increase profits.

The aged care sector – and the care sector more generally – is different because the product is care: a worker spending time interacting with, looking after and providing for the personal needs of the recipient.

Given three-quarters of aged care costs are labour costs, the easiest way for a provider to reduce costs is either to reduce care time, or to reduce the cost of that time by employing cheaper, less well-qualified staff.

Reducing care time (or the quality of care time) while receiving the same funding does not increase productivity – it diminishes output. It is the same as biscuit makers reducing the size of the pack while charging the same price.

The sector has got away with this until now because the standards used to evaluate its performance have been so lax. Mandating minutes of care time will make it harder to achieve savings through labour reduction, but human ingenuity driven by the profit motive is a powerful force. A motivated provider will probably find scope to achieve further savings in other areas (food, laundry, heating and cooling) if labour costs can be cut no further.

A possible solution to limit profits being diverted from other funding is to pay for profits separately and explicitly.

Some groups will argue that this is inappropriate, because nobody should be able to profit from the provision of aged care. However, it is not clear why aged care is different to any other socially desirable activity. Food production is essential to our society, yet nobody complains if farmers make a profit. And anybody who thinks timely access to quality services can be guaranteed by a system of government provision should examine the public hospital system.

Under a separate payment for profit arrangement, the Pricing Authority would determine the funding levels required to deliver high quality aged care services, excluding any allowance for profit. Providers would be funded on this basis, and would be required to acquit the funding to demonstrate that it was being spent on delivering services.

The framework for acquittals would need to be designed to ensure that providers did not shift profits to the books of parent companies through inflated charges for rents, labour hire, or management services.

The government would then provide an additional funding stream in the form of a profit allowance, calculated on a per resident per day basis to avoid paying providers for empty rooms.

The allowance could be set at different levels to create an incentive to provide aged care in underserviced outer regional and rural areas. The rates could be set to encourage provision of care through smaller home-like services, rather than more “efficient” 200 room facilities.

Once the government develops a robust system for measuring the quality of care, the allowance could be increased for providers with a track record of excellent care, and reduced or suspended for providers delivering substandard care.

Under this model the profit motive would encourage providers to improve quality, rather than act as it currently does as an incentive to reduce quality by cutting costs to make a profit.

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