Australia Looks Toward Long-Term Care Insurance to Provide Aged Care

Long-term health care is a global problem, and Australia is no different. The Australian government is tasked with delivering long-term health care. The government funds all aged care services, including in-home care, residential care in nursing homes, and short-term care (such as respite care). 

However, the large number of people who require help with daily living activities or supervision makes the problem of long-term health funding even more difficult. An expert says that private Long-Term Care Insurance could benefit many Australians.

Michael Sherris, Professor in the School of Risk and Actuarial Studies at the University of New South Wales Business School and Chief Investigator and Director of Industry Engagement at the Centre of Excellence in Population Ageing Research (CEPAR), says that long-term health care costs will increase as the population ages. Sherris says there are constraints on government funding in Australia.

The current government commits to improving aged care quality and financing, along with other government-provided services including health and childcare. 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.

Professor Sherris is a leading expert in this field. He was appointed Head of Actuarial Studies at UNSW Sydney in 1998 to establish the program. While he officially retired in 2016, he continues to research and supervise and mentor other researchers.

Significant Change Needed in Aged Care Financing in Australia

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

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

Professor Sherris

LTC Insurance Currently Unavailable in Australia

Private insurance for aged care is usually referred to as Long-Term Care Insurance. It is currently available in the United States, Canada, and the rest of the United Kingdom, France, and other countries. Private Long-Term Care Insurance is currently not available in Australia.  

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 short-term care needs following a hospital stay or, in some cases, palliative care.

Sherris explains that Long-Term Care Insurance provides benefits when an individual needs help with activities of daily living (ADLs). ADLs deal with self-care needs like eating, dressing, getting into or out of a bed or chair, taking a bath or shower, and using the toilet. It will also provide care for those who require to be supervised because they are suffering cognitive decline (impacting memory, language, thinking, or judgment) 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 someone is eligible for benefits. The need for care is generally certified by a physician or other health care professional. 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.

LTC Insurance Not for Everyone

Professor Sherris says, however, that Long-Term Care Insurance is not for everyone. He says people would need to purchase Long-Term Care Insurance early on in retirement, or preferably before retirement, while in good health. He says that insurance premiums are based on the age someone is when they obtain coverage. Plus, he says, insurers usually do not offer LTC Insurance to individuals in poor health.

There are other ways the insurance program could work.

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.

Professor Sherris

Care Rationing and Increasing Waiting Periods for Care Plague Government Program

In Australia, the Retirement Income Covenant for Superannuation funds is placing an increased focus on risks and income needs of members in retirement. There is an increasing need for aged care in Australia, creating care rationing, neglect, and long waiting periods for in-home care. Sherris says there is likely to be an increased focus on aged care financing needs and how they link with the future superannuation and retirement income needs and risks. 

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.

Asset Protection Major Reason for LTC Insurance

Sherris says Long-Term Care Insurance is most likely to interest couples with significant financial resources who want to protect an inheritance. 

It's also important to include inflation in benefit payments, which adds to the Long-Term Care Insurance cost. Insurers are also not always willing to provide Long-Term Care Insurance because of the risk of having to pay a higher number of claims than anticipated to high-risk clients.

Professor Sherris says that an aged care levy was recommended by the Aged Care Royal Commission to increase funds available for aged care. It is paid based on taxable income during working life. He says it would be like the Medicare Levy, which partly funds government health and NDIS costs.

If such a levy was adopted for aged care, then this is where intergenerational issues become important and also where the role of an insurance structure for financing aged care would be important to ensure the aged care levy was applied to improving aged care.

Government Still Has Role – Especially for Those with Limited Resources

Some in Australia say that private insurance is just a way for the government to offload its responsibility. Sherris says that government funding will always be the most significant form of financing for aged care, especially for individuals with limited resources in older age.

The government funds specified amounts for home care packages and specified residential care funding. The aged care royal commission has highlighted how this funding is inadequate to provide a sufficient level of quality of care, and substantial additional funding would be required. Otherwise, the current system of poor-quality residential care and long waiting time for home care packages will continue. 

Sherris explains that in other countries such as Japan, where they have an insurance-based aged care financing system, individuals contribute, but government financing is important. 

Individuals with sufficient resources are generally willing to contribute towards their aged care, especially if it improves the quality. With the government budget under pressure, additional resources from individuals will contribute to improving the system, especially as the Australian superannuation system matures and retirees will have more financial resources to support the risks of needing aged care in retirement.

Professor Sherris says the government could allocate more funding to aged care in the budget. It rations the funding provided for aged care based on a ratio of people over age 75 in the Australian population. He says the basis they use to allocate funds is inadequate since the measure they used does not reflect the aging population and the time when aged care will be needed. 

The government is also under budget constraints.

No matter how you consider the financing of aged care, there will be a need for more contributions from individuals if we want to meet the future expected demand and have a reasonable quality of care.