ACFA recommends keeping $32B RAD system, going against Royal Commission recommendation

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The Aged Care Financing Authority (ACFA) has warned that suddenly scrapping the system of Refundable Accommodation Deposits (RADs) could leave a “significant number” of providers struggling to repay debt and facing liquidity pressure – countering a key recommendation contained in the Royal Commission’s Final Report.

As we reported here, the Department of Health funded the Macquarie University Centre for the Health Economy (MUCHE) to look at the role of lump sum accommodation payments in the residential aged care sector for ACFA in October 2020.

Retaining RADs and DAPs the best option

ACFA’s report from the research has concluded that having a system that continues to include RADs and DAPs along with user contributions is the most appropriate.

The report discusses four options for a future role for RADs:

  • Retain the current system of RADs and DAPs
  • Retain RADs and DAPs but introduce changes to encourage greater use of DAPs
  • Retain RADs and DAPs but introduce changes to create economic equivalence between the two
  • Prohibit RADs with effect from a fixed date

Counsel Assisting and Commissioners recommend phased removal of RADs

The Counsel Assisting had presented evidence that reliance on RADs increased the risk of “complacency and inefficiency” among providers – currently, the value of RADs is at $32 billion with the average RAD value at $332,000.

They proposed consideration should be given to their phased removal, a recommendation that the Royal Commissioners took up.

Recommendation 142 from Commissioner Lynelle Briggs AO recommends the Government begin to phase out RADs for new residents from 1 July 2025, and assist providers with the transition away from RADs as a source of capital by establishing an aged care accommodation capital facility,

But this funding directs incentives towards providers to develop small household models of accommodation and there is little other detail around how such a facility could be established.

“Significant” number of providers to struggle without RADs

ACFA’s report notes that while the use of RADs has declined in favour of DAPs, it found that if this change was to accelerate – either through a drop in occupancy or by a change in Government policy to move away from RADs with a short implementation time – a “significant number” of providers could struggle to adjust.

“Providers who are more dependent on RADs could struggle to repay debt and may face liquidity pressure,” it reads.

“Additionally, the finance market would be unlikely to be able to provide sufficient debt for providers given the higher cost of that debt and a greater reliance by financiers on conventional lending requirements. ACFA notes that a significant number of providers are already excluded from accessing commercial debt despite holding RADs as they do not meet lending criteria such as size, management experience, and strong financial positions.”

No viable alternatives for financing the system

While the sector could absorb a small gradual reduction in RAD balances, ACFA states it is unlikely that banks and investors could provide sufficient funding to meet the future capital financing requirements of the residential aged care sector – and there are no ‘alternatives’ waiting in the wings.

“Given how dependent the current system is on RADs, any significant policy move away from RADs would have to be transparent, gradual, involve sector consultation and occur alongside increased returns for the sector as a whole – noting the current diversity of financial performance across providers.”

ACFA does acknowledge the financial risks associated with RADs – which are guaranteed by the Federal Government – and recommends strengthening prudential regulations, including liquidity and capital adequacy standards, and improving financial reporting – both recommendations also made by the Commissioners.

They also suggest the Government consider a form of risk premiums to be paid by providers for the guarantee with the cost likely to be passed onto the consumer, plus better access to information and financial advice for consumers.

Which view will the Government favour – ACFA’s or the Commissioners?

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