Updated: Oct 13, 2019

The Community has lost confidence in the Australian aged care system. There are regular reports of unacceptable care and few people now want to go into residential care. Not surprisingly we have a Royal Commission examining the problems. What has happened?

Compared with a hundred years ago, our life expectancy has increased dramatically. The majority of us will live well into old age and die from chronic disease. On current data, around half of us are likely to use the aged care system at some point in our lives. 

Today, in Australia Aged care, is a large and complex service system. Over a million people are receiving some form of aged care including basic home support, high level residential care and home care packages.

There are over 5500 age care facilities and more than 350,000 people are in the paid aged care workforce. Around $22 billion is spent on these services. The Commonwealth Government has responsibility for aged care. 

But the contemporary Australian aged care system is a relatively recent creation. Prior to world war 2, aged care was largely the role of the family and benevolent State and charitable institutions. Commonwealth and State involvement was limited, partial and haphazard.

Now in advanced economies like Australia, families are much smaller; women are much more likely to be in the paid workforce; adult children are much more geographically mobile and dispersed; family structures are much more fragmented; and the community is much more diverse as a result of globalisation and migration.

Contemporary welfare states, like Australia, improve economic productivity, social cohesion and equity by providing support to families for child care, disability, mental health and aged care. These services take the pressure off families to provide informal care and support. In particular, they permit much greater participation of women in the paid workforce.

Of course, these services and support could be provided through private markets, but the costs are high, unpredictable and fall unequally on different families at different points of the life cycle. The community does not see this as fair. Nor are we prepared to see unacceptable outcomes for vulnerable people when private arrangements fail. That is why government involvement is central.

Comprehensive national policy for aged care came to Australia when the Hawke Government moved to take primary responsibility for aged care services in the 1980s. 

It did so by establishing population planning ratios for aged care places, a funding model for capital and services, a delivery model based on dependency and place of care, an assessment model for access and eligibility and a national regulatory framework. All of this was financed through pay as you go general revenue and user contributions.

The Hawke Government model was highly centralised with uniform national planning regulatory and funding arrangements. There were rigid boundaries between different types of service delivery, including hostel, nursing homes and home and community care. The model focused on funding and regulation to manage access, provision and quality. The delivery of services was left to a range of closely managed private, non government and State agencies.

State Governments, which at the time had a significant role in aged care, were generally happy to hand over responsibility for aged care to the Commonwealth. It was clear the number of older people was growing as the baby boomers were headed for old age and the States did not have the money to deal with these emerging pressures.

The Commonwealth put in more money, but focused heavily on cost containment through rationing, means testing and by requiring older people to meet some of the costs of care themselves. At the same time, the Commonwealth tried to maintain quality standards through a highly centralised provider accreditation scheme and complaints process. 

Over time, the system came under serious pressure. On the one hand older people and their families wanted improved access and quality, particularly to allow people to ‘age in place’. Advocates wanted increased home and community care and the integration of hostel and nursing home funding. 

On the other, private and non government providers wanted better funding to meet the cost of providing services and accommodation. They also wanted more flexibility in staffing, administration and how they demonstrated compliance with regulations. 

Government was caught in the middle, trying to hold down growth in expenditure, ensure access and quality and maintain the viability of providers.

The 1997 Howard government response and the subsequent Labor government refinements in 2012 put their faith in greater deregulation, market competition and consumer control. They also wanted consumers to pay more where they were able to.

This saw dramatically increased accommodation deposits and daily accommodation payments for residential care, the integration of hostel and nursing home funding streams, a revised classification and funding model, and the introduction and rapid expansion of home care packages with means testing. 

Importantly, consumer directed care was introduced for Home Care Packages. This meant eligible consumers could pick the agency they wanted to provide their care and the money for their package would follow them.

The aim of reform was to move from the earlier rigid, heavily centralised, cost constrained approach to an integrated, flexible, needs based, consumer directed model. 

But in practice many of the features of the earlier model remain in place. The aged care budget is still capped. Eligibility and access remain tightly managed. Planning remains centralised. Funding streams still create rigid boundaries between community and residential care. Quality assurance remains focused on the maintenance of standards through centralised accreditation processes.

As a result, the combination of the earlier centralised Hawke Government model with subsequent market reforms of the Howard and Gillard governments have produced a set of tensions that have not been resolved. There are several key issues that need to be addressed if the unstable transition in place at the moment is to be successfully concluded.

The system is under funded

First there is significant evidence that Australian aged care is underfunded. This is one of the main causes of problems with access to services and the quality of care.

There is a strong argument for increasing funding to meet current and future needs either through hypothecated taxation for example by increasing the Medicare levy or through the introduction of a mandatory social insurance scheme.

Increased revenue could then be used to progressively uncap access to aged care services to meet demand and to improve the quality of care that is provided. This point has of course been made previously by bodies like the Productivity Commission.

We also need to clarify the contributions we expect consumers to make. As with the National Disability Insurance Scheme, older people could be expected to meet normal living and accommodation expenses themselves. Additionally, means tested contributions for care and accommodation costs could simplified and streamlined. 

The evidence for underfunding is clear. Australia spends less on aged care than similar countries. On average countries in the OECD spend 1.4 per cent of GDP on aged care services. Australia spends around 1 per cent. Countries like Sweden and the Netherlands spend three times as much of their national income on aged care than Australia. 

There is insufficient funding to meet the demand for Home Care Packages. There are more people waiting for their allocated Home Care Package than the total number of packages that have been allocated. 

In June this year there were 120,000 people assessed as eligible for a home care package who were waiting to get there allocated package. Waiting times for most packages are longer than 12 months. Most get interim services, but the wait causes significant disruption, distress and frustration. At the extremes some die as they wait. Some end up in inappropriate care.

Cuts to residential care funding are sending a number of agencies broke. Recent changes to reduce growth in government outlays for residential care have put pressure on the financial viability of a number of residential care providers. Survey results suggest that nearly half of all residential facilities made a loss in 2017/18. Smaller services, many of which are in rural areas, were particularly vulnerable. 

Facilities address financial stress by reducing staffing, services and maintenance costs. This increases the risk of poor quality care, experiences and outcomes for residents. 

The Commonwealth has allocated short term funding to deal with the immediate crises. But without broader action underfunding will get worse. 

It’s clear that demand for services will increase dramatically as the population ages over the next three decades. If current spending per person is kept constant and adjusted for increased life expectancy total spending on aged care will need to double by 2035 to keep up with population ageing. This does not take account of any unmet need that already exist.

Options for raising the required additional funds include increased taxation, greater user contributions, voluntary participation in private long term care insurance, and mandatory participation in long term care (social) insurance. 

Financing through general taxation is problematic when economic conditions change. It’s then tempting for Government to cut growth in the aged care budget as happened recently. Pay as you go budget financing for aged care is also inequitable as younger generations will increasingly pay for older people’s care as the population ages. Nevertheless, it is how most Commonwealth services for the community are financed.

The recent increased funding required to meet the reasonable and necessary costs of long term care for people with disabilities in Australia was supported through a mix of hypothecated taxation (an increased Medicare Levy) and general taxation. A similar strategy could be also be adopted to increase funding adequacy for aged care.

User contributions are another way of financing aged care. However, high user contributions can be unfair, even when they are means tested. Inevitably those who have the greatest need for services have to pay the most and these costs can be very high. So called ‘stop-loss schemes’ that place an upper limit on contribution costs for older people (after which the government meets costs) are a strategy for partially reducing this inequity and risk. How fair they are depends on where the limits are set.

Private, voluntary insurance schemes can manage risks and finance aged care services, but they require appropriate market conditions, and they usually require favourable regulatory arrangements and government incentives. Although in Australia insurers have expressed an interest in developing appropriate products, they have not yet done so. 

Means tested social insurance is fairer. People make contributions to create a pool that pays for their future care when they need it. The pool is allocated on the basis of need so it spreads the burden across insured population. It also means younger people aren’t paying for older people. However, it takes time to develop a sustainable funds pool. Alternative arrangements are required during the establishment phase.

Japan provides a recent example of the introduction of a long-term care insurance scheme. Long term care (which we know as aged care) is part funded by premiums paid by people aged 40 and over and part funded by taxation. Users are required to make a 10 per cent contribution to the cost of services. The scheme is considered affordable and popular. 

Aged care is overly centralised

The Commonwealth’s high level of centralisation causes significant rigidity and inefficiency in the current aged care system. It reduces flexibility, innovation and consumer choice.

Responsibility for the day to day planning, oversight and management of aged care should given to independent regional bodies that have much closer relationships with providers and the community. These bodies should act as system stewards.

System stewards should also provide independent local support for consumer directed care. 

In theory, consumer choice and provider competition are meant to drive innovation, efficiency and quality. In practice the current system is not designed to allow this to work. 

For consumer directed care to work, older people and their families need independent local, personalised comprehensive advice and support to navigate eligibility and access, care planning and service contracting. 

On their own, it is difficult for consumers to gather the information they need, analyse it, plan and negotiate with service providers to get what they need. Oddly, in the current system assessment isn’t used for care planning, only to determine eligibility and funding levels. Consumers are on their own in planning, finding and negotiating services.

Asking service providers to assist consumers to determine the level of service they need and then to provide and coordinate their care creates enormous moral hazards. Providers have their own legitimate interests to attract consumers and ensure they are financially sustainable. These often conflict with the interests of consumers to get the best possible arrangements to suit their needs.

Consumers need independent, local support to help them sort out access and eligibility, plan services, negotiate with providers and coordinate care.

Regional system stewards should provide information on local service options and service, costs and quality. They should determine eligibility for services and co contribution levels. 

They should assist people in service planning to meet their needs and choices and help people to negotiate service agreements. Where older people choose, they should coordinate and manage service providers on their behalf. This support should be funded separately from care services.

Aged care assessment and regional assessment services should be integrated and combined with service planning. Eligibility assessment should be streamlined and assessment should help older people to plan the services they need. 

The current system navigator trial that is underway across Australia is a step in the right direction.

More broadly, individual older people and their carers cannot develop and manage the local service system to make sure it has the capacity to meet their needs. Regional system stewards should be responsible for the development of local aged care systems.

Similarly, it is difficult to manage quality assurance successfully from Canberra. Cyclical accreditation reviews aren’t enough. Most providers already pass these reviews, despite regular incidents of very poor quality care. A focus on local ongoing monitoring, reporting and quality improvement is needed.

Accreditation and standards monitoring by the Australian Aged Care Quality and Safety Commission needs to be supported by much stronger local system stewardship to reduce the variability of service quality we have at the moment. Independent regional market managers who are close to providers and consumers are needed. These bodies should have contractual relationships with providers in their region for ongoing performance monitoring and accountability.

In concert with the Commission regional system stewards should have a role in resolving service quality and safety concerns. Where older people have complaints, in the first instance, the Commission could require regional stewards to assist the them in their resolution with providers.

There are well established social market and local system management models for developing and integrating area based service capacity, quality and performance. These could be applied to manage under developed markets like those we have in aged care.

For example, the Commonwealth has established 31 regionally based primary health networks. PHNs have independent boards. They do not deliver services, except in exceptional circumstances. They are required to have clinical and community advisory councils. Their objectives include developing service system capacity and integrating services. They have significant planning, commissioning and monitoring capability. They could provide a platform to consumers and area based aged care system management.

Funding models are no longer fit for purpose

Current funding models were not designed for consumer directed care. They were designed to allocate funds to providers not consumers. They remain focused on determining eligibility and classifying older people to service cost groups. The model is no longer fit for purpose and it cannot work for consumer directed care.

As with the National Disability Insurance System, consumer directed funding should be directly tied to the reasonable and necessary costs of individual care plans. Individual care plans should be developed jointly by consumers and independent service planners. Assessment should focus on developing individual care plans rather than on eligibility and classification for funding allocations.

Accommodation and care should be funded separately and funding for care plans should be portable across settings to encourage the development of more innovative and flexible service models. 

For plan based funding to work, planning guidelines and standards for reasonable and necessary service levels are required and maximum prices for service units (e.g. hours of care) need to be specified. For example, the National Disability Insurance Scheme has developed a model for plan based funding that includes approval, monitoring and review processes. 

In the first instance individual care plan funding should replace the current funding arrangements for the Home Support Program and Home Care Packages. Consideration should be given to applying individual care plan funding for residential care when consumer directed care is expanded for all aged care services.

The current aged care funding instrument (ACFI) was developed to allocate funding to providers, not consumers. In the ACFI model funding is tied to assessed dependency levels. But actual service costs for individual consumers vary within each level of dependency in the classification system. So providers manage risk and costs across their client or resident population. Effectively they move money between residents to manage risk.

In contrast, Consumer Directed Care allocates funding to particular individuals. Providers cannot move funds from one person to another. Home Care Packages have four broad funding levels ranging from around $8,000 to $50,000. These levels of funding are far too broad and imprecise to allow efficient use of funds. Inevitably, a significant proportion of individual consumers underspend their entitlement. Currently the underspend is over half a billion dollars. This is wasted money.

Care plans and package budgets are constructed by providers for consumers of Home Care Packages. There are significant conflicts of interest and moral hazards for consumers and providers in these arrangements. Administration and care coordination costs are now around 30 per cent of packages. Costs for exactly the same service package vary by around 45 per cent from low to high cost providers. 

Imagine for a moment that you book an overseas trip with a travel agent and then discover 30 per cent of the cost is for their administration. You then check with another agent and find the cost is 45 per cent higher for exactly the same trip. Then you discover both travel agents are owned by the airlines providing the travel. 

High unspent funds, high cost variations and high levels of administrative costs in Home Care Packages are a huge waste public funds. This is not an efficient market.

If a plan based model, like that developed for the NDIS were adopted for aged care funding, reasonable and necessary care services could be funded. Plans would determine the reasonable and necessary services individuals require and the cost of the plan would be managed through a schedule of maximum costs for services included in the plan. Planning and coordination costs would be funded separately. 

Plan based funding would prevent the build up of large pools of unspent funds within care packages. It would reduce inefficiency and waste in the current delivery of services. It would allow flexible service purchasing across different accommodation settings and care types.

Focus on rights and outcomes

The policy and legislative framework for aged care is out dated. It focuses on ensuring access to financially affordable, acceptable quality care. But the main aged care act is relatively silent on the purpose and outcomes we expect for aged care services.

A stronger rights based frameworks for aged care should be considered as the basis for legislation and policy. There are well developed human rights frameworks for older people that build on the Universal Declaration of Human Rights. 

Rights for older people include respect for inherent the dignity, individual autonomy and independence of each person, non discrimination, respect for differences, and full and equal participation and inclusion in society. 

There has been a much stronger focus on a rights framework in legislation for people with disability than there is for aged care. The National Disability Insurance Scheme Act sets the provision of support for people with disabilities within a human rights framework and makes it clear that one of the main purposes of the NDIS is to provide the reasonable and necessary supports required for the independence and social and economic participation of people with a disability.

Increasingly, principles for aged care services have emphasised consumer choice, equitable and non discriminatory access and the importance of providing good quality care. But the focus is still mainly on care rather than outcomes. There is little focus on the importance of supporting older people’s independence, social and participation in the community.

Social inclusion and participation in society is a fundamental goal that should guide the development of services for older people. There is overwhelming evidence that too many older people are isolated, excluded and lonely.

The interest in the recent social experiment of bringing four year olds into a retirement village is understandable, but this just highlights the fact that we haven’t thought hard enough about the problem. Building child care centres next to residential care facilities is not the solution.

Advocates for older people have been much too modest and cautious in their ambitions. A much stronger policy framework that encourages innovative approaches to make it possible for older people to participate in range of valued activities with their families and in the community is needed.


There are of course a number of other issues that need to be addressed to improve the aged care system, particularly in strengthening the workforce, building better monitoring and accountability systems, research and innovation and strengthening the operational management of services that. These warrant further discussion.

There is general agreement that Australia should aim for a high quality, integrated, flexible, needs based, consumer directed model of aged care. In practice the aged care system is unstable and in transition from an earlier more rigid centralised model.To complete the transition successfully we need to ensure an adequate funding base for aged care, we need to strengthen regional system stewardship and support for consumer directed care, we need to reform funding models so that funding is properly tied to consumer needs and we need a much stronger focus on the rights of older people, particularly so they are able to participate in society