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Aged-care services will more than A$35 billion this year. Treasurer Jim Chalmers it’s one of the government’s biggest ongoing funding challenges. The , which looked out over the next 40 years, came to the same conclusion.

In a search for answers, the government has set up an to report on how aged care should be funded, and by whom. Its report is due by the end of the year.

The aged-care funding system is complex and covers a wide range of services delivered to older people in their own home, in the community and in aged-care homes. Some services are generally funded by governments, such as health care. Others are more of a private responsibility, such as housing, food, transport and other everyday living expenses.

Even for private expenses, however, there are publicly funded safety nets for people in need. There are also caps which limit the total aged care fees older people pay each year and during their lifetime.

We all agree older people deserve high quality and safe care and support. But for the system to be sustainable, we need to ensure everyone is paying their fair share.

How is care in the home means tested?

Older people living at home may be assessed as needing health services and personal care. They may also need help with everyday living activities.

Depending on their needs, they become eligible for either (which provides mainly basic help, including meals, transport, domestic services and social activities) or a (which provides more complex and coordinated health and personal care at one of four levels, depending on the client’s requirements).

For home support, the government has developed fee guidelines which encourage providers to consider the cost of the services and the financial and social circumstances of the clients. Generally, people pay a higher proportion of the cost of their meals and transport and very little for nursing and allied health services such as physiotherapy.

Client contributions a little under 10% of total funding each year for the ³Ô¹ÏÍøÕ¾ Support program.

People receiving home care packages are subject to an income test to see how much they should contribute (though full age pensioners are exempt from the fee). All clients may also be asked to pay a , which can be up to 17.5% of the single basic age pension. While these fees are not mandatory, the government expects people receiving government-subsidised home care to help with the cost by paying fees if they can afford to.

However, research from my colleagues and I at the University of Technology Sydney found older people only about 2% of the total funding for these packages.

Two factors for this. First, there is strong competition in the sector, with providers unwilling to charge up to the level of permissible fees. Second, there is a high and rising level of unspent funds across the packages, creating resistance to paying fees when even the government contribution is not being fully used.

How could this be fairer?

There is an opportunity for change to fairer funding as part of the government’s of a new Support at ³Ô¹ÏÍøÕ¾ Program, which will replace the two existing programs in 2025.

At a recent aged care funding summit, my colleagues and I reforms that would keep a strong safety net for those in need. However, new clients with significant income and wealth would be required to make mandatory contributions, rather than the more “optional” current fee arrangements.

The annual and lifetime caps should also be raised. The lifetime caps for income tested home care fees and means tested residential care fees are at a little over $76,000, but there is scope for some older people with considerable means to make greater contributions over the years they are receiving subsidised care services.

Further, we propose that the financial contributions from new Support at ³Ô¹ÏÍøÕ¾ clients should vary according to the type of support they receive.

Under this model, the costs of health and personal care would be largely publicly funded by taxpayers, similar to universal health-care principles for the general community.

However, people should take greater private responsibility for funding their everyday living costs. Again, this would be subject to a safety net (including for those receiving the age pension).

What about means testing in aged-care homes?

Currently 63% of aged-care homes are . But those losses are not spread equally across the three main activities of diect care, everyday living and accommodation.

So the funding and means-testing reforms must be tailored to the specifics of each type of activity.

Health and personal care

Direct health and personal care are funded according to the assessed needs of the residents in each home. The care services include nursing, medication management, showering and help with feeding.

The financial returns for providers are, on average, just above the break-even point for providing this direct care. While nearly 95% of the funding , this is consistent with the general principles underlying other health policy.

Everyday living

Everyday living services, in contrast, are akin to activities that are a private responsibility for people living in their own homes. This includes the preparation of meals, cleaning, laundry, power and other utilities.

These services have a long history of loss-making for aged-care home providers and yet all residents, irrespective of their means, pay the same Basic Daily Fee (capped at 85% of the single basic age pension).

that, for new residents, the amount charged should be increased to a level where providers can break-even, while leaving the cap in place for those on a pension.

Accommodation

The largest source of losses for providers of aged care homes is from the costs of providing the accommodation itself (the land and building, fit-out, maintenance and periodic refurbishment).

Taxpayers pay providers for the accommodation costs for those in need, which is not dissimilar to providing public housing and rental assistance for those in need in the community.

However, for those with significant income and assets, the current accommodation payments – whether by way of fully refundable lump-sum payments or rental-style daily accommodation fees – are on average both below the cost of providing the accommodation and below the general housing market rates.

There is a strong argument that the cost of their accommodation in aged care homes should be closer to the housing market rates – so long as the quality is also similar.

The government’s , including its guarantee of no negative equity, is one way of helping older people with substantial means to meet higher accommodation and other consumer contributions by enabling them to draw down some of the equity of any housing they may own.

The government’s establishment of an aged care taskforce suggests it’s willing to have difficult conversations about how to make aged care funding more sustainable over the longer term. It’s in the interests of the whole community to take this opportunity and ensure subsidised, high quality and safe aged care can be available for our senior citizens when it’s needed.

Michael Woods is a Professor of Health Economics at the University of Technology Sydney and former Deputy Chair of the Productivity Commission. He has had various government appointments and has received funding from government and stakeholder bodies to undertake research into the reform of aged care.