Social Security (Long-term Residential Care: Budget Measures)

Regulatory impact statement

Publication Date: 
23 May 2012

Agency Disclosure Statement

This Regulatory Impact Statement has been prepared by the Ministry of Health.

It provides an analysis of options for setting the asset threshold that is used to determine the eligibility of a resident in aged residential care for the Residential Care Subsidy. The proposal is to change from increasing the threshold by $10,000 each 1 July to increasing the threshold by the change in the Consumers Price Index.

Analysis was undertaken of the number of residents who would, if the policy was changed, pay more of the cost of their residential care, and the extent that they would pay more. Critical estimates were (a) the number of residents with assets worth $10,000 to $80,000 more than the current threshold of $210,000. These residents would, at some point over the next four years, have assets of a value that would have been under the threshold, but, with the change, would be over the threshold, and (b) the amount those residents would pay under a Residential Care Subsidy income assessment. Changing the asset threshold requires an amendment to part 4 of the Social Security Act and changes to the asset threshold used by the Ministry of Social Development when determining a resident’s contribution to the cost of their care.

None of the policy options considered would impose significant additional cost on business; impair private property rights, market competition, or the incentives on businesses to innovate and invest; or override fundamental common law principles.  Residential care providers will incur minor costs informing residents of the changed thresholds.

Don Gray
Deputy Director General
Ministry of Health
Signed: 16 May 2012

Status quo and problem definition

The Residential Care Subsidy provides financial assistance for people in long-term aged residential care in a rest home or hospital towards the cost of their care. Residents not eligible for the subsidy pay for the cost of their care up to a maximum contribution.  Around 9,000 people in aged residential care pay the maximum contribution. People eligible for the subsidy pay their income (less certain exempt amounts) for their care. The resident’s District Health Board pays the difference between what the resident pays and the contracted cost of their care. To be eligible for the subsidy a resident must have assets less than the asset threshold that is set out in part four of the Social Security Act 1964. The threshold is currently $210,000[1]. Under schedule 27 of the Act the asset threshold increases by $10,000 each financial year until 2025/26. 

The problem with the current rules is the growing fiscal cost of aged residential care at a time when the government’s fiscal position is restricted. District Health Boards spent $840 million on subsidising the cost of aged residential care in 2010/11. They have forecast expenditure of $870 million in 2011/12. 

Objectives

The objective of the change is to reduce fiscal costs. Increasing the asset threshold by the change in the CPI maintains the real value of assets a resident is able to retain for their own use, including for bequests, if that is their wish.

There is no authoritative or statutory basis for undertaking the analysis. The outcomes are not subject to any constraints.

Regulatory impact analysis

Options considered were the status quo ($10,000 annual increase in the threshold), increasing the threshold by the CPI and keeping the threshold at $210,000. Other feasible options, such as reducing the asset threshold, were not examined.

Maintaining the status quo

Maintaining the status quo would not reduce fiscal costs.

Increasing the asset threshold by the CPI

Increasing the asset threshold each 1 July by the CPI (rather than by $10,000) would reduce the number of residents eligible for the subsidy and thereby reduce the amount of Residential Care Subsidy paid. The reduction in expenditure would be the number of residents affected, multiplied by the difference between what they would pay if they were eligible for the Residential Care Subsidy and what they would pay if they were not.

The fiscal savings from increasing the asset threshold by the CPI are estimated to be as shown in Table 1.

Table 1: Fiscal Savings from increasing the Asset Threshold by the CPI
  2012/13 2013/14 2014/15 2015/16
Savings from CPI indexation ($m) 4.5 8.4 12.4 16.4
Number of residents affected at any time 170 320 470 610
Inflation assumption 1.57% 2.00% 2.00% 2.00%
Asset threshold - current rules 220,000 230,000 240,000 250,000
Asset threshold - CPI indexation* 213,297 217,563 221,914 226,352

* assuming 2% increase in CPI from year to March 2013 onwards

We estimate that about 170 people would be affected at any time during the first year. This is based on the number of people who have become eligible for the subsidy on 1 July in previous years, when the threshold has been increased by $10,000. Numbers increase each following year as the gap between the threshold under existing rules and the threshold under CPI indexation increases. The increase in the gap depends on the size of the CPI change compared to $10,000. 

The extra amount residents will pay while they remain above the threshold has been estimated from the difference between the maximum contribution and the income assessment for residents who have assets close to, but below, the current asset threshold. The extra amount is around $70 a day. 

Because paying the maximum contribution will reduce the value of resident’s assets, the value of their assets will, over time, fall below the asset threshold. A $70 a day payment from assets would mean that a resident starting with assets valued at $220,000 will come under the threshold 96 days later during 2012/13 because of the change. 

As some residents become eligible for the subsidy during the year, others who started with higher asset values will come into the range affected by the change. This will keep the number affected at about 170 in the first year as long as numbers of residents with asset values in the range $210,000 to around $260,000 is evenly distributed across the range. Over four years, as the current threshold would have risen to $250,000, residents starting the year with around $290,000 assets could be in the affected range by year end.

Moving to CPI indexation of the asset threshold reduces the fiscal cost by more each year that CPI indexation is less than $10,000. This is significant in the longer term when numbers in residential care are expected to increase.

Keeping the threshold at $210,000

Keeping the threshold at $210,000 would affect a greater number of people and save a larger amount as set out in table 2.

Table 2: Fiscal Savings from keeping the Asset Threshold at $210,000
  2012/13 2013/14 2014/15 2015/16
Savings ($m) 7 14 21 28
Number of residents affected at any time 260 520 780 1040

Choosing between keeping the threshold at $210,000 and increasing the threshold by the change in the CPI is a matter of balancing the fiscal position and the extra cost to some residents for a period of time.

Consultation

The analysis of fiscal savings was undertaken by the Ministry of Health with limited consultation with the Ministry of Social Development and the Treasury. Consultation was limited in order to maintain budget confidentiality.

Conclusions and recommendations

Reducing the asset threshold saves fiscal costs by increasing the costs for some residents. Deciding whether to keep the threshold at $210,000 or increase it by the change in the CPI requires balancing the government fiscal position and the extra cost on some residents.

Implementation

Increasing the asset threshold by the CPI will be implemented by the Ministry of Social Development using the new threshold in its assessments. In subsequent years the amount of the threshold will be notified in the Gazette along with other annual notifications related to the Residential Care Subsidy. A change does not affect any other policies. The change will be communicated to all relevant agencies. A fact sheet is being prepared in order to answer any queries from the public.

Monitoring, evaluation and review

No monitoring or evaluation will be undertaken as data on the value of assets of people who do not qualify for the Residential Care Subsidy is generally not collected.


[1] For a couple, where only one is in long-term residential care, the resident can use a lower asset threshold, with the house and car exempt. That threshold is currently $115,000.

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