Embedded Incentives in the Funding Arrangements for Residential Aged Care in Australia

We examine the Australian Government’s role in the market for residential aged care in Australia and consider its impact on the incentives of market participants. We find that, due to the structure of the funding arrangements, providers are likely to have an incentive to discriminate against high-care residents, in favour of low-care residents. Since high-care residents, unlike low-care residents, face few viable alternatives, many are forced into public hospital beds as a result. This has placed pressure on the broader health system. In providing lessons from our analysis for reform, we stress the importance of fostering proper incentives in policy design and infer the implications for health reform more broadly.