RAD, DAP, Retention & Indexation - Navigating New Accommodation Rules

The recent increase in the RAD limit that a provider can charge without approval from $550,000 to $750,000, along with other changes outlined in the government’s response to Taskforce recommendations, presents both challenges and opportunities for aged care providers.

The increase and the retention clarify the accommodation revenue landscape and signal a shift in how accommodation charges will be structured in the coming years.

Simplified Approval Process

While the increase in the RAD limit will significantly reduce the number of applications for higher accommodation charges, unless there is a change in providers’ approach to setting accommodation charges, it is likely to have limited impact on accommodation revenue. 

As most providers already have excess RAD, they will only gain substantial benefit if they can encourage residents to pay a higher DAP.

Growing Demand for Pricing Expertise

As the sector grapples with inconsistent methodologies for setting accommodation prices, we are seeing greater interest in understanding how to establish and maintain a reliable pricing methodology. As many providers will increase their RAD to between $550,000 and $750,000, this creates a rare opportunity to implement a robust accommodation policy and price-setting methodology. 

We have developed a three-factor model that balances affordability, competitiveness and return to the provider, and we’ve been surprised at how using this methodology has identified many cases of underpricing accommodation.

Analysis Reveals Shortcomings

In a recent assignment, our assessment of the financial metrics related to pricing identified deficiencies that could be optimised. The table summarises some key financial indicators:

The key takeaways from this analysis were:

1. Poor Investment Returns vs MPIR

The average earning rate on invested funds (1.6%) was significantly below the MPIR (7.64%). This means increases in RAD holdings will negatively impact their EBITDA compared to DAP increases.

2. Excessive RAD liquidity

Cash reserves are almost equivalent to RAD liability. As RAD is meant to be used for capital works, this suggests that the provider is not spending on capital improvements, and if this is correct, then they have no need for more RAD.

3. Potential for Optimisation

If this provider focuses on attracting more DAP-paying residents, they will: 

• reduce excess RAD, 
• reduce investment earnings, but
• increase DAP by a far greater amount, and
• thereby, improve their overall operating result.

In our advice, we recommended that the provider set accommodation prices at the appropriate level, and then work to increase the amount of DAP they receive. There are many ways to do this. One way we’ve found effective is to promote a tailored combination payment that covers all charges in residential care. We developed the Single Payment Plan (SPP) to support providers who want to increase their accommodation outcome.

Impact of the Single Payment Plan (SPP)

The table below provides a summary of the impact and benefits to a provider when residents switch from a RAD to the SPP.

In the above example, the provider is expected to see a decline in aggregate RAD of up to $1 million if 60% of current RAD payers adopt the SPP. This will translate to an increase in EBITDA of up to $61,000 or $5,300 pbpa.

In addition to being financially attractive to the provider, this model is very attractive to consumers; it can reduce means tested care fees, remove the necessity to sell the home at a time of stress and removes the confusion of the fees and charges in care.

Transitioning Away from RADs

The government's intention to phase out RADs by 2035 suggests a gradual move towards alternative payment structures. Embracing products like the SPP can position your organisation for this change, provide you with a point of difference and alleviate stress and the financial burden on residents.

Understanding the Retention Charge

The introduction of a 2% annual retention on RADs will be a positive but is really quite limited in its impact. Further because of the way it is calculated, it will increase the confusion for residents seeking to understand the charges they pay. Because it will be phased in, we estimate that in the first year, an average provider will, in effect, generate less than 0.4% of their RAD balance in retention fees. We’ve developed a calculator that allows you to estimate the annual impact on your facility from 2026 to 2031, you can download it below. 

Indexing Daily Accommodation Payments (DAPs)

Again, this will be phased in, and so the impact is diminished. Because it applies to the RAD at entry, and given resident turnover, the impact of this will be limited unless the provider indexes their RAD. This reinforces the need for a robust accommodation policy and methodology.

Positioning in the Market

As most providers do not have a robust pricing methodology, merely setting your prices relative to your competitors’ prices almost guarantees that your prices will not be optimised. With a robust methodology and framework for setting your accommodation price, your organisation can better position itself relative to your competition. 

In Summary

While there are headline increases in accommodation charges—from the increased Higher RAD limit, the 2% retention, and DAP indexation—these changes will not represent a panacea for providers. They do, however, highlight the challenges and opportunities available to providers who are prepared to embrace a commercial approach to accommodation charges. As with all things new, the best outcomes are achieved by finding win-win scenarios. We have shown providers how they can enhance service delivery, improve resident satisfaction, and position themselves for long-term financial sustainability.

If you’re unsure if your pricing methodology and policy is appropriate for the new era, feel free to reach out and talk with us about your concerns.

Accommodation Revenue and Occupancy services

Join our webinar

We’re hosting a webinar with Inside Ageing on December 5: 'Pricing Strategies for the New $750,000 RAD Threshold'.

In this webinar, we’ll explore the key issues to consider when setting your accommodation price, and the key decision priorities of consumers when choosing a facility. With this background, you will be confident that your new prices don’t leave accommodation revenue on the table which could have increased your financial sustainability.

To learn more about the webinar and register, click here.