Some Commentary on the Maximum Permissible Interest Rate (MPIR)
We are tempted to ignore the MPIR, simply accepting it as the factor which converts RADs into DAPs - lump sums into their income stream equivalent. However, we have some concerns about this approach, both from a practical perspective and whether the mechanism is appropriate for Aged care. Please accept our apologies in advance for the complexities, but they are included to make a point.
|The current MPIR rate - effective 1 April 2022 to June 30 2022 is: 4.07% - increasing to 5.00% from July 1 to September 30, 2022. We suspect that the trend will be to higher rates in the medium, in line with general interest rates.|
MPIR Trends over time
Major changes were made to aged care funding in 2014, at a point in time in which interest rates were near historic lows. Interest rates then reduced even further, more recently as a consequence of the economic measures taken during the Covid 19 pandemic, until central banks began to rise interest rates because of inflationary pressures in 2022.
Changes in the MPIR can materially affect the level of DAP applicable. The table below illustrates the DAP equivalent of a RAD of $400,000 based on the MPIR rate over the last five quarters. The increase scheduled for 1 July, 2022 to 5% is very material but if you review the chart above it was only 2019 when the MPIR rate was at 6% and with the current trajectory in interest rates that is very possible in the medium term..
|RAD = $400,000||From||To||DAP||Annual Cost|
|MPIR = 5.00 %||1 July 2022||30 Sept 2022||$54.79 per day||$20,000|
|MPIR = 4.07%||1 April 2022||30 June 2022||$44.60 per day||$16,280|
|MPIR = 4.04%||1 January 2022||31 March 2022||$44.27 per day||$16,160|
|MPIR = 4.01%||1 October 2021||31 Dec 2021||$43.95 per day||$16,040|
|MPIR = 4.02%||1 July 2021||30 Sep 2021||$44.05 per day||$16,080|
Since RADs and DAPs are all about funding capital costs this might be logical, but is it really practical to have a system in which the daily payment alternative has such inherent potential volatility?
What is the MPIR?
The next question is to what degree the MPIR really reflects a cost of capital to Aged care providers? You would expect a long and detailed spreadsheet looking at funding costs but this is how the MPIR is determined:
1. The MPIR is calculated in accordance with Section 6 of the Fees and Payments Principles 2014 (No. 2) (Aged Care Act).
2. Section 6 provides for the following approach:
The maximum permissible interest rate for a day is worked out as follows:
3. The Taxation Administration Act provides that the general interest charge rate for a day is the rate worked out by adding 7 percentage points to the base interest rate for that day, and dividing that total by the number of days in the calendar year.
4. The base interest rate is the monthly average yield of 90-day Bank Accepted Bills published by the Reserve Bank of Australia for the month in the third column of the table.
5. So, the process in summary to find the MPIR involves the following:
Base Interest Rate = monthly average yield of 90 day bank bills
Base Interest Rate + 7% = General Interest Charge
General Interest Charge - 3% = MPIR
Maybe this process does lead to a rate that fairly approximates the cost of capital for an aged care provider, the rate they would have to pay to borrow money, but we can't find any supporting evidence. If the rate somehow emerged from Aged Care services then we could believe that it might have a basis in the current real cost of capital, but the mechanism appearing above suggests a very blunt instrument. Given its importance, that leaves us with considerable concerns.
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