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.
MPIR Trends over time - Downward Pressure?
Major changes were made to aged care funding in 2014, at a point in time in which interest rates were near historic lows. In the meantime interest rates have reduced even further, particularly since mid 2019, with these movements partially reflected in the MPIR.
Changes in the MPIR can materially affect the level of daily charges - changes over the last two quarters have been relatively small and therefore the impact on daily rates has been relatively minor, but there has been quite a bit of volatility in interest rates recently (see the chart above) and the impact can be significant. The table below illustrates the DAP equivalent of a RAD of $380,000 based on the new rate of 4.91% from January 1, 2020 compared to the previous rate of 4.98%.
|RAD = $380,000||
|MPIR = 4.91% (Current Rate)||
$51.12 per day
|MPIR = 4.98% (Previous Rate)||
$51.85 per day
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.