Aged care funding model ‘failing complex residents’, providers warn

IHACPA’s consultation documents stopped short of making definitive conclusions, but they painted a picture of a sector under strain.

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Aged care providers are warning the sector’s core funding model is failing to keep pace with the cost and complexity of care, raising fresh concerns about access for residents with the highest needs.

Submissions to the Independent Health and Aged Care Pricing Authority argued the current system does not adequately fund people with dementia, mental health conditions and complex clinical profiles — leaving providers under pressure and potentially distorting who gets access to care.

“Providers report that they do not receive adequate funding to meet the specialised care needs of residents,” one submission said.

The concerns, laid out in IHACPA’s latest consultation documents on residential aged care pricing, go to the heart of how the system pays for care – and whether it is still fit for purpose.

Providers said the Australian National Aged Care Classification (AN-ACC) model, which determines funding based on resident needs and service characteristics, was not keeping up with the reality on the ground.

Peak body Ageing Australia warned funding levels were “inadequate to meet the level of care required”, particularly for residents with complex needs.

Stakeholders repeatedly highlighted gaps in how the model accounts for cognitive impairment, behavioural complexity and high-intensity clinical care, warning that funding levels did not match the resources required to deliver safe and appropriate services.

Allied health providers went further, arguing that “costing reflects the care currently provided, not clinically assessed need” – suggesting structural underfunding was baked into the model itself.

The result, they suggested, was a growing mismatch between funding and care – with potential consequences for both providers and residents.

Pressure points emerging

While IHACPA itself does not set prices, its annual advice informs government decisions on how much funding flows into the system.

The latest pricing framework and consultation report – which will underpin advice for 2026–27 – revealed a sector grappling with rising costs, new regulatory demands and increasingly complex resident profiles.

Providers pointed to the cumulative impact of workforce shortages, higher wage costs and expanded compliance obligations under the new Aged Care Act, arguing that funding has not kept pace.

At the same time, the introduction of mandatory care minute targets and strengthened quality standards was increasing the intensity of care expected – without clear evidence that the underlying funding model had fully adjusted.

Several stakeholders warned that this combination risked creating perverse incentives, where providers may be financially exposed when taking on residents with higher needs, or disincentivised from offering certain services.

Inequality widening across the system

The pressure was not evenly distributed, said contributors.

Submissions highlighted stark disparities between metropolitan services and those operating in rural and remote areas, where the cost of delivering care was significantly higher.

The Australian Medical Association noted that geographic location was “a key determinant of the cost of delivering care”, with providers in regional and remote areas facing structural disadvantages.

These included higher workforce costs, difficulty recruiting staff, reliance on agency workers and increased expenses for food, transport and infrastructure.

In some cases, services were effectively operating as providers of last resort, taking residents who cannot be supported elsewhere – often with more complex needs – while absorbing the financial strain.

Stakeholders argued the current funding settings did not adequately reflect these realities, calling for stronger location-based adjustments and more flexible funding mechanisms.

Indigenous services under strain

The challenges were particularly acute in Aboriginal and Torres Strait Islander aged care services, where providers said funding models were not aligned with culturally appropriate care.

Submissions highlighted “the need to understand the costs of delivering culturally appropriate care”, including services that support cultural connection, trauma-informed care and community engagement.

Providers reported that essential elements of care were often not adequately funded, with some services effectively cross-subsidising these activities to meet community expectations.

There were also concerns that broader reforms, including new consumer contribution arrangements, could undermine access and cultural safety if not carefully designed.

IHACPA acknowledged the issue, noting equity of access and outcomes for Aboriginal and Torres Strait Islander people as a key consideration in future work.

Everyday costs also under scrutiny

Beyond clinical care, providers also pointed to funding gaps in so-called “everyday living” services – including food, cleaning and laundry.

These services are funded through a mix of resident contributions and government supplements, but stakeholders argued the current settings did not fully cover the cost of delivery, particularly in high-cost environments.

Separate submissions warned that parts of the system, including allied health, were already “in a parlous state”, highlighting broader concerns about sustainability.

Major reform on the table

Taken together, the feedback is fuelling a broader reassessment of how aged care funding is structured.

IHACPA is currently undertaking multi-year reviews of key programs, including services in rural and remote areas and those supporting Aboriginal and Torres Strait Islander communities, with a view to advising government on future funding models.

Stakeholders have called for more flexible and blended funding approaches, better integration across health and aged care systems, and pricing that more accurately reflects the true cost of delivering care in different settings.

Some submissions have also questioned the foundations of the current model, calling for “further consideration” of whether activity-based funding remains appropriate for aged care.

While IHACPA’s role is limited to providing advice, the direction of travel is clear: pressure is building for structural reform, not just incremental adjustments.

The consultation documents stopped short of making definitive conclusions, but they painted a picture of a sector under strain – and increasingly vocal about the limits of the current funding model.

As one submission put it, pricing “should reflect the cost of delivering the desired quality” – a benchmark many in the sector say the system has yet to meet.