On current demographic projections, the number of Australians aged 85 and over will increase from 330 000 in 2006 to 580 000 in 2021, and then to over 1.6 million in 2051.^[5] Underlying this trend are changes in life expectancy at the conventional retirement age of 65. As shown in Table 1, in 1983, life expectancy at age 65 stood at 14 years for men and 18 years for women. By 2001–3, life expectancy had increased to 18 years for men and 21 years for women. It is expected to have increased further to 21 years for men and close to 24 years for women by 2021. Reflecting this increase in life expectancy after age 65, the number of the very elderly is expected to rise especially sharply, in the context of a population which, as a whole, is becoming more concentrated in the older age brackets.

As that process occurs, the challenge of providing long-term care^[6] of and to the elderly will become of increasing importance. It is obvious that the need for some form of assistance with everyday activities increases with age. For instance, in 2003, 32 per cent of those aged 65–74 years needed some form of assistance, compared with around 86 per cent of those aged 85 or older (Productivity Commission 2008: 9).

Reflecting this, the ageing of the population will require increased spending, be it public or private, on aged-care services. As shown in Table 2, the federal government’s consultative body, the National Health and Hospitals Reform Commission, has estimated that 337 500 aged-care places will be needed by 2020, while 464 000 places will be needed by 2030, representing an increase of 108 per cent over the June 2008 level (NHHRC 2009: 165).

Two other developments add to these challenges. The first is ‘the old’ are living longer than ever before, with a rise in the numbers expected to live beyond the age of 70 and hence to be at greater risk of requiring care.^[7] The second is that younger cohorts are having fewer children,^[8] which among other things means they will have fewer voluntary carers to draw on when they reach old age. These trends alone — the sheer increase in the numbers of the very old, especially relative to the potential population of carers — make large and sustained increases in the demand for aged care inevitable.

The impacts on the structure of demand for care are also important, though more complex.

On the one hand, smaller differences in life expectancy between men and women^[9] may reduce the demand for residential care as they translate into fewer years of widowhood — since loss of a family care-giver often precipitates a need for residential care.^[10] This effect, which is partially offset by the increase in the number of persons who have never married or who are divorced or separated (Australian Bureau of Statistics 2007), may be accentuated by improved health among the ‘younger elderly’,^[11] as well as by the likely strong aversion of the ‘baby-boomers’ to institutionalised living and institutional forms of care.^[12]

On the other hand, the growth in numbers in the very elderly age brackets is likely to be associated with increased numbers of sufferers from dementia, extreme fragility and other serious impairments to daily living activities, all of which usually require some form of intensive residential care.^[13] More generally, while there will be a significant increase in the average number of years a person lives in the age brackets 65 and above, it will continue to be the case that ageing will bring with it associated health problems (US National Institute on Aging, National Institutes of Health 2002 and Gillick 2006: 124ff). These age-related pathologies will be accentuated by the rising population incidence of chronic conditions such as obesity, which appear more likely to give rise to increased morbidity in the older population than to increased mortality.^[14] These factors will translate into a requirement for substantial, ongoing and continuous assistance, usually involving residential care, especially for the ‘older old’.

The overall result seems likely to be to create a growing need for two types of care provision.

The first is care that is provided in a person’s home, including in congregated living arrangements — such as life care communities — that seek to integrate home and care. This type of care, which corresponds to the various forms of community care, should suffice for the growing numbers who have a reasonable, even if incomplete, ability to carry out basic daily activities, especially in circumstances where they also have spousal or family assistance. The strong preference of the ‘baby-boom’ generation for independent living is likely to make this kind of domiciliary care the option of choice for large sections of the aged population.

The second is care in residential facilities that provide for those who have little or very little ability to undertake basic daily-living activities, and who need a high level of close support — as in current ‘high care’. Demand for this kind of care will rise as we experience a continued increase in the incidence of those chronic conditions — such as Alzheimer’s disease, severe arthritis and serious visual and hearing impairment — that reduce, if they do not eliminate, the ability to live without continuous assistance.

Conversely, demand for residential ‘low care’, which is intermediate between home care and ongoing close support, may decline as a proportion of total long-term care as the ‘baby-boom’ generations come into old age. ‘Low care’ facilities will, of course, remain of importance, if nothing else because the sheer scale of the increase in the older population will ensure continued substantial demand for residential facilities oriented to low, but not insignificant, levels of disability. Moreover, the demand for intermittent residential care services, again oriented to relatively low levels of disability, is also likely to increase substantially.^[15] This kind of care will in many instances be provided in a ‘low care’ setting. But while these factors will ensure that ‘low care’ remains significant in absolute terms, its weight in the overall structure of care provision seems set to diminish.

In short, demand for care is likely to shift from being a continuum that moves from home, into low-level care and then (often for only a short time) into high-level care, towards a pattern concentrated at the two ends of the spectrum.

At the same time, the temporal structure of care — that is, the distribution of durations of care in the recipient population — is likely to change.

Thus, long durations are likely to become more common in high-level care, as that care becomes less of an immediate antecedent to death. Already, at all levels of frailty, residents with dementia remain in residential care for significantly longer than other residents (Lindsay et al. 2003). Over the last four years, the proportion of discharges from permanent residential care that were in care for at least two years after admission has risen by 1.9 percentage points (from 38.6 per cent to 40.5 per cent).

However, short stays are also common. In the last three months of 2006, for example, 10.9 per cent of discharges from high-level residential care occurred less than one month after admission, and 12.2 per cent of discharges occurred between one to three months after admission (with 70 per cent and 69.8 per cent, respectively, of these discharges being due to death). These short stays are likely to remain common, and indeed may become more so, both because of the greater prevalence of intermittent care and because many admissions continue to be as a result of acute events.

As a result, the distribution of durations of residential care, which already is bimodal,^[16] may become even more so, with a bunching of durations at the relatively short and relatively long ends of the duration spectrum.

These changes in the level, structure and duration of demand will impose a significant adjustment burden on the aged-care sector. The total supply of care will need to increase, with large absolute rises being required in the level of provision in each part of the aged-care spectrum. For example, for current ratios of places available to the aged population to be met in 2025, an absolute increase of 83 100 places would be required in low care (as compared to a total number of low-care places of 86 000 today), with the corresponding increase in high care being of 87 400 places (as compared to a total number of high-care places of 81 700 today). At the same time, the structure of supply will need to shift, with larger increases in community care on the one hand, and high-level residential care on the other.

Supply-side adjustments will also be forced by changes in the costs of the different types of aged care.

Community care often relies upon the presence of a co-resident informal carer.^[17] Here somewhat offsetting factors seem likely to operate. As noted above, a diminished gap in life expectancy between men and women is likely to reduce the number of years of widowhood, effectively increasing the supply of co-resident care. On the other hand, as has also been previously noted, the increased numbers who have never married, or who are divorced or separated^[18] will at least partially offset that increase in supply. Additionally, the greater scarcity of working-age people in the future population will also increase the opportunity cost of the choice to engage in informal caring, reducing the supply of informal care services. Finally, low birth rates in recent decades^[19] mean that the average older person will have fewer children from whom informal care can be sought. As a result, and on balance, the supply of informal care is likely to diminish relative to the size of the older population.

Given that demand for community care is likely to increase strongly, reduced supply of informal carers could impose substantial costs on the community-care sector. Already the opportunity cost of informal care, measured as the reduction in paid employment due to caring, has been estimated as being in the order of 0.6 per cent of GDP (that is, about 9.9 per cent of the value of total formal health care). The cost of replacing the work done by informal carers were their services no longer available is, of course, much higher. It has been estimated that if all hours of informal care were replaced with services purchased from formal care providers and provided in the home, the replacement value would be about 3.5 per cent of GDP; that is, about 62.2 per cent of other formal health care (Access Economics 2005; Productivity Commission 2003) though there are obvious limits on the relevance of such estimates to the assessment of economic costs.

The difficulties caused by adverse trends in the availability of informal care will be made all the more acute by the fact that the supply of the formal care workforce will also face considerable pressure as the share of the population requiring care increases (Stone and Wiener 2001). In effect, population ageing seems likely to create an increased demand for hospital care, with here too the sheer weight of the numbers moving into the higher age brackets more than offsetting possible reductions in the number of annual hospital bed-days required for each person in each age class.^[20] The resulting growth in total hospital bed-days will require a corresponding increase in the medical labour force, forcing the aged-care sector to compete for nurses and other specialised labour inputs in a tight labour market.

Significant innovations in the way in which services are delivered will be needed if these structural pressures are to be dealt with efficiently. These innovations will affect both the venues in which care services are provided — with forms of congregated, but not institutional, living likely to be important in reconciling the need for care with the baby-boomers’ demand for independent living — and the manner of service delivery. Widespread diffusion of these innovations will need to be accompanied by shifts in the composition of supply, and most notably, by a re-weighting of supply towards care in the community and the more intensive forms of ‘high care’.

Whether the aged-care sector will have the flexibility required to effect these changes remains to be seen. Aged care in Australia developed initially primarily through the charitable sector and, to this day, charitable and non-profit organisations (and state and local governments) account for some 68 per cent of residential places and 95 per cent of community-care packages. While there are many respects in which supply by charitable and non-profit organisations can be a highly effective means of meeting aged-care needs,^[21] there is also evidence that those organisations find it more difficult to undertake supply adjustments (Hansmann, Kessler and McClellan 2002). Thus, their willingness to retrench in a timely way is reduced by the absence of a profit constraint, while their ability to expand is constrained by limited access to equity funding.