The real cost of aged care in a pandemic

Until recently, aged care and class actions were not something that were mentioned in the same breath. But the past few months have seen the commencement of two class actions and the impending commencement of two more. These class actions are making claims on behalf of not only residents but also their relatives and staff members.

The commencement of class actions is not surprising given that around one-third of deaths related to COVID-19 are linked to known clusters in aged care facilities.

When it comes to class actions, the stakes are high. They usually take three to four years to resolve and involve organisation-wide disruption and very significant legal costs. A spate of class actions is not something the chronically underfunded and fragmented industry can afford.

What kind of claims could we expect to see?

For a class action to be worthwhile a plaintiff law firm or litigation funder will seek a sizable return in order to justify ‘investing’ in a claim. It is difficult to quantify what that return may be but expect claims against aged care providers for breaching their duty of care causing residents to contract COVID-19 and suffer personal injury, as well as from family members who suffer psychiatric harm from not being able to accompany loved ones in their final moments. 

There is even talk of claims for false imprisonment for those residents who were wrongly told they could not leave the facility under public health orders that said nothing of the sort. Unlike claims for personal injury, such claims are not limited by statutory caps.

Reputational damage and financial costs are still being calculated

Class actions are just one of a multitude of worries for the industry. There have been significant infection rates of residents, resulting in extraordinary mortality rates. The reputational damage, and resulting fall in demand in the sector, have the potential to wreak financial havoc. 

The financial impact on aged care providers will come in the form of reduced revenue from resident fees and subsidies, and net outflows of refundable accommodation deposits (RADs), which average around $380,000 per resident. In other words, the threat of facility-wide infection is likely to result in an unprecedented strain on liquidity and, potentially, a series of events that rapidly and inexorably lead to insolvency for many aged care providers.

So, despite the focus on clinical care and governance that the sector has engaged in over the past months, it is critical for boards of aged care providers to double down on efforts during the pandemic. 

What do boards need to do?

Boards need to provide more proactive stewardship, and ensure more rigorous risk management and crisis response planning. While the number of active COVID-19 cases in Australia has fallen in recent times, the virus is still a threat and boards must remain alert to ensure that risk does not materialise and, if it does, that the organisation has adequate plans in place to identify, contain and eradicate the virus in a residential setting. Boards – if they haven’t already –must plan and document what they will do if the present risks of extraordinary infection and mortality rates materialise. The aged care legislation requires providers to maintain liquidity management strategies for the repayment of RADs within the statutory timelines, which is usually within 14 days from the date a resident leaves the facility. Those strategies are based on historical death rates, not extraordinary ones. If  another storm hits, there will be little that aged care providers can do to stem the outflow of capital. 

The financial cost, let alone the human one, is not confined to the industry. If aged care providers cannot fund the repayment of RADs, then the Commonwealth Government will have to. Under the aged care legislation, the Commonwealth guarantees the repayment of RADs where an aged care provider defaults. In an industry where RADs amount to hundreds of millions of dollars, that is a significant burden to bear. 

The true impact of the pandemic on aged care is measured in both human and financial costs. Now that we have seen the devastating consequences of COVID-19 and the commencement of class actions, aged care providers cannot afford to get it wrong. 

About the authors

Jack Pembroke-Birss is a litigation partner and a leader of the firm’s aged care practice, and Danielle Avery is senior advisor in risk advisory at Norton Rose Fulbright.