Following a Fair Work Commission (opens a new window) (FWC) Work value case spanning over three years, aged care workers have been granted a significant wage rise of up to 28.5 per cent across the entire sector.

This decision by the FWC will no doubt bring immense relief and a profound sense of recognition to the more than 200,000 residential and home care workers impacted by the ruling.

However, the FWCs decision comes at a critical time for the industry, which continues to grapple with pressing workforce challenges, which are widely recognised as the most significant hurdle facing the sector.

In this article, we delve into some of the potential risk and insurance implications for aged care providers as a result of this significant wage increase.

Potential benefits of higher wages within aged care

Higher wages for aged care workers were a pivotal recommendation of the Royal Commission into Aged Care Quality and Safety (opens a new window).

Overall, higher wages for providers of aged care services can lead to a more sustainable, compassionate, and effective aged care system.

Across the aged care sector, which has faced longstanding workforce issues, higher wages are anticipated to generate positive outcomes including:

• an increased ability to attract and retain a more highly skilled workforce;

• improved quality of care;

• enhanced employee morale, job satisfaction, and mental health;

• increased productivity and efficiency to meet deliverables, and;

• enhanced organisational and industry reputation.

Potential risk and insurance implications of the wage increases

While higher wages are anticipated to yield benefits to providers from a general workforce standpoint, they are also likely to result in multifaceted risk and insurance implications, necessitating careful evaluation and strategic planning.

The potential impact of wage increases on risk and insurance is diverse, likely leading to a mixed bag of outcomes.

Consequently, aged care providers may encounter both higher and lower premiums across different classes of insurance.

Some of the key considerations for aged care providers are outlined below.

1. Short-term impact for Workers’ Compensation

‘Total Wages’ is a significant component in the calculation of workers’ compensation premiums, along with industry rates and claims performance.

Over the past few years, we have seen some large increases in the industry rates for Aged Care, particularly across the eastern states of Australia.

The combination of higher wages, multiplied by higher rating factors, is likely to translate to significant increases in workers’ compensation premiums for aged care providers.

Furthermore, the increased wage costs will increase the cost of claims where there is a time loss component, further exacerbating the potential premium increases.

2. Longer-term impacts for Workers’ Compensation

While the short-term outlook for workers compensation premiums may be bleak, the longer-term perspective may hold the promise of a more positive trajectory.

With the right strategies in place, aged care providers may have an opportunity to reduce the number of injuries and subsequent claims in the longer term.

The wage increases have the potential to unlock numerous benefits that, if managed adeptly, can present opportunities for aged care providers, ultimately resulting in better outcomes for their workforce.

Higher wages are expected to enable aged care providers to attract more highly skilled workers, while also enabling providers to fill positions that were previously left vacant due to recruitment challenges.

A more highly trained and experienced workforce, along with robust workplace health and safety (WHS) practices, could potentially allow aged care providers to mitigate the risk of workplace injuries, thereby potentially reducing workers' compensation claims costs.

With improved staffing levels, employees are likely to experience more acceptable levels of workload pressure, potentially leading to a decrease in workers’ compensation claims for both physical and mental health injuries.

Higher wages are also expected to bolster workforce morale, leading to improvements in working conditions and reduced turnover, factors that typically contribute to happier staff and fewer claims.

In addition to the improved WHS outcomes of individual providers, wage increases also have the potential to enhance WHS outcomes across the entire aged care sector, which could potentially lead to a positive impact on the Aged Care industry rate (a key premium rating factor) in the longer term.

3. Public Liability

Higher wages are expected to enable aged care providers to attract and retain more skilled and experienced workers, consequently enhancing the quality of care that a provider can offer to its residents and customers.

With a better-staffed and more adequately compensated workforce, providers may be able to prioritise safety, quality, and regulatory compliance, while also facilitating training and innovation initiatives aimed at adopting new and improved methods of care.

Consequently, this could lead to better delivery of care to customers and their families, and reduce incidents or claims made against the provider for abuse, negligence, or failure to provide high quality of care.

Ultimately, the positive outcomes resulting from the wage increase have the potential not only to benefit individuals receiving care but also to mitigate public liability risks and liabilities for care providers.

4. Medical Malpractice/Professional Indemnity

The potential impact of higher wages on Medical Malpractice/Professional Indemnity insurance in the aged care sector is also likely to be positive.

The qualifications, experience, and training of healthcare professionals employed by aged care providers is a key factor in the cost and cover available for medical malpractice insurance.

Higher wages are likely to attract more skilled and experienced workers to the aged care sector which could potentially reduce the risk of medical errors or malpractice incidents.

A potential decrease in malpractice incidents could lead to improved insurance outcomes and ultimately contribute to enhanced quality of care for residents and customers.

5. Employment Practices Liability

Higher wages have the potential to impact both the frequency and severity of claims of employment practices claims.

On a positive note, employees who feel more adequately compensated for their work are generally less inclined to file claims related to discrimination, unfair dismissal, and similar issues.

On the flip side, higher wages may lead to larger potential settlements or judgments in employment-related lawsuits, thereby necessitating higher coverage limits, which would inevitably necessitate premium increases.

Aged care providers should review their insurance policies carefully to ensure there is adequate coverage for the increased cumulative risks associated with higher wages and adjust coverage limits if necessary.

6. Management Liability/Directors & Officer’s Liability & Statutory Liability

The anticipated benefits of the wage increase could alleviate at least some of pressures on aged care ‘Responsible Persons’ to fulfill their governance duties, potentially resulting in reduced governance risk.

This potential reduction in exposure may have a positive impact on Management Liability/D&O Liability and Statutory Liability premiums.

Adequately compensated staff, potentially better trained, and more experienced, are more likely to enable providers to improve their compliance with regulations, potentially surpassing regulated standards.

However, the potential for a reduction in governance risk is occurring against the backdrop of impending substantial changes to aged care legislation.

The new Aged Care Bill 2023 includes substantial increases in penalties, including heightened fines and the possibility of up to five years in prison for individuals convicted of the most severe offences.

If passed into legislation, the new Aged Care Bill 2023 is expected to exacerbate the strain on the already challenged insurance market, potentially prompting insurers to further reduce capacity and impose increases in premiums and deductibles.

An additional complication is the potential issue of insurance implications for Registered Nurses (RNs) defined as ‘Responsible Persons.

The new Aged Care Bill proposes to include RNs within the definition of ‘Responsible Persons’, which is likely to introduce further exposure to the already challenged insurance markets for D&O, Public Liability and Professional Indemnity/Medical Malpractice.

The question of funding looms large

With the aged care sector already facing a precarious financial situation, the government's response to the recommendations of the Aged Care Taskforce (opens a new window) regarding additional funding mechanisms to allow providers to sustain the wage increases is eagerly anticipated.

Wages constitute the most significant cost for aged care organisations, and an increase in wages, though necessary, is poised to exacerbate the financial burden on Australia’s aged care providers.

With many providers already operating on extremely thin margins, any additional financial strain could further jeopardise their viability.

In light of this, there's a pressing need for comprehensive reforms and sustainable funding solutions to ensure the ongoing stability of the aged care sector in Australia.

The government's response to the Aged Care Taskforce's recommendations will be crucial in determining the future trajectory of the aged care sector and the welfare of both providers and the elderly population they serve.

Closing remarks

It is undeniable that aged care providers are currently confronted with numerous challenges, and the wage increase adds another layer to the complexities they must navigate.

However, there is cause for optimism.

The benefits arising from increased wages offer a glimmer of hope, as they are expected to provide relief from some of the most urgent workforce issues currently burdening providers.

This could present an opportunity to shift focus towards a more strategic agenda.

Embracing this opportunity may entail investments in training programs, technological advancements, or the implementation of robust risk management strategies.

By leveraging the wage increases as a catalyst for positive change, aged care providers may be able to position themselves for long-term success during this challenging period for the sector.

The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.