The Commonwealth Ombudsman said the federal health department's assessment system for aged care services had led to unfair outcomes for residents and undermined public confidence in the system.
The algorithm was launched in November as part of reforms to the aged care sector by the federal government, and would decide what level of support a person needed for at-home care instead of going into a nursing home.
However, complaints have risen about the system, especially over the inability to change the algorithm's decision after assessments have been carried out.
Ombudsman Iain Anderson said serious questions had been raised about the outcomes generated by the algorithm, many of which were inappropriate.
"(The algorithm) and its associated decision-making framework do not merely have the potential to undermine public confidence: rather, a reasonable person would, in my view, lack confidence that the system is in fact fair and consistent," he said.
"The department did not, and may still not, understand key components of the legal framework it created, nor did it understand what legal framework it was meant to create."
The ombudsman said the implementation of the measures had been "unreasonable" and that an independent review was needed for the system.
Among the ombudsman's 10 recommendations, it called for laws to be changed that would allow assessors to override the algorithm's decisions if it made a mistake.
It's estimated about 85 per cent of older Australians, or 1.1 million people, access aged care services through the home support system.
Government ministers said an independent review would investigate how assessments were carried out and would be released in the first half of 2027.
"Older Australians deserve an aged care system that works for them and their loved ones,'' Health Minister Mark Butler and Aged Care Minister Sam Rae said in a statement.
''We have heard that the assessment system isn't always getting it right. We listened, and we've acted.
"The government will consider the ombudsman's report carefully as we continue to improve our aged care system, including the assessments system."
Opposition health spokeswoman Anne Ruston said the findings from the ombudsman showed the government had ignored lessons from robodebt, which had used an automated system to incorrectly calculate debt.
"Older Australians should not be reduced to a score generated by a computer. Technology can support an assessment, but it must never replace professional judgement," she said.
"You cannot tell Australians a qualified human is in control while designing a system where an assessor cannot override an algorithm-generated result."
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