Hon Dr Nick Smith Minister for ACC Speech

Increasing Choice in Workplace Accident Compensation

Sky City Convention Centre

Auckland

This morning the Government is releasing a discussion document on increasing choice in workplace accident compensation.

I want to put the case and need for reform.

I want to put it into historical context of New Zealand's unique system of Accident compensation.

I want to give you the detail of how this reform can deliver safer workplaces, better rehabilitation and lower costs.

Can I acknowledge Chris Blake, Chief Executive, Department of Labour and the team from the Department that has supported this important policy work.

I also acknowledge the many representatives of employers, employees, workplace safety experts, insurers and others who have joined us this morning for these announcements. I want to re-emphasise the commitment of the Government to working with you on getting the detail right. We are deliberately going about this reform in a careful and considered way.

Support for fundamental principles

I am proud of National's heritage in the early 1970's of having the foresight and the boldness to provide our comprehensive ACC system.

It was, as then Prime Minister Jack Marshall said, a landmark in New Zealand's social development.

I reflect on awful tragedies like Pike River and Christchurch's earthquakes, and am proud that our scheme provides certainty of entitlements for families of those killed and those injured.

The principles of 'no-fault' and 24/7 coverage have served New Zealand well, and will not change.

Nor is there a challenge to the underlying five Woodhouse Principles that underpin the scheme.

The issue is whether this 24/7 no-fault cover can be delivered only by a state monopoly. This question was not given deep consideration in the Royal Commission of 1967. That is not surprising in the context of that era.

Today, we need to look at best practice public policy. We need to reflect on nearly 40 years experience with ACC's state monopoly. We need to look at the evolution of workplace compensation internationally. Our goal is safer workplaces, better rehabilitation, and less cost.

The cost of workplace accidents

New Zealand's workplace safety performance is below average across the OECD in both injuries and fatalities. We need to work harder at reducing the number of accidents at work that are so costly for our country.

The financial impact alone has been estimated at $4.9 billion a year - the lion's share of this being the loss of human capital.

What the numbers showed was the cost of health care, rehabilitation, carers, and equipment pales alongside the loss of a productive contributing citizen.

There is clear international and domestic evidence that the key to reducing workplace accidents is the engagement by management.

The problem with ACC's standardised levy system is that it was considered a tax. It doesn't matter if your company has a good or bad safety record, or whether it is actually involved in rehabilitation or not, the levy is just the same.

The Stocktake Report undertook a comprehensive study of the Accredited Employer Programme and found a 12% lower injury rate and 15% lower costs. This reinforces the conclusion that the more businesses are directly involved, the better the performance.

Examples
There are a number of accredited employers represented here today who know first hand about the benefits to their business that come from "owning" claims management and rehabilitation.

First, New Zealand Post.

New Zealand Post says its approach as an accredited employer has resulted in improved productivity and cost savings.

New Zealand Post's injury rate has fallen from 85 injuries per million work hours to 65 - a 24% reduction - since the introduction of a targeted injury prevention programme. The number of working days lost due to injury has fallen by 44%.

Another accredited employer is The Warehouse.

Over the past five years the number of days people are away from work - 'fully unfit days' - has steadily declined; so that in 2009/10 the number was a third of what it was five years previously.

Then there's the Fire Service.

A Fire Service internal review last year found that since 2001 injury numbers have decreased by 21%, and lost time claims have decreased by 26%, although it says there's still room for improvement.

The Fire Service says participation in the AEP has been influential in developing nationally consistent health and safety and injury management systems.

Another example is KiwiRail.

The freight, mechanical, passenger and Interislander activities of KiwiRail have been in the AEP since 2007 and in that time the lost time injury frequency rate has decreased from 23 injuries per million hours worked in 2007 to less than five currently.

KiwiRail has recently expanded its accredited employer programme to include the employees of New Zealand Railways Corporation and KiwiRail Network, previously known as OnTrack.

The Government's primary goal in these reforms is to extend these benefits of safer workplaces and better rehabilitation to far more workplaces than those able to get into the existing Accredited Employer Programme.

ACC's performance

We also need to improve ACC's performance. Our immediate focus on coming into Government was to rein in the huge deficits ACC had accumulated in the last few years: $2.4 billion in the 2007/08 year, and $4.8 billion in 2008/09.

It is ironic that in 2008, while publicly ACC was releasing the PWC report that gave it a good review, behind the scenes it was facing up to major cost blowouts and starting to talk to the Government about a bail-out.

These losses exceeded those of every finance company that has collapsed in recent years and, in our first year in office, made up nearly half of the Government's total deficit.

There has been considerable commentary of these figures, with many of the political left having an agenda to muddy the waters to avoid accountability for their mismanagement.

The Stocktake and Financial Condition reports provide an excellent background to these difficulties.

I acknowledge the complexity of assessing actuary liabilities and the inevitable volatility in investments, but the steep rise in claim costs from 2004/05 to 2008/09 was unsustainable.

In those four years (from 2004/05 to 2008/09) claims costs increased by 57% and liabilities by 109%.

The Government in 2009 took a number of steps including:
* changes to Governance
* reversal of entitlement extensions
* putting increased emphasis on rehabilitation
* measures to contain treatment costs, like physios
* and increasing levies.

I am particularly proud of the work ACC has done to turn around rehabilitation rates that have had a huge impact on costs of the scheme.

The 70-day rate deteriorated from 73% to 68% in the five years prior to 2009, but has consistently improved and is now back at 71%. The 9 month rate is now at 92%.

A 1% improvement in rehabilitation rates reduces liabilities by half a billion dollars.

These reforms have got ACC back onto a sound financial footing while ensuring claimants receive proper care, rehabilitation and compensation. The concern is whether this performance will be sustained into the future.

History would suggest not. The scheme has repeatedly got into financial difficulty triggering reviews in the 70s, 80s, and 90s, as well as the Stocktake Steering Group Report led by David Caygill in 2010. The group concluded that the scheme was inherently unstable as a monopoly, and that without the constant pressure of competition will inevitably revert back to a cost-plus culture. This is one of the factors driving reform.

Accredited Employers Programme

First, let me outline changes to the Accredited Employers Programme.

Accredited employers enter an agreement with ACC to manage claims and pay the costs of claims for an agreed period. In return they pay lower levies.

Employers share the risk with ACC but ACC is still closely involved; it is responsible for making sure employers have the management systems and financial strength to be part of the programme.

ACC also takes back responsibility for claims after an agreed period.

It operates within a legal framework that ensures claimants' entitlements and rights are protected.

It works by putting employers at the centre of injury management. If they carry the weight of responsibility for workplace injury claims, then they have greater incentives to reduce injuries.

Approximately 15% of the New Zealand workforce is in the AEP - I want to increase that number.

Risk-sharing arrangements
One way to make the programme more accessible is to provide for more flexibility and a greater range of risk-sharing options.

We are proposing a greater range of claims management periods; meaning that employers who are confident and experienced at risk management can keep managing claims for longer; or alternatively employers can choose a shorter period if that works for them.

We are also proposing more flexibility for employers to purchase high-cost claims cover and stop loss cover.

These are effectively forms of re-insurance - limiting the employer's exposure.

Currently employers are able to purchase this type of cover, within quite strict limits, from ACC. We propose employers should be able to choose how much cover they want to purchase; and also whether they purchase it from ACC or a private insurer.

We are also proposing more flexibility over when and how claims management is handed back to ACC. This is about managing long-term and complex claims.

The employer would continue to cover the costs for an agreed period, but it may be that ACC is better placed to manage the claims.

Entry requirements
We need to have rigorous control over entry into the programme.

Everyone needs to be confident that the employer has the financial and management ability to deliver.

But it could be made easier for an employer to demonstrate they meet the requirements; for example by using a bank guarantee.

We are also considering allowing groups, such as franchises, or co-operatives to be part of the AEP.

Ongoing compliance costs
Currently, accredited employers undergo both a health and safety audit and an injury management practices audit on entry to the programme, and at regular intervals while they remain in the programme.

The audits should be focussed on the outcome of ensuring those injured get what they are entitled to, rather than on a systems check. We propose streamlining the audit process and reducing the number of compulsory audits.

Smaller employers
The AEP is generally more suited to larger employers with the capability to take responsibility for claims management.

However, smaller employers can still take a greater share of the financial responsibility.

We are proposing a claims excess arrangement. This would expose employers more directly to the costs of injuries in their workplace, and therefore provide them with an extra incentive to improve safety.

Extending the AEP will give more employers the choice of sharing the risk with ACC.

The next step is to give all employers a choice.

Choice in ACC Work Cover

The Government is proposing to give employers a choice of purchasing work-related personal injury insurance from either ACC or a private insurer, from 1 October 2012.

This will keep the pressure on ACC to perform.

This is quite different from the reforms of the 1990s, because ACC continues to be a player in the market, in its existing organisational form.

We are retaining control of the accident compensation scheme - the Government will continue to decide what people are entitled to, and legislate to require all providers to deliver at least those minimum entitlements to treatment, rehabilitation and compensation.

We are providing for a mix of public and private provision of workplace accident compensation. This approach is common overseas.

While no country has exactly the same model as us there is a mix of state and private cover for workplace accidents in a number of countries, including Switzerland, the Netherlands, Belgium, Denmark and Finland.

A mix of public and private provision is also common in other sectors of the New Zealand economy, for example, broadcasting.

Allowing other players to offer workplace insurance cover alongside ACC is no different to the decision in the 1970s to allow radio stations to compete with Radio New Zealand and, in the 1980s, for TV3 to compete with TVNZ.

Just as people would scoff these public policy changes were "privatisation", so too we should dismiss today's claims as extravagant political rhetoric.

And just as choice in radio and television has produced better performance in broadcasting, choice in workplace cover will help drive ACC to be more customer-focused, more innovative, and more cost effective.

I now want to cover four important aspects of this proposal:
* ACC's position in the market
* ensuring continuous cover
* Protecting workers' rights
* administering the interface with the health sector as efficiently as possible

ACC's position in the market
Let's be frank. I am not putting forward a purist competitive model, with a level playing field. I am proposing a pragmatic option that will give employers choice and keep long-term costs down for New Zealand as a whole.

ACC would continue to operate as a crown agent with no requirement to pay tax or dividends. It would not simply be a default insurer; it would be required to compete although it would not be permitted to offer non-accident insurance products.

There are a number of proposals aimed at providing private insurers with the confidence and the information they would need to enter the market.

ACC would operate a separate work account from 1 October 2012. The operation of this work account would be transparent, with requirements for disclosure of some financial information and independent oversight.

At the same time, ACC's work account pricing would be deregulated to allow it to compete. This means ACC would set levies itself without political involvement; but within prudent constraints.

ACC and private insurers would be required to provide data to a central pool, so they all have the same information on which to base risk assessment and pricing; with, of course, the necessary protections for individual privacy.

Some people will see ACC's position as a competitive advantage, as it will not face a cost of capital nor be required to provide a dividend to the Crown. Others suggest it will struggle to compete as it will not be providing other insurance products like general fire, public liability, or other insurance products.

I see it as a workable way to improve efficiency and effectiveness that will give employers choice while continuing to offer state-provided accident insurance cover.

ACC's Board and management have been kept in the loop as these proposals have been developed. The Department of Labour will continue working with them and other key groups to ensure the approach we decide on is practical and workable.

Continuous cover
We need to ensure everyone is covered all the time and we must have infallible arrangements in this area.

We are proposing that employers and insurers would have responsibilities spelt out in the law, and would be monitored and face stiff penalties if they do not comply.

Employers would be required by law to ensure their workers have continuous cover. If they have not actively contracted with a private insurer, then they would be automatically covered by ACC. If an employer ends a contract with a private insurer, and has not made alternative arrangements, they would again go back to being covered by ACC.

A central register would keep a track of which private insurers are covering which workers.

Insurers would be required to provide at least the minimum level of cover currently set out in the Accident Compensation Act 2001, for all of the employer's workers - no exceptions.

We have seen from the Christchurch earthquake that there is a real risk of insurance companies becoming insolvent.

We are proposing a number of measures to manage this risk.

The Insurance (Prudential Supervision) Act passed last year makes the Reserve Bank the regulator and supervisor of all insurance providers in New Zealand.

This would include those providing workplace accident cover.

The Reserve Bank would undertake a detailed assessment to check whether any of the provisions of that Act need to be modified to line up with the requirements of workplace accident cover.

Insurers have until 2013 to become fully licensed under this Act. But if they want to enter the market for workplace accident cover from October 2012, then they would need to be licensed by that date, ahead of the existing deadline.

In the worst-case scenario of an insurer becoming insolvent, ACC would take over claims management and costs would be met by a levy on all workplace insurers.

Protecting workers' rights
I want to stress again that entitlements to treatment, compensation and rehabilitation are written in the law.

We are giving employers a choice of how those entitlements are delivered. They do not get to choose to avoid or ignore those legal entitlements.

Employers will also still be obliged under the Health and Safety in Employment Act to take all practicable steps to ensure the safety of employees at work.

In fact, introducing choice is expected to increase employers' focus on injury prevention. This is because in a competitive market prices would more closely reflect the actual risk and safety record of the employer; and therefore reducing injury rates would have an impact on the price they have to pay for cover.

To make sure employers and insurers are fulfilling their responsibilities, a market regulator would be appointed. This office would proactively monitor employer and insurer action and enforce compliance. The regulator would be able to impose stiff fines for any breach of the law.

Workers would also continue to have access to independent dispute resolution.

Our move to set up Dispute Resolution Services Limited as a stand-alone Crown-owned company from 1 July this year is important in this context.

We are removing Dispute Resolution Services from ACC ownership to make its independence explicit.

That sets the scene for it to handle disputes relating to private insurers as well.

Health interface
Health treatment providers are a critical part of making sure injured people get the care and support they are entitled to, when they need it.

We are taking care to avoid unnecessary administration and costs for health treatment providers.

We propose setting up a single claims lodgement unit to direct all initial claims from treatment providers to the relevant insurer.

The GP, or other health provider, would use one form, that they would send to one address, no matter where their patient worked or who they were insured with.

I expect this would be an IT based system, as fast and efficient as possible.

Insurers would be required to make decisions on claims within set time limits, and pay providers promptly.

The Department is also asking for submissions on methods for allocating the cost of public health acute services and emergency ambulance services appropriately across ACC and private insurers.

Self-employed people
We have also looked at how self-employed people might be given a choice between purchasing cover from ACC or a private insurer.

This is complicated by the fact that currently self-employed people pay for cover for both work-related and non-work injuries together.

There is a proposal in the discussion document that they be able to choose a private insurer for both work-related and non-work injuries.

I'm interested in exploring the implications of this during the consultation process.

Impact
I am confident that introducing choice will lead to a greater focus on reducing the number of injuries, because prices would more closely reflect an individual employer's risk and safety record.

I also expect the introduction of choice to result in more efficient and effective management of claims, by both ACC and private insurers.

With more players in the market, there will be some additional costs, but the proposals are designed to keep these to a minimum.

Overall I am confident there will be a long term net benefit to New Zealand Inc - safer workplaces, better rehabilitation and greater efficiency.

Conclusion

In summary, the Government is committed to a no-fault 24/7 accident insurance scheme that is affordable, and sustainable.

We are committed to finding a fair balance between the right of claimants to proper care and compensation, and the real costs the scheme puts on households and businesses.

We have advanced a considered and carefully scheduled programme of reform, consistent with our election policy.

Our first step in 2009 was to stop the financial haemorrhaging of ACC by getting claims costs under control and to reverse declining rehabilitation rates.

Our second step in 2010 was to undertake the comprehensive Stocktake.

Our third step in 2011 was to introduce experience rating.

Our fourth step, announced two weeks ago, was to separate out the Disputes Resolution Service.

And our fifth step released today is a comprehensive discussion document on the detailed policy options for introducing choice and extending the Accredited Employers Programme.

A discussion document setting out proposals on both will from this morning be available on the Department of Labour's website with submissions open until 15 July.

We will not be making a final decision on extending choice in ACC until we have refined the important detail through this consultation and received an electoral mandate from the public.

Our pragmatic reforms of ACC are about ensuring the service delivers the best it can for all New Zealanders with improvements in safety, rehabilitation and efficiency.
Thank you.

ENDS

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