Hon Dr Nick Smith
Minister for ACC

27 October 2011 Speech
Address to Occupational Health and Safety Industry Group Conference, Wellington
Can I acknowledge Paul Jarvie, Chairman of the Occupational Health and Safety Industry Group, and other distinguished contributors to this important conference on challenges and changes in occupational health and safety.

Today I want to talk to you about:

• ACC’s performance and financial problems over time and in recent years

• The Government’s reform programme to address these issues and improve ACC

I also want to make some public statements on the Government’s work on investigating options to introduce more choice into ACC’s Work Account.

Support for fundamental principles
There is much that is good about our unique system of Accident Compensation in New Zealand.

I am proud of National's heritage in the early 1970's of having the foresight and the boldness to introduce the comprehensive system we have today.

The principles of ‘no-fault’ and 24/7 coverage have served New Zealand well, and will not change under a National-led Government.

Challenges
However, we are in very challenging economic times. Households and businesses are under enormous pressure. We in Government need to be satisfied that we have looked in every opportunity to do things more effectively and efficiently while reducing costs.

This includes finding ways to reduce the number of accidents at work that are so costly to our country.

Those of you attending this conference will be only too well aware of the horrendous personal and economic costs of workplace injury.

The Department of Labour has estimated that the full financial cost of work-related injury and disease is more than $5 billion a year

The draft Occupational Health Action Plan that Lesley Haines spoke about in her opening address yesterday notes that every year there are an estimated 700 to 1000 deaths from occupational disease, and 17,000 to 20,000 new cases of work-related disease.

Figures released by the Department of Statistics last week showed that the overall rate of injury claims to ACC has been reducing. That is good news. But in 2010 ACC still accepted more than 200,000 claims for work-related injuries. That number is simply too high, and by international comparisons is too high.

ACC performance
Our immediate focus on coming into Government was to rein in the huge deficits ACC had been accumulating: $2.4 billion in the 2007/08 year, and $4.8 billion in 2008/09.

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 on these figures, with many of the political left looking to muddy the waters to avoid accountability for their financial mismanagement.

The Stocktake and Financial Condition reports provide an excellent background to, and the reasons for, the financial difficulties ACC management got itself into.

I openly acknowledge the complexity of assessing actuarial liabilities and the inevitable volatility that occurs in investment returns, but the simple fact is the steep rise in claim costs from 2004 to 2008 was unsustainable.

In those four years claims costs (that is costs ‘out of the gate’) increased by 57% and liabilities by 109%. Costs were simply out of control.

The Government in 2009 took a number of steps including:
• changes to Governance
• reversal of entitlement extensions
• putting increased emphasis on improved rehabilitation and containing costs
• and increasing levies.

I am particularly proud of the work ACC did to improve rehabilitation rates as they have such a huge impact on costs of the scheme.

For example, the 273-day rate deteriorated from 93.4% to 90.6% in the five years prior to 2009, but has consistently improved and is now back at 93.6%.

That change may not seem like much, but it matters a great deal. Every 1% improvement in rehabilitation rates reduces liabilities by half a billion dollars.

Another key measure of what has been achieved is the number of people receiving support from ACC on a long term, ongoing basis. This number was increasing at around 700 per year and ACC had forecast that by 2020, 20,000 New Zealanders would require long-term income compensation.

I thought we might in 2008 be able to get the number to flat line at around 14,000, but in fact it has reduced by 1000 per year. It is now down to nearly 11,500 and could be heading for 11,000. I am sure you can appreciate the huge difference this makes to the cost structure of ACC.

The steps that were taken – and the hard work and commitment of the Board and staff of ACC – have led ACC back to a path of financial sustainability while ensuring claimants receive proper care, rehabilitation and compensation.

From that loss of $4.8 billion that we inherited, in 2009/10 we posted a $2.4 billion surplus and for 2010/11 a surplus of $3.5 billion – albeit the overall solvency of the scheme is still well below 100%.

This strong performance has enabled levy reductions for workers and businesses from 1 April next year.

These levy reductions will put half a billion dollars a year back into the New Zealand economy and contribute towards keeping both household and business costs down.

The 17% reduction in the average levy on wage and salary earners will save households $340 million a year – or $170 a year for someone on the average wage.

The 22% reduction in the average levy for employers and the self-employed will reduce costs for businesses by $247 million a year.

For a typical small Kiwi business with seven employees this means a saving of a bit over $1100 a year.

The levies on vehicles and petrol are to remain the same.

The solvency in the Motor Vehicle Account is significantly behind the Work and Earners’ accounts. Levy reductions will be possible in the next term of Government for motorists if the ongoing performance improvements in ACC are maintained.

It is worth bearing in mind the turnaround in performance has come during challenging economic times and when ACC has incurred significant and unforeseen costs from the earthquakes in Christchurch and the Pike River Mine tragedy.

These significant levy reductions are good news for New Zealand workers as it increases their take home pay by keeping money in their pockets. It is equally good news for businesses by improving their cash flow.

This financial turnaround and levy reductions has been achieved by those major improvements in rehabilitation rates and the better management of costs. Rehabilitation rates steadily declined from 2005 to 2008, but have consistently improved since with 20% fewer people on long-term compensation.

ACC’s claim costs rose 58% from $1.93 billion in 2005 to $3.06 billion in 2008, but have since been trimmed back by 15% to $2.58 billion in 2010/11.

Health Benefits of work
These improved rehabilitation rates are very encouraging as the earliest and safest possible return to work after injury has to be the underlying pillar of ACC’s approach.

That’s because there is a huge accumulation of evidence from around the world that an early and safe return to the workplace is one of the key elements – if not the key element – in achieving a speedy and lasting rehabilitation after injury.

It’s not necessarily a case of getting the injured person back to the job they were doing before the injury; the important thing is to get them back into the work environment as early as possible, even if it is on part-time or light duties – or in some other role if they’re unable to return to their previous job.

International research over many years has also shown that too long away from the workplace can have just the opposite effect; in that it can delay and obstruct rehabilitation to the point where it can threaten the person’s continued employment and cause a whole range of consequential negative health impacts.

Since assuming responsibility for the ACC portfolio, I have placed a particular emphasis on other incentives to encourage safer workplaces and a timely return to work for those who have suffered an injury.

Experience rating
Foremost among those has been the introduction of an experience rating system for setting levies this year.

Under experience rating, employers who have lower-than-average injury rates and better-than-average return to work rates may receive a discount on their ACC work levy; while employers who have higher-than-average claims for their work category and worse-than-average return to work rates may receive a loading on their ACC levy.

This is a step towards motivating employers to become more focussed on workplace safety, by giving businesses the opportunity to actually have some influence over the levy they pay. It also puts ACC’s pricing on a more business-like footing.

I am encouraged by the results so far. In my role as the MP for Nelson I have plenty of experience of employers expressing concern to me about levy increases, and those same employers then asking their second-tier managers why this has happened and what the accident record of the business is. When you start impacting on the bottom line, this certainly focuses the mind on workplace safety.

The Government has also been considering the introduction of greater choice into workplace accident compensation.

Consultation and decisions
On 1 June this year I released a Department of Labour discussion document outlining two possible options in this area – extending the existing Accredited Employer Programme, and giving employers the choice of continuing to purchase work-related personal injury cover from ACC or from the alternative of a private insurer.

A number of organisations took the opportunity to make their views known, and to share their perspectives on the options and relate their experiences from the relatively short period when the previous competitive model was in place. I am grateful for this feedback as it is enabling the Government to refine the approaches we are considering.

The Government’s whole approach to improving the performance and operation of the ACC system has been to put in place a careful and considered programme of reform. That’s what we are continuing to do.

We are doing it because there are opportunities to keep improving the delivery of ACC; to make sure that treatment, rehabilitation, and compensation are managed as efficiently as possible, and to reduce the number and cost of injuries.

We are doing it in quite a careful and deliberate way because there is a huge amount of detail to get right.

So what changes have we been considering?

Accredited Employers Programme
First, the Accredited Employers Programme.

It’s a risk-sharing arrangement introduced by the previous Labour Government in 2001 as a sort of sop to those concerned about the removal of the option to have a private insurer.

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.

This programme is not a way for employers to completely opt out.

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

A review of this programme for the Stocktake found that accredited employers had 12% fewer claims and 15% lower costs for treatment, rehabilitation and compensation.

Examples

Let me highlight a couple of examples.

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. The number of working days lost due to injury has fallen by 44%.

Another accredited employer is the New Zealand 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 is also saying there is 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.

In the AEP there are 147 employers, covering 15% to 20% of the New Zealand workforce. I do find it ironic that this number is dominated by State sector employers rather than private sector ones. It is the Government’s view that we should aim to increase the number of AEP employers.

To achieve this we are considering more flexibility for employers to purchase high-cost claims cover and stop loss cover.

These are effectively forms of re-insurance that limit the employer’s exposure.

Currently employers are able to purchase this type of cover, within quite strict limits, from ACC. We believe 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.

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

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

But it could be made easier for an employer to demonstrate they meet the requirements; for example by providing a bank guarantee rather than ACC having to do an individual appraisal of financial status.

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 are part of it.

Injury management 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 introducing more flexibility into the process.

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

However, smaller employers could take a greater share of the financial responsibility for workplace accident claims.

To achieve this we are considering 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 would give more employers the choice of sharing the risk with ACC.

The next logical step, of course, would be to give all employers a choice.

Choice
The Government is also considering the option of giving all employers a choice of purchasing work-related personal injury insurance from either ACC or a private insurer.

This would keep competitive pressure on ACC to continue improving its performance in the Work Account.

Throughout its history, the ACC scheme has repeatedly got into financial difficulty. ACC is now on a more sound financial footing, but that performance needs to be sustained into the future.

The approach we are considering is different from the reforms of the 1990s, because ACC would continue to be a player in the market, in its existing organisational form.

The Government would continue to decide what people are entitled to, and legislate to require all providers to deliver those entitlements of treatment, rehabilitation and compensation.

Because the Government would be retaining ownership of ACC and control of the level of entitlements, it is quite misleading to label this as privatisation.

What is being contemplated is a mix of public and private provision of work accident compensation which is actually the most common model internationally.

While no country has exactly the same model, there is a mix of state and private insurance for workplace accidents in a number of countries, like Switzerland, the Netherlands, Belgium, Denmark and Finland. It is also a common arrangement in many states of the United States.

A mix of public and private provision is common in other sectors of the New Zealand economy.

The decision in the 1970s to allow Kiwis to choose between private radio stations and Radio New Zealand and in the 1980s to allow TV3 to compete with TVNZ could never be labelled as privatisation.

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

Protecting workers’ rights
I want to stress again that entitlements to treatment, compensation and rehabilitation would be firmly written in the law.

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

To make sure employers and insurers fulfil their responsibilities you would need to have a market regulator. The regulator would proactively monitor employer and insurer action and enforce compliance. The regulator would also have the capacity to impose stiff fines for any breach of the law.

Workers would continue to have access to independent dispute resolution.

That’s one of the reasons why on 1 July this year the Government removed Dispute Resolution Services Limited from ACC ownership with it becoming a stand-alone Crown-owned company.

This makes its independence explicit and sets the scene for it to handle disputes relating to other insurers.

Impact
I am confident that the introduction of choice would 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 would also expect choice to result in more efficient and effective management of claims, both by ACC and by those insurers.

Next Steps
The Government has now directed officials to keep refining these two possible approaches to changes in the Work Account, and to prepare the draft legislation that will be required to introduce them.

If the Government receives a mandate on 26 November, we will then be able to make final decisions on the way forward early next year and move to implement those.

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 was to separate out the Disputes Resolution Service from ACC and set it up as an independent Crown company.

Our latest step has been to consider two options that would enable greater choice in ACC’s Work Account.

We appreciate the feedback on this from stakeholders which is helping officials to continue refining the proposals in advance of a decision by the Government. The direction is clear, but equally important is getting the details right.
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 again for the opportunity to address your conference.

ENDS

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