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ACC’s liability grows by $4.8 billion in 12 months

ACC Media Release

9 October 2009

ACC’s liability grows by $4.8 billion in 12 months

ACC’s liability grew by $4.8 billion in the year to June 2009, Chairman John Judge announced today.

The Scheme’s claim liability (the future cost of existing claims) now stands at $23.8 billion – against current net assets (the money ACC has ‘in the bank’ to cover those future costs) of $11 billion. The gap is $12.8 billion.

Mr Judge said the key drivers of the liability growth were:

• an historic growth in claims numbers of 4% per annum - outstripping population growth
• healthcare and rehabilitation costs rising in some cases at 20% per annum - faster than inflation
• declining rehabilitation rates
• increases in the scope of the Scheme and entitlements
• a revaluation of the assumptions underpinning the liability to take a more realistic view of future claims costs.

“Historically the focus has been on current costs rather than the long-term cost implications of accidents. That’s at the root of our problem,” said Mr Judge.

“The gap between ACC’s assets and liabilities of $12.8 billion is the equivalent of 3.6 times our annual levy income. Five years ago, the gap was only one year’s levy income.

“The lack of focus on long-term costs, and the under-funding has meant the gap has been growing at an alarming rate,” Mr Judge said. “This is not a sustainable position for New Zealand and a programme of actions to address this serious problem must be put in place.

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“We have got to a point where the continued existence of the Scheme is under threat. We must act now to protect it for the sake of all New Zealanders.

“The risk of failure is not immediate, since a significant proportion of our liability consists of ongoing costs associated with longer-term serious injury claims, which don’t have to be met for some years yet.

“However, failure is a very real prospect if we don’t put in place a series of actions that will result in funding to cover our liabilities. The problem is of such a magnitude that I believe the programme of actions will take about 10 years to recover the situation.”

Mr Judge said that ACC had begun implementing wide-ranging measures aimed at reducing external cost pressure and improving rehabilitation performance.

For example:
• improving the way we manage claims
• negotiating better value for money and outcomes from health professionals
• being tougher on the extent and duration of ACC support, such as weekly compensation
• ensuring we’re not providing more or less than we are legally required to provide
• encouraging more personal responsibility for “getting-back-on-your-feet” after an injury
• reducing administrative costs

ACC is targeting savings of over $2 billion.

“These are meaningful savings, but nowhere near sufficient on their own to close the gap of $12.8 billion and achieve long-term sustainability for the Scheme,” Mr Judge said.

“We are working with Government on the need for legislative and regulatory change to ensure that ACC has the ability to properly manage the costs of the Scheme. In addition, the Minister has recently announced a “stock-take”, which is fully supported by the Board.

“However, in addition to all of these measures, substantial levy increases are also required, particularly for motor vehicle owners, and earners (i.e. those in the paid workforce).”

ACC will begin consulting next week on its 2010/2011 levy proposals.

“The prospect of levy increases will be unpalatable to many New Zealanders,” Mr Judge said, “especially since this is a time when people are hurting as a result of the current economic climate. However, if we don’t improve ACC’s financial position now, the gap will continue to grow and we will simply be passing the problem on for future generations to deal with.

“After public consultation on levies, the Board of ACC will make recommendations on any increases to the Minister and the Government will make the final decision.

“The ACC Board strongly supports the principles of the ACC Scheme, but we need to make it right for the times and right for the future.”


Questions and Answers

Snapshot of the problem
Q What’s the issue?
A ACC’s claims liability (what ACC must pay to meet all the future costs of the claims on our books) is growing increasingly larger than our assets (the funds we’ve set aside to pay claims costs).
Our current claims liability is $23.8 billion, against assets of $11 billion - a shortfall of $12.8 billion.

Q Why is this a problem?
A If ACC’s claims liability continues to outgrow its assets, then at some point in the future it will be unable to meet its financial obligations – in other words, we simply won’t be able to pay for the help we are required, by legislation, to provide for people following injury. The growing gap between assets and liabilities must be bridged to ensure the ACC Scheme is sustainable.

Q How urgent is the problem?
A ACC’s claims liability is made up of future costs (ie, ongoing costs associated with longer-term, serious injury claims). Because these costs don’t have to be met for some years yet, there’s no immediate risk to ACC’s solvency. However, we can’t just ‘park’ this problem – it demands immediate action to avert a crisis a few years from now.

Q What does this all mean if I am receiving ACC now?
A There is no impact on current claims or entitlements.

Q Why must future costs be paid for now?
A ACC operates on what’s called a ‘fully funded’ basis. This means each year, we’re responsible for collecting enough funds to meet the lifetime costs of all claims we receive that year.
The fully funded approach ensures future generations aren’t ‘burdened’ with the injury costs of previous generations - since funds to meet these costs have already been set aside.

Q Given that we are in a recession, why don’t we delay the need to fully fund residual claims for a few years?
A This is a decision for Government to make, it is not a decision for ACC. But one of the reasons we are facing large levy increases now is because hard decisions on levies have been put off in the past. We can’t keep doing that.

Q How long has the problem been building?
A A number of factors have contributed to the problem which has been building over a number of years. Until recently, claims were increasing at a faster rate than population growth, highlighting the need for all New Zealanders to take greater care to prevent injuries. Treatment costs have increased markedly as they have in the broader health sector and it’s been taking longer to rehabilitate people. This has meant that the Scheme has effectively been dipping into its assets to meet its costs, further increasing the gap between its assets and liability. To some extent, healthy returns on ACC’s investments have masked the size of the problem.

Q Why has the problem only now come to light?
A The new Board of ACC was appointed to bring a greater level of actuarial, financial and investment management expertise to the ACC Scheme.
The Minister for ACC has asked the Board to operate the Scheme in a more business-like way. There has therefore been a fundamental reassessment of the Scheme’s current financial health and long-term sustainability.

Causes of the problem
Q What’s behind ACC’s growing liability?
A A number of factors have contributed to the growing gap between ACC’s assets and liability. The main ones are:
Increased number of claims
Until recently, the rate of growth in new claims easily outstripped New Zealand’s population growth each year. While there’s no clear reason for this, the ageing population; improved understanding and awareness of the Scheme; and people surviving serious accidents and living longer with serious injuries due to improved technology; are all likely to have played a part in the increase in claim numbers.

Increased time taken to recover and get back to work or independence
On average, it’s taking longer for people to get back on track following injury. This is a worldwide trend with a number of reasons behind it but no single factor responsible.

Increasing costs of medical treatment and rehabilitation
The costs of medical treatment and rehabilitation services have been increasing at rates well above inflation. Improved (and more expensive) technology; broader ranges of products and services; and shortages of skilled practitioners; have all contributed. These trends are likely to continue.

Broader entitlements and access to coverage of the Scheme
In recent years, the scope of the ACC Scheme has been expanded, both by including new categories of injuries, and by extending the entitlements available. This expansion has been driven by legislative change, as well as decisions made in the Courts.

Solving the problem

Administration and operation of the Scheme

Q How does ACC plan to tackle the situation?
A Addressing the gap between our assets and liability demands action on a number of fronts. Our plans include:
• Major changes to the way we manage claims and work with treatment providers, aimed at improving rehabilitation outcomes and achieving greater value for money
• Reducing administrative costs
• Proposed levy increases.
In addition to the changes ACC is making ‘on the ground’, the Government has announced a “stocktake” of the ACC Scheme which will be a thorough examination of all ACC accounts covering motor vehicles, earners, employers, non-earners, treatment injury and residual claims. It will investigate the drivers of cost increases, alternative options for service provision and funding, and monitoring of ACC.

Q What internal changes has ACC made?
A Several parts of ACC’s business have been reorganised, and we’ve begun a major drive to achieve greater value for money of our operating and Scheme costs. Work in this area is ongoing.

Q How is ACC changing the way it manages claims?
A The trend towards longer rehabilitation (which is a worldwide phenomenon) must be addressed if the ACC Scheme is to become more sustainable.
Better at work
Keeping people at work or getting them back to work as soon as possible after an injury has been proven by international research to significantly improve their recovery. Once people become dislocated from their workplace it can be harder for them to return or to find alternative work.

ACC has been working with GPs in Taupo and with other practitioners nationwide who specialise in helping people return to work. This work has introduced two new programmes: “Better@work” and “Stay at work”. Both of these programmes help injured people to stay connected with their workplace by brokering arrangements between the injured worker, their employer and their treatment provider.

Service delivery
ACC has reviewed its approach to service delivery and introduced the following key changes:

• upfront ‘triage’ of new claims
• improved processes at the front end
• a new service for managing long-term claims
• more specialised assistance for those with serious injuries.
The new triage approach involves streaming new claims according to expected rehabilitation complexity, to help us immediately identify and assign the appropriate level of intervention required. A major benefit of this approach will be that clients with more complex needs receive timely and comprehensive help, to prevent their rehabilitation from becoming unnecessarily protracted.
The new service for longer-term claims is aimed at better meeting the complex physical and psycho-social needs that these clients often have, while an enhanced service for seriously injured clients is aimed at increasing their independence and self-reliance in a more sustainable way.

These changes have already begun showing significant improvements in enhancing rehabilitation outcomes and reducing unnecessary time off work.

Q How is ACC changing the way it works with treatment providers?
A How much it costs to treat and rehabilitate injured people has been increasing at rates which far outstrip inflation and are unsustainable. Wage and price inflation in the health sector, supply pressures and increases in the number and the type of services provided have all contributed to increased costs.
ACC has therefore introduced new arrangements for how it purchases health and rehabilitation services, focused on outcomes and value for money, and a new way of monitoring the performance of providers. Already progress is being made in areas like physiotherapy, high-tech imaging and elective surgery.

Q What financial impact will these changes have?
A The Board has set some challenging targets for ACC’s management. It’s also initiated an independent review to determine the optimal performance outcomes that can be achieved from management of the Scheme.

Q Are there other changes in the wings?
A The Government has commenced a major stocktake to examine the fundamental nature of the ACC Scheme. Any change to ACC policy is a matter for Government, but ACC will support the Government in any initiatives or changes that result from the stocktake.

Q What can we all do to reduce pressure on the ACC Scheme?
A The growing cost of the ACC Scheme is evidence of the enormous economic burden that injury represents for our country.
Everyone in New Zealand can play their part in reducing this burden, by taking steps in their everyday lives to prevent injury.
At the end of the day, an injury on the road, in the home or on the sports field is something we all pay for.

Levy proposals for 2010

Q Why are levy increases necessary?
A The increasing gap between ACC’s assets and liability means levy increases are needed to help bridge the gap.
The ACC Board appreciates there’s a limit to how much New Zealanders should be expected to pay in ACC levies, and that many will view the prospect of levy increases at this time with dismay.
We wish to stress, therefore, that levy increases are not seen as the only answer to the challenges confronting the ACC Scheme – the focus must be on other ways to make the Scheme more sustainable and affordable in the long-run.

Q When will new levy increases happen?
A ACC will begin consulting on proposed levy increases next week. We will make a recommendation to Government on levy increases later in the year, and after this the Government will make a final decision on what the rates will be. New levies will take effect from 1 April 2010, except for motor vehicle levies which take effect on 1 July 2010.

Q Is it certain that there will be levy increases?
A As it does every year when it sets levy rates for the year ahead, ACC is consulting with the public over its proposed levy changes for 2010/11 before Government makes a final decision.
However, given the Scheme’s current financial circumstances it is difficult to see how levy increases can be avoided, though the final amount of any increases may differ from those proposed.

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