BRIEFING TO THE INCOMING MINISTER FOR ACC

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1 BRIEFING TO THE INCOMING MINISTER FOR ACC November 2008

2 Message from the Chair Congratulations on your appointment as Minister for ACC. The ACC Portfolio will provide you with an opportunity to have a positive impact on the New Zealanders who lodge the over 1.7 million claims ACC receives each year. The portfolio also impacts on the businesses, motorists and individuals who fund the Scheme through their levies and taxes; the providers who deliver services on ACC s behalf; and the communities and groups that support ACC s injury prevention initiatives. When the Scheme was set up in 1974, it was revolutionary, introducing the social contract between the Government and New Zealanders whereby New Zealanders gave up their right to sue in exchange for comprehensive accident insurance cover for personal injury. This cover included accidents wherever they occur: at work, at home, on the road, etc. Over time, New Zealand has grown and become more diverse and the Scheme has continued to evolve to meet these changes. There have been five fundamental revisions of the Scheme s legislation over its history to ensure that the social contract is maintained and that the Scheme s delivery remains relevant. There are a number of longer-term changes affecting social insurers worldwide including changes in the population and an increasing incidence of co-morbidities. These changes are creating increasing overlaps in both clients and services between ACC and the health and welfare sectors. At an organisational level, ACC continues to adapt its policies and practices in response to its changing environment. We are implementing international best practice programmes and initiatives and strengthening our delivery relationships with the Ministries of Health and Social Development to better align our services to leverage each others strengths. This document provides an overview of the ACC Scheme. The document places ACC in a national and international context. This document is the first in a suite of briefings to support you in your new role. Once again, congratulations on your appointment and I look forward to working with you. Ross Wilson Chair ACC Board Accident Compensation Corporation Page 1

3 Contents Message from the Chair 1 Introduction 4 Immediate decisions 4 Section 1: Overview of ACC 5 A snapshot of ACC s operations 6 Structure and accountability 6 Strategic direction 9 ACC s business model 9 Section 2: The ACC Scheme in the International Context 18 Introduction 18 Comparisons with other Schemes 18 Section 3: The ACC Scheme: Direction and Issues for the Future 24 Introduction 24 Delivery of services to New Zealanders 24 New Zealand s investment in the Scheme 27 Injury prevention 30 Conclusion 32 Accident Compensation Corporation Page 2

4 List of Tables Table 1: ACC s levy accounts income and description 12 Table 2: ACC s funding position (by account) at the end of 2007/08 15 Table 3: Percentage of costs spent directly on providing services 22 Table 4: Estimated impact of extending the full funding deadline to List of Figures Figure 1: ACC s governance and management structure 7 Figure 2: ACC s business model 9 Figure 3: ACC s levy accounts claims registered, net levy income and claims liability 13 Figure 4: Claims liability inclusive of risk margins (by payment type) 16 Figure 5: ACC s reserves portfolio returns vs benchmark returns 17 Figure 6: Age adjusted rates of fatal injury (per 100,000 population) 19 Figure 7: Frequency of work-related non-fatal serious* injury and disease claims by jurisdictions 20 Figure 8: ACC s return to work rate compared with Australia 21 Figure 9: ACC s durable return to work rate compared with Australia 21 Figure 10: Standardised average levy rates (comparison of ACC and Australian schemes) 22 Accident Compensation Corporation Page 3

5 Introduction This briefing provides you with an overview of the ACC Scheme, its context and its challenges. It contains three sections: Section 1 provides an outline of ACC s role and purpose. It sets out the key elements of the Scheme and its structure. It also includes a brief summary of the issues requiring your immediate action Section 2 places ACC in an international context. It draws heavily on the recent review of the ACC Scheme undertaken by PricewaterhouseCoopers Section 3 details the more specific pressures on the Scheme. It describes how ACC is adapting to these pressures and is working to ensure the Scheme will continue to remain relevant. For ease of reference, key points have been highlighted in boxes throughout the text. More detailed briefings can be provided on any of the issues raised in this document. Immediate decisions Levy consultation The annual levy setting process includes a statutory requirement for ACC to consult with levy payers before recommending levy rates to the Minister for ACC. Consultation on the 2009/10 levy rates was completed on 10 October 2008, and the ACC Board has made recommendations as to what it believes what levy rates should be recommended to Cabinet for the 2009/10 year. The Board s levy rate recommendations were provided to the Minister for ACC s Office on 6 November The Department of Labour will provide additional advice regarding the levy rates for your consideration, and will draft on your behalf a Cabinet paper of your final recommendations. Accident Compensation Corporation Page 4

6 Section 1: Overview of ACC The ACC Scheme was established following the 1967 Royal Commission of Inquiry on workers compensation headed by Sir Owen Woodhouse. The Woodhouse Report as it is commonly known, recommended a completely new no-fault approach to compensation for personal injury. The Woodhouse Report proposed that: Injury arising from accident demands attack on three fronts. The most important is obviously prevention. Next in importance is the obligation to rehabilitate the injured. Thirdly there is the duty to compensate them for their losses. The Scheme creates a social contract where individuals forgo the right to sue for compensatory damages under common law. It provides cover for: non work-related personal injuries, e.g. home, road, sport, etc... work-related personal injuries work-related gradual process injuries work-related diseases or infections sensitive (sexual abuse) claims injuries that occur as a result of medical treatment. Since 1972, there have been five changes in legislation governing the Scheme. The current governing legislation is the Injury Prevention, Rehabilitation, and Compensation (IPRC) Act The ACC scheme is a statutory entitlement scheme. This means that not only the requirements for cover and access to entitlements are prescribed in legislation; but that in most circumstances the calculation for the quantum of any entitlements is also set out in legislation and regulation. Effectively, ACC must provide the entitlement at the level prescribed in the legislation or regulation once cover and access to the entitlement has been confirmed. This has been a consistent feature of all five sets of ACC legislation. The purpose of the IPRC Act 2001 is to provide a comprehensive, fair and sustainable scheme for managing the effects of personal injury. The Scheme s overriding goal is to minimise the overall incidence of injury in the community, and where injury does occur, minimise economic, social, and personal impacts. As a Crown entity, ACC delivers on the social contact by providing 24-hour, no-fault personal injury cover for everyone in New Zealand whether they are a citizen, a resident or a temporary visitor. 1 1 The ACC scheme covers overseas visitors to New Zealand and in certain circumstances New Zealanders travelling overseas. Accident Compensation Corporation Page 5

7 A snapshot of ACC s operations In 2007/08, ACC was responsible for: managing 1.76 million claims, paying $2.73 billion for the cost of claims including medical treatment, social rehabilitation, weekly compensation and vocational rehabilitation enabling access to entitlements, including weekly compensation, social and vocational rehabilitation services to support around 210,000 injured people providing weekly compensation of $869 million for 105,000 injured workers during their rehabilitation, of whom approximately 15,000 are long term clients who have been receiving support for more than 12 months spending $446 million on social rehabilitation and $54 million on vocational rehabilitation providing ongoing support for nearly 4,000 seriously injured long-term clients with complex needs spending nearly $40 million developing and implementing programmes to prevent injury, and working with a range of other government agencies, organisations and community groups to this end collecting $2.8 billion in revenue through levies on employers, employees, motorists and $863 million (including treatment injury) through government appropriation, giving a total of $3.7 billion. managing $10.1 billion in investments, and managing a claims liability of approximately $18 billion employing 2700 staff, including frontline staff at 29 branches nationwide. Structure and accountability In line with ACC s status as a Crown entity, the diagram below outlines ACC s governance and management structure. Accident Compensation Corporation Page 6

8 Figure 1: ACC s governance and management structure Board ACC has a Board, appointed under the Crown Entities Act 2004 and the IPRC Act 2001, which reports to the Minister. The Crown Entities Act 2004 sets out the collective duties of the Board. The Board is accountable to the Minister for the performance of the organisation as a whole. The Board currently consists of a Chair, a Deputy Chair, and six other members. Chief Executive and Executive Leadership Team The Chief Executive, Dr Jan White, is responsible for the operational day-to-day management of ACC, and leads the Executive Leadership Team (ELT) who manage the individual business groups. The Department of Labour The Department of Labour (the Department) receives a specific appropriation from the Government through Vote: ACC of $2.4 million to fund the departments ACC-related activities. The Department works on behalf of the Minister and has the responsibility for monitoring ACC s performance and legislative compliance. The Department also gives advice and support to the Minister relating to Board member appointments and induction, its strategic direction, planning process, output agreements and annual levy recommendations. Accident Compensation Corporation Page 7

9 Accountability to the Minister The Board s accountability to the Minister is recorded annually in a suite of documents, which are developed with the Minister for ACC and the Department of Labour. These include: the Statement of Intent (SOI); the Service Agreement with the Minister for ACC, and the Non-Earners Purchase Agreement (NEPA). The SOI has a three - to five-year focus and is tabled in Parliament. It is a strategic document designed to give Parliament a full and balanced view of ACC s objectives and outcomes regarding strategy, capability and performance. The Service Agreement with the Minister for ACC is the agreement between the Board Chair and the Minister regarding the management of the Scheme. The Service Agreement forms the basis of the quarterly reports to the Minister on ACC s performance. The NEPA is the agreement between the Board Chair and the Minister regarding the management of the government-funded Non-Earners Account. ACC subsidiaries ACC has two wholly-owned subsidiary companies that provide commercial services: Catalyst Risk Management Limited provides case and claims management services for accredited employers (employers who manage their own claims) and develops injury prevention, and illness management programmes for employers. The Chair of the Board is Gregory Fortuin. Dispute Resolution Services Limited (DRSL) provides a range of dispute resolution services to ACC and commercial organisations. DRSL manages the review process when clients, levy payers or health professionals disagree with a decision made by ACC. The Chair of the Board is Wayne Butson. The ACC Board has always been conscious of the need for public confidence in the autonomy of dispute resolution regarding individual claims. In 2005, the ACC Board commissioned a review on the independence of DRSL. The review found that by having a separate Board reporting to the ACC Board, DRSL was sufficiently independent within its current structure. In their view a total separation from ACC would not achieve any additional independence. In the past two years ACC has utilised DRSL s mediation function as an alternative to the formal review process. This means that clients can have their claim-related issues resolved faster through a less adversarial process. Accident Compensation Corporation Page 8

10 Strategic direction In 2006 ACC introduced its vision: Freedom from injury and its consequences for everyone in New Zealand. The Strategic Plan sets out seven strategic priorities (EMPOWER) through which ACC will achieve its vision. These priorities are: E Ensuring New Zealanders have confidence in ACC M Maintaining fair and stable levies P People-focused with good outcomes O Open and fair access for all New Zealanders W Working to reduce injuries and occupational diseases E Efficient, sustainable and flexible organisation R Rehabilitation focused on returning to productive life. These strategic priorities form the basis of ACC s accountability documents, and drive its key programmes of work. These strategic priorities were designed to enable ACC to respond to challenges within its current operating environment. They position ACC to anticipate and respond to future environmental challenges such as changes to its client needs, provider base, and the population. ACC will continue to enhance and adapt its strategic direction to meet the needs of injured people within changing conditions. ACC s business model This section describes the Scheme broken down by the elements of the current business model pictured below. Figure 2: ACC s business model Accident Compensation Corporation Page 9

11 Delivery of services to New Zealanders What does the Scheme cover? Establishing cover under the ACC Scheme hinges on three criteria: ascertaining that a person has sustained a personal injury; the cause of that injury; and where the person sustained the injury. A personal injury can be either a physical injury, a mental injury caused by a physical injury, or mental injury resulting from sexual abuse or by witnessing a traumatic event at work. Personal injury also includes injuries that occur during medical treatment, or mental or nervous shock resulting from sexual assault or abuse. What are ACC clients entitled to? Entitlements are based on assessed need. If a client has cover and an assessed need, ACC is required to provide the appropriate entitlement. ACC s current funded entitlements include: contributions towards the cost of treatment social and vocational rehabilitation, and associated ancillary services purchase of aids and appliances to support rehabilitation weekly compensation for earners lump-sum compensation for permanent impairment accidental death benefits. Claims registered In 2007/ million new claims were registered with ACC. New claim registrations have grown on average at roughly 5% per annum since Most people who have an injury access the Scheme by seeking treatment from primary health care providers (such as GPs and physiotherapists) or public hospitals. ACC has two service centres which register new claims and determine whether they are covered by the Scheme. Claims management Most new claims (around 88%) only require a small number of treatments from their provider. In 2007/08, 210,000 clients received more active management. Depending on the nature of their individual needs, these clients are managed by: Contact centres located at five sites around the country, these provide telephone management service for clients who have injuries requiring support for less than 13 weeks. Branches located at 29 sites throughout the country, these provide face-to-face services for clients with more complex needs. The focus is to develop and manage (with the client, employer and treatment provider) an individual rehabilitation plan. This plan identifies the services the client requires to get them back to work or independence. Accident Compensation Corporation Page 10

12 Specialist units these are centralised functions that manage specific types of claims (such as fatal and hearing loss claims). Rehabilitation The aim of rehabilitation is to return clients to productive life to the best extent practicable by providing entitlements that restore a client s health, independence and participation in society. The rehabilitation services offered are: Treatment aims to restore a client s health, to the maximum extent practicable, and is delivered by providers such as GPs, physiotherapists and dentists. In 2007/08 medical treatment costs were $534 million. Social rehabilitation aims to restore a client s independence and is provided through entitlements such as: aids and appliances; home support services; modifications to the home; and transport for independence (such as modified vehicles). In 2007/08 social rehabilitation costs were $446 million. Vocational rehabilitation helps clients to maintain or obtain employment, or regain or acquire vocational independence. If it is not practical for the claimant to return to their pre-injury job, ACC can provide vocational assistance to help the client train for, and find work in, alternative employment. In 2007/08 vocational rehabilitation costs were $54 million. Ancillary services help clients to access services, including, emergency transport by ambulance, transport to treatment, and the purchase of pharmaceuticals, and aids and appliances. In 2007/08, ancillary services costs were $50 million. ACC pays providers in three ways: By regulation These prescribe the amount ACC contributes. Providers are able to charge clients a co-payment on top of this amount. As contracted Through contracted arrangements with providers, where the amount payable for a service is agreed within the contract. At cost as invoiced by the provider, normally with prior approval. Financial compensation The ACC Scheme also provides financial compensation to clients for losses due to personal injury, including: Weekly compensation ACC pays compensation at 80% of pre-injury earnings for earners who are injured and have not returned to work within a week. The maximum amount of compensation payable is capped at $ per week. Clients in employment are eligible for weekly compensation, regardless of whether the injury occurs at work or not, on the provision of a medical certificate confirming they are unable to work as a result of their injury. In 2007/08, weekly compensation costs were $869 million. Lump-sum compensation Clients with a permanent whole person impairment of 10% or more (equivalent to at least, for example, the loss of two fingers) are entitled to an additional lump sum compensation if their injury occurred on or after 1 April The regulations require this entitlement to be assessed using the American Medical Association Guide to Impairment Version 4, which attributes a whole of person percentage loss for an impairment for an injury that arises from an accident. The value of the payment is determined by the degree of impairment and ranges from $2,929 to $117,184. Clients injured before that date can still apply for the Independence Allowance, which is an allowance paid every three months for impairment as a result of Accident Compensation Corporation Page 11

13 personal injury. In 2007/08, lump sum costs were $37 million and independence allowance costs were $39 million. Accidental death benefits Entitlements arising from fatal injuries include: funeral grants; survivors grants; weekly compensation for surviving spouses, children and other dependants (where the client was an earner); and childcare for the deceased s children. In 2007/08 accidental death benefit costs were $92 million. New Zealand s investment in ACC Funding the Scheme The Scheme is managed through six separate accounts, each maintained for a specific purpose. These Accounts are funded through specific levies collected by ACC to meet the costs of providing rehabilitation services and compensation for claims within each Account. The Non-Earners Account is funded by a government appropriation. A number of factors are considered when levy rates are set including: the estimated cost and number of claims; investment income; funding policy; and administration costs. ACC is required to consult levy payers on proposed levy rates before making recommendations on these rates to the Minister for ACC on future levy rates. Final levy rates are a government decision. The following table provides detail on the Accounts, what they cover and how they are funded. Table 1: ACC s levy accounts income and description Account Levy income 2007/08 Funder Cover Work $583 m Employers and self-employed based on liable earnings and what type of industry the business is in (industrial classification unit) Work related injuries 2 to employees that happen on or after 1 July 1999 Work related injuries suffered by self-employed people at work on or after 1 July 1999 Residual Claims (for the Work Account) $534 m Employers and self-employed based on their liable earnings and what type of industry the business is in (industrial classification unit) Work injuries to earners that occurred before 1 July 1999 and non-work injuries to earners that occurred before 1 July 1992 Earners $990 m Earners based on their liable earnings. This is collected by Inland Revenue through PAYE tax for employees Personal injuries occurring outside the workplace for those in paid work on or after 1 July 1992 (except motor vehicle injuries) 2 Work related injuries are defined by the legislation as injuries that occur at the workplace during the work day. Accident Compensation Corporation Page 12

14 Account Levy Funder Cover income 2007/08 Motor Vehicle $634 Motor vehicle owners and users through an annual vehicle levy (licensing fee is collected by the New Zealand Transport Agency and a petrol levy collected by Customs as part of the excise duty on petrol) Non-Earners $780 m Government through the nonearners appropriation All injuries involving moving vehicles on public roads (except those deemed to be covered by the work account) and including current and residual claims Injuries to people not in paid employment (except motor vehicle injuries) includes young and older clients Treatment Injury $130 m From earners (via the Earners levy) and the Government via the Non Earners Account appropriation. Injuries that arise as an unexpected consequence of medical treatment The graph below shows the relative proportions of claims registered, net levy income and liability for each Account. The liability is the amount of money ACC would need to hold in order to meet the total immediate and future cost of its current claims. The graph shows that the Motor Vehicle and Residual Accounts have higher proportions of liability relative to the number of claims, but have considerably fewer claims than the Earners and Non-Earners Accounts. Figure 3: ACC s levy accounts claims registered, net levy income and claims liability Percentage Work Residual (Work Account) Earners Non earners Motor vehicle Treatment Injury Account % of claims registered % of net levy income % of claims liability Accident Compensation Corporation Page 13

15 Scheme viability Injury prevention Injury prevention is a lever for reducing ACC s claims liability. The responsibility for injury prevention is shared across a number of government agencies, including Health, Labour, Transport and Justice. In 2007/08, ACC spent approximately $40 million on injury prevention relative a national spend of $412 million on the New Zealand Injury Prevention Strategy. The IPRC Act 2001 confirms injury prevention as a primary function for ACC. The role of injury prevention is to reduce the impact and incidence of injury. The New Zealand Institute of Economic Research (NZIER) recently estimated the social and economic cost of injury to New Zealand to be $60 billion per year. Any substantial reduction in injuries would therefore deliver significant benefits to New Zealanders, through reducing both the social and fiscal cost of injury. ACC s role in injury prevention is broken down into two core functions: The New Zealand Injury Prevention Strategy (NZIPS) ACC houses the NZIPS Secretariat and is charged with improving New Zealand s injury prevention performance through collaboration. NZIPS identifies six priority areas for injury prevention: motor vehicle traffic crashes, suicide and deliberate self-harm, falls, assaults, workplace injuries and drowning. NZIPS is managed through the Chief Executives Injury Prevention Forum, made up of the chief executives from the Strategy s lead agencies, such as Ministry of Transport and the Department of Labour. The Forum has a key role in aligning government s activities with national strategies and integrating agency efforts. ACC s injury prevention programmes These are focused on falls and drowning, for which ACC is the lead agency under NZIPS, as well as other key areas where there is a prevalence of injuries of serious consequences (in terms of financial and social impact). These programmes relate to: the workplace, the home, sport and on the road. ACC is the recipient of all injury claims that occur in New Zealand. However, in terms of its spend on injury prevention activities, it is a relatively minor funder in the sector. A number of agencies have direct accountability for the injury prevention in their sector. For example, in 2007/08 ACC spent approximately $7.6 million on road safety. In the same period Land Transport New Zealand, the agency with a statutory responsibility and accountability for injury prevention on the road had a budget for promotion, information and education activities of $34 million with the estimated Police costs of enforcing road safety approaching $258 million. ACC s workplace injury prevention programmes have recently been reviewed by NZIER, in a report commissioned by the Department of Labour. This report noted that the ACC workplace programmes they evaluated were effective and were estimated to save ACC $31 million annually. In addition, these programmes carry an estimated saving in societal costs of $473 million annually. To deliver effective injury prevention ACC must work with a range of other government agencies, organisations and community groups. Accident Compensation Corporation Page 14

16 Full funding Current legislation requires ACC to be fully funded by Before 1999, the Scheme was funded on a pay-as-you-go basis where levy income was raised only to cover the cash costs paid during the levy year, irrespective of when the injury occurred. The future cost of existing claims remained an unfunded liability. In 1998 a decision was made to allow cover for all injuries that occurred in the work place to be opened up for competition in a private market. Before private insurers could operate in the accident insurance market the Scheme had to be moved to full funding. Full funding means that ACC must have sufficient reserves to meet the estimated lifetime costs of all existing claims. All levies from 1999, with the exception of injuries to non-earners, have been collected on a fully funded basis. This forms the basis of the fully funded portion of each of the Accounts as set out in the table below. Following this decision, ACC has also been collecting sufficient reserves to fund the pre-1999 claims, where there is an unfunded liability. This forms the basis of the residual portion as set out in the table below. ACC is required by the current Act to be fully funded by The table below shows the proportion of the residual and fully funded portions of each Account for which ACC has collected reserves as of 30 June As highlighted in Figure 3, the residual portion of the Motor Vehicle and Work Accounts remain significantly under-funded. This is likely to have implications for the levy rates for 2009/10, and those going forward to Table 2: ACC s funding position (by account) at the end of 2007/08 Account Residual portion Fully funded portion Work (Work Account and Residual Account) 28% 156% Earners 94% 113% Motor Vehicle 18% 101% Non-Earners n/a 3 106% Note: Full funding is achieved when assets equal liability (present value of future claim costs). Claims liability As of 30 June 2008, ACC s estimated outstanding claims liability was approximately $18 billion, of which $8 billion is unfunded by current assets. Claims liability is made up of the current and future costs of providing treatment and rehabilitation for clients who are covered by the Scheme. This includes claim costs that ACC currently has revenue to cover, and those that ACC still needs to collect as part of its fully funded requirement. ACC s claims liability totals $18 billion; ACC currently has $9.6 billion in reserves, leaving approximately $8 billion of the claims liability unfunded. 3 The government decided in 2001 that the Non-Earners Account will be run on a pay-as-you-go basis for claims prior to 2001, and fully funded for claims after this date. Accident Compensation Corporation Page 15

17 Each year, an actuarial estimate provides the amount required to fund the current and future costs of all claims that will be incurred during that year. To estimate the claims liability this calculation takes into account a number of factors such as: interest rates, claims growth, changes in costs of healthcare and legislative changes. The estimated claims liability determines the revenue that ACC needs to collect that year, and is part of the calculation for determining the levy rates. By law, independent actuaries are required to evaluate and estimate ACC s outstanding claims liability at the end of each fiscal year. ACC s current independent actuaries are PriceWaterhouse Coopers. The Department of Labour verifies these estimates with its own independent actuaries, and a third verification is undertaken by independent auditors, appointed by the Office of the Controller and Auditor General. The following graph shows the largest portions of ACC s liability broken down by payment type. Figure 4: Claims liability inclusive of risk margins (by payment type) 7 6 Claims liability ($ Billion) C Serious injury social rehab Non-Fatal weekly comp Medical treatment PwC June 2007 Claims Liability Valuation Hospital rehabilitation Claims Handling expenses Non-serious injury social rehab Independence Allowance PwC June 2008 Claims Liability Valuation At 30 June 2008 the two key areas of the liability are: social rehabilitation for clients with serious injury estimated $5.8 billion, making up 32% of total claims liability non-fatal weekly compensation estimated $5.5 billion, making up 31% of total claims liability. Accident Compensation Corporation Page 16

18 Investments Current economic conditions have had a significant impact on the performance of ACC s investments. ACC currently manages over $10.1 billion in investments. This amount is increasing as levies are collected toward full funding, consistent with ACC s full funding requirement. ACC s key investment objectives are to maximise long-term returns while minimising risk. Investment risk is defined in terms of how investment returns could affect the objective of smoothing changes in levy rates and achieving full funding by Investment activities are conducted in an ethical manner in accordance with the United Nations Principles for Responsible Investment. ACC s investments are managed by a small specialist internal team. The decision to manage ACC s investments in-house has ensured that the cost of managing the various assets is at a much cheaper cost then if the Corporation placed the management of the investments into the hands of a third party investment house. Additionally, the performance of the internal investment team has exceeded its benchmarks for the last 16 years, and the team has outperformed all comparable investments teams in the private sector in New Zealand for the last 10 years, and Australasia for the last seven years. ACC has recently experienced downturns in investment income, mostly due to the unfavourable global economic conditions impacting all financial markets. In 2007/08, returns for investments were $768 million below budget. Despite this, ACC managed to maintain an investment performance that exceeded market benchmarks in 2007/08. ACC s reserves portfolios have outperformed their (weighted) market-based benchmarks by an average of 1.62% per annum over the past 16 years. The ACC Board is currently reviewing its investment strategy to ensure it remains relevant in light of the current economic conditions. Figure 5: ACC s reserves portfolio returns vs benchmark returns Value of $100 invested June 1992 N Jun 92 Feb 93 Oct 93 Jun 94 Feb 95 Oct 95 Jun 96 Feb 97 Oct 97 Jun 98 Feb 99 Oct 99 Jun 00 Feb 01 Oct 01 Jun 02 Feb 03 Oct 03 Jun 04 Feb 05 Oct 05 Jun 06 Feb 07 Oct 07 Jun year 3 month ACC Reserves return = 10.21% p.a. 16 year 3 month ACC Benchmark return = 8.67% p.a. Accident Compensation Corporation Page 17

19 Section 2: The ACC Scheme in the International Context Introduction ACC is the only scheme in the world to provide such universal cover. While the ACC Scheme cannot be directly compared as a whole, direct comparisons can be made for the Work and Motor Vehicle Accounts with similar Schemes in other countries. In addition, some limited scheme level comparisons can be made with regard to accident related fatality and injury rates. This section draws from the review of the Scheme undertaken by PricewaterhouseCoopers (PwC) in 2008 and the comparative analysis provided by the Heads of Workers Compensation Authorities in Australia. Comparisons with other Schemes Scheme coverage The nature of the ACC Scheme provides significant social and economic benefits to New Zealand. ACC provides 24-hour no-fault cover to everyone in New Zealand, not just workers or motorists as is the case for many other Schemes. PwC estimates that only 1% of clients currently covered by the Earners and Non Earners Accounts current would be able to access compensation in a fault-based jurisdiction. PwC consider that the universal, no fault schemes provide the following generic benefits: more injured people receive compensation a higher proportion of total costs goes directly to clients faster rehabilitation and commencement of payments, because access to cover is not restricted by lengthy litigation processes better client outcomes including health outcomes and return to work rates for those receiving no-fault weekly benefits lower administration expenses mainly due to limited legal challenges. PwC have identified how these generic benefits play out in the context of the ACC scheme. Accident Compensation Corporation Page 18

20 Social benefits Improved quality of life for injured New Zealanders and their carers, families, and friends, as a result of improved injury management. Reduced risk of poverty due to injury for groups who are least able to afford private insurance cover or litigation, as can occur in other jurisdictions. Economic benefits Reduced long-term spending on health care and other government services due to improved injury management. Improved return to work, resulting in an increased pool of labour that is available and able to work, leading to increased consumption spending. PwC estimates that total increased workforce participation from effective injury management under ACC may be worth approximately $315 million per annum to the New Zealand economy. Potential to increase the levels of labour market participation due to improvements in the ability of injured people to return to work, and higher workforce morale associated with a reduction of fear, improved care and higher perceptions of fairness. Legal cost savings due to the removal of the right to sue for personal injury, other than exemplary damages. Injury trends New Zealand s injury rate has a direct impact on the scope and cost of the ACC Scheme. New Zealand has a high injury rate relative to other countries. While getting accurate comparative data for injury rates is difficult due to differences in data collection and definitions, there is robust data available for the number of fatalities due to injury. The following graph shows New Zealand s fatal injury rate, relative to other countries using data on all fatal injuries combined from Figure 6: Age adjusted rates of fatal injury (per 100,000 population) Accident Compensation Corporation Page 19

21 ACC s claims growth (total number of all claims registered) has been steadily increasing. The following graph shows the rate of claims in the Work Account relative to the Australian Workers Compensation Schemes. The increases have been significant and New Zealand s rate of fatal injury is above that of most other OECD countries. Figure 7: Frequency of work-related non-fatal serious* injury and disease claims by jurisdictions * Includes all accepted workers compensation claims involving temporary incapacity of one or more weeks plus all claims for fatality and permanent incapacity. Both the number and the nature of the injuries entering the Scheme have an impact on the rehabilitation outcomes ACC can support its clients to achieve and the cost of achieving those outcomes. Rehabilitation performance ACC s ability to rehabilitate its clients is affected by societal changes such as demographic profiles and co-morbidities as well as economic changes such as shifts in the labour market and employment rates. The increasing injury rate has led to increases in ACC s claim rates. This increase, when added to environmental challenges such as changes in the labour market, demographics and public health issues such as co-morbidities, has impacted on ACC s rehabilitation performance over the past five years. ACC s rehabilitation performance has an influence on ACC s claims liability. The following graphs from the Return-to-Work Monitor 4 shows the changes in ACC s annualised return to work, and durable return to work rates relative to the Australian Workers Compensation Schemes. While ACC s performance has shown a gradual increase in duration over the past five years which has been secondary to other factors, it still outperforms the Australian average. 4 The Return-to-Work Monitor is a survey conducted by Campbell Research on behalf of the Heads of Workers Compensation Authorities. Accident Compensation Corporation Page 20

22 Figure 8: ACC s return to work rate compared with Australia 5 94% Percentage 92% 90% 88% 86% 84% 82% 80% 78% 93% 91% 91% 91% 88% 87% 86% 87% 84% 85% 86% 85% 85% 85% 83% 83% 2000/ / / / / / / /08 Australia New Zealand Figure 9: ACC s durable return to work rate compared with Australia Percentage 90% 85% 80% 75% 70% 83% 74% 84% 73% 85% 73% 87% 76% 79% 76% 80% 79% 81% 77% 80% 75% 65% 2000/ / / / / / / /08 New Zealand Australia Levy rates ACC s levy rates are low relative to other jurisdictions. ACC can compare its work levy rates with workers compensation schemes in Australia. As shown in the following graph, ACC s standardised work levy as a proportion of wages has remained relatively steady at 0.94% of payroll and is nearly half that of the standardised Australian average rate. This comparison does not include ACC s residual levy for pre-1999 claims. 5 Figures for these graphs have been obtained from the 2007/08 Australia and New Zealand Return-to- Work Monitor, conducted by Campbell Research and Consulting. Accident Compensation Corporation Page 21

23 Figure 10: Standardised average levy rates (comparison of ACC and Australian schemes) 6 Administrative efficiency ACC spends less on claims management costs and other administration costs as a percentage of its total Scheme expenditure 7 than the Australian Workers Compensation Schemes. In 2006/07 ACC spent 19.7% of its total expenditure in the Work Account on administration and claims management compared to the Australian average of 25.2%. Table 3: Percentage of costs spent directly on providing services Percentage of total expenditure % Australia ACC (Work Account) Direct compensation and services 74.8% 80.3% Claims management and administration costs 25.2% 19.7% The claim dispute rate for Australia is 7.3% relative to New Zealand s 0.4%. The higher Australian costs are largely attributable to their much higher legal costs associated with cover disputes. The universal cover of the ACC scheme reduces the boundary disputes evident in the Australian schemes. This enables ACC to pay a higher proportion of its total levies directly to support client rehabilitation than comparable schemes. 6 7 Return to Work Monitor. In this comparison Scheme expenditure includes all costs related to payments to injured workers and the administrative handling of those payments. Accident Compensation Corporation Page 22

24 Services and compensation The concept of replacement earnings is almost universal across workers compensation schemes. ACC s weekly compensation is paid based on a statutory calculation of 80% of pre-injury earnings. Some schemes offer higher initial benefits than New Zealand s legislatively mandated figure, but they usually have a range of step-downs over time. Averaged over time, these schemes are in line or lower than the 80% offered by ACC. ACC does not meet all of the costs incurred by a client following an injury. For some services, such as GP visits and physiotherapy, 8 ACC makes a contribution toward treatment costs at a regulated rate. Providers are then able to charge clients an additional co-payment. 9 For other services, such as surgery and specialist treatment, ACC meets the full costs. This is slightly different to Australia, the United States and Canada, which all cover medical expenses in full. 8 9 Physiotherapists can sign up to the Endorsed Provider Network, under this contract physiotherapists are not permitted to charge clients are co-payment. In 2007 the amounts paid by the scheme for an adult standard consultation were between $17 and $29. Accident Compensation Corporation Page 23

25 Section 3: The ACC Scheme: Direction and Issues for the Future Introduction This section outlines the specific challenges faced under each area of the business model. It also presents ACC s current responses to those challenges. Where appropriate, longer term challenges and possible responses to them are also detailed. Delivery of services to New Zealanders ACC s service delivery overlaps with the health and welfare sector creating both issues and opportunities. Over the years, ACC s service delivery model has been considered world leading in a number of areas. As a monopoly provider, ACC has been able to build systems that enable it to receive claims, make cover decisions and provide entitlements quickly. ACC has traditionally outperformed other accident insurance schemes in both its rehabilitation and financial performance indicators. However, changes within the Scheme s operating environment have put pressure on this model. Its standardised approach to rehabilitation is no longer adequate to respond. Challenges and issues The key challenge facing ACC is the gradual increase in duration secondary to other factors like pre existing health co-morbidities, which have impacted on its rehabilitation performance, and the subsequent growth in the cost of the Scheme. This phenomenon is currently being experienced by other comparable accident insurers. Rehabilitation outcomes are dependent on a number of factors including: ACC s rehabilitation processes; labour market conditions; and the client s desire to work. These factors are also being faced by other schemes overseas. In order to learn from the experiences of others, ACC has been building strong networks with Australian and Canadian workers compensation schemes. The specific challenges affecting ACC s delivery of services include: Increasing claims The number of claims ACC receives is rising. In 2007/08, the number of registered claims increased by 4.3%, compared with population growth in the same period of 1%. Accident Compensation Corporation Page 24

26 In order to meet increasing demand ACC must purchase additional services. Both high rates of inflation in the health industry and local provider constraints are placing cost pressures on ACC. For example, ACC s overall cost of medical treatment increased by 55% in the last three years to June 2008 from $345 million to $534 million. This increase in new claims and their impact on the claims management system is also increasing claims duration. Boundary blurring between illness and injury Clients are increasingly entering the Scheme with a combination of injury, and pre-existing psychosocial factors and illnesses such as depression and/or diabetes. These pre-existing conditions increase the risk of injury and slow the rehabilitation process. Boundary blurring is particularly relevant in elderly clients who are likely to have preexisting conditions at the time of injury, such as arthritis and coronary heart disease. This challenge will grow as the population ages. Statistics New Zealand projects that the percentage of the population aged over 65 will grow from 12% in 2006 to 17% in For clients with pre-existing conditions, it is difficult to apportion which costs are injury related (pertain to ACC), and which costs are health related (pertain to the health sector). For example, a client with diabetes will typically take longer to recover from an injury than a client with no pre-existing conditions. Clients with pre-existing conditions are also likely to be receiving services from the health system at the time of their injury. ACC has recognised that the increasing number of complex claims will require enhanced collaboration with the health sector. Current responses ACC has implemented a number of changes to respond to these challenges. These focus on managing shared clients with other systems such as Health and Welfare, and improving ACC s internal service delivery. These include: Managing shared clients: Changes to the purchase of hearing loss services ACC is liable to cover the effects of work-related noise induced hearing loss. These claims generally only become visible in later life, by which point a degree of natural hearing loss may also have occurred. It is difficult to determine the proportion of hearing loss attributable to occupational exposure, which leads to a blurring of funding between injury and illness. The cost of ACC-purchased hearing loss services for workers suffering gradual process injury escalated rapidly from $18 million in 2002 to a projected $90 million in In 2007/08 ACC established performance-based contracts, to improve the management of the liability for work-related noise induced hearing loss. Within six months of the implementation of the new performance-based contract, the average price of aids had fallen by 17% and $1.3 million gross savings had been achieved. Accident Compensation Corporation Page 25

27 Changes to improve the responsiveness of ACC s services to individual needs: The National Serious Injury Service (NSIS) introduced nationwide in 2008, the NSIS has been developed to allow a tailored approach to meeting the needs of seriously injured clients. Early signs show that the new approach will have a positive impact on ACC s liability. Focus on sustainable outcomes ACC has been shifting the focus of its frontline service from delivering process to delivering outcomes: the objective of rehabilitation has shifted from a timely recovery to the achievement of a sustainable return to work or return to community. Future options ACC has a number of long term strategies under development to continue to respond to the changing environment it faces. These include: Service delivery model make fundamental changes to its internal service delivery model, which will segment clients and deliver services according to risk and need, aligning its service delivery to current leading practice in rehabilitation management. This includes: automatic streaming of at risk claims by an expert triage function a focus on rehabilitating people at work, where appropriate, rather than taking them out of the workforce using the employer as a key rehabilitation partner purchasing outcomes, not services, from providers managing high complexity claims face-to-face, based on shared goal setting. Health and rehabilitation purchasing framework Health and rehabilitation expenses are rising at a rate that exceeds inflation and duration is increasing. ACC is developing a health and rehabilitation purchasing framework that will provide a mechanism to ensure the best outcomes are delivered to clients in the most cost effective manner. This framework will support: value-based purchasing decisions the provision of innovative and high quality services fair and equitable access to services for clients. Collaborative purchasing Collaborative purchasing with the health sector offers significant opportunities to improve outcomes for New Zealanders through, for example: more seamless services for shared clients; each system leveraging off the strengths of the other; and reduced administration costs for providers and funders. Progress towards a more collaborative approach is occurring in several areas including acute hospital and ambulance services, home and community support services, and primary care. There is considerable potential for further gains through collaboration with the health sector. Accident Compensation Corporation Page 26

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