Workers comp needs real reform, not 'red tape' fiddling

Prime Minister Tony Abbott’s “biggest bonfire of regulation in our country’s history” will allow some organisations to opt out of state compensation schemes and instead operate under the Commonwealth’s scheme, Comcare.

This change is likely to be counterproductive in an already messy system and has the potential to further undermine the viability and fairness of workers compensation arrangements in Australia.

Workers compensation does need regulatory reform. It needs real, ‘big picture’ reform, not piecemeal cuts or politicking.

The government is claiming the planned changes will save employers AU$32.8 million per year in compliance costs, but at the same time workers compensation costs appear to be shifting from the state to taxpayers, workers and their families.

Cost shifting arises from two key problems with current workers compensation arrangements. First, the negative consequences of regulatory duplication and inconsistency. Second, the impact of financial pressures on the ability of schemes to meet their primary objectives.

Regulatory duplication

Presently, separate workers compensation schemes exist across Australia’s nine jurisdictions. This poses an important regulatory burden on firms operating in multiple states. Each scheme has different coverage, injured worker entitlements, scheme governance and business models, employer reporting requirements, claims excess arrangements and employer premium rates. Their data capture and reporting processes also differ, making it impossible to compare raw injury data and claims performance across jurisdictions in a meaningful way. The repeal will not change this.

Even firms operating in only one jurisdiction are subject to unnecessary regulatory burdens. Governments compete against each other; taking turns in tweaking and reforming their systems to continually reduce premium rates for employers and modify flexible arrangements such as self-insurance.

The high price of low cost

Competition among schemes on employer costs assumes that lower premium rates improve business prospects and jobs (albeit with no evidence of employers relocating to minimise workers compensation premiums).

Pressure on governments to have lower-than-average premium rates has seen those with higher rates politicised as inefficient and ineffective. Little attention is directed to the different protections those jurisdictions may offer injured workers. The result is the inevitable “ratcheting down” of premium rates around Australia.

Premium reductions are appropriate responses to reduced administrative costs, improved governance and advances in health and safety performance. However, our report looking at changes to NSW’s compensation legislation suggests reductions can also be made by eroding the protections available under the scheme.

NSW workers compensation reforms

The NSW government’s latest workers compensation scheme reforms were prompted by a 2011 actuarial deficit estimated at A$4.1 billion. The deficit was attributed equally to the impacts of the 2008 global financial crisis on scheme investments, the discount rate used for actuarial estimation and the expected increase in future liabilities for payments to long-term, seriously injured workers.

The government determined the deficit had to be eliminated quickly. Premium increases were unacceptable. Instead, the reforms sought to truncate the “tail end” of scheme liabilities by ejecting the majority of long-term injured workers from the system.

The changes eliminated or severely restricted access to weekly and medical compensation for many work-related injuries and illnesses. Furthermore, insurers are now unilaterally able to decide an injured worker’s capacity to earn a hypothetical income from a job that need not exist, and reduce their weekly income accordingly. Accepting legal fees for advising clients about an insurer’s decision was also made illegal.

Together the NSW reforms not only managed to eliminate the $4 billion deficit in less than 12 months, but also enabled further reductions in NSW employer premiums of 7.5% in June 2013 and another 5% in January 2014. These came on top of an accumulated 33% reduction in premiums since 2005.

Who ultimately pays?

Our report for Unions NSW found reducing employer premiums and eroding systems of support for injured workers externalises the human and financial costs associated with poor work health and safety performance. That is, it transfers costs from employers to injured workers.

Without personal resources or family support, these workers can then be left to depend on a Centrelink disability support pension. Similarly, Medicare provides a crucial safety net when compensation schemes (and private health insurers) refuse to cover ongoing medical treatment for work-related injuries. Together, these federally funded systems are subsidising premium reductions in workers compensation schemes.

Health minister Peter Dutton recently cited a 124% increase in Medicare costs over the last decade, calling the trend “unsustainable”. Social services minister Kevin Andrews made a similar statement with respect to “this relentless growth in [welfare] recipient numbers". Yet the impact of cost shifting from workers compensation systems remains unacknowledged.

In order to draw a direct line to increased welfare costs, more information is required. Broad quantitative data on scheme collections and expenditure, return to work, welfare and Medicare expenditure, along with specific case studies of individuals will help researchers establish the extent of cost shifting in the future.

Drift to failure

If government ministers are serious about reducing unnecessary regulatory duplication, they will focus on delivering nationally consistent arrangements. The recent efforts to harmonise WHS legislation was an important step in the right direction for ensuring the health and safety of workers and provides a clear example of what needs to be done.

It is time for a serious conversation in Australia about the value we place on workers and their health and safety. Competition is important but it needs to be driven by efficiency and effectiveness rather than the erosion of support for people who most need it.

The jurisdictional ‘race to the bottom’ for lowest premium rates, arguably just shifts the costs of poor work health and safety onto federal social security systems (taxpayers), workers and their families, and reduces public policy incentives for investment in safe and healthy workplaces.

The International Governance and Performance (IGAP) Research Centre has received research funding from CPA Australia, the Institute of Chartered Accountants (ICAA), the Safety Institute of Australia (SIA) and Safe Work Australia.

Sasha Holley works with The Centre for Workforce Futures.

The Centre for Workforce Futures, Macquarie University, received funding from Unions NSW for research used in this article, as part of an ongoing research project into the NSW Workers Compensation System.

Ray Markey works with the Centre for Workforce Futures.

This article was originally published on The Conversation. Read the original article.