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Regulatory Impact Statement - Injury Prevention, Rehabilitation and Compensation Amendment Bill 2009

Executive summary

The costs of the Accident Compensation Corporation Scheme have been rising above the rate of inflation (the Labour Cost Index) for some years.

Some of these additional costs are due to legislated increases in cover and entitlements over time.  The government has asked for amendments to the Injury Prevention, Rehabilitation, and Compensation Act 2001 (IPRC Act) to help reduce costs.  This is only the first phase of legislation.  The government will be undertaking a Stocktake of all ACC Accounts, the results of which are likely to lead to further legislation in 2010.  In addition, a review is planned of cover and entitlements under the ACC Scheme, the results of which may also require future legislative change.

The current amendments cover a range of proposals that trim some entitlements and cover, rescind some amendments made late last year, change the date for fully-funding the Residual Claims Account, allow different sources of funding for collection of the levy for the Motor Vehicle Account and enable experience rating in the Work Account.

Most proposals will reduce levies and Crown costs but will affect some entitlements and cover.  Some costs are likely to be transferred to the health and social welfare budgets.  Disentitlement of claimants with wilfully self-inflicted injuries including suicide is likely to affect the families of those claimants.

Changing the final date for fully funding residual claims will reduce levies but extend the payment time further into the future to levy payers who did not incur the residual claims.  Allowing experience rating will provide an additional way of individual risk rating in the Work Account, which should encourage safer workplace practices and reduce subsidisation of employers who have high claims costs by employers with low claims costs.

Quantification of all cost and benefit impacts has not been possible.  Figures are provided wherever relevant data exists.  Qualitative assessment of costs and benefits has however been made.

Adequacy statement

“The Treasury Regulatory Impact Analysis (RIA) Team has reviewed the regulatory impact statement (RIS) and considers that it does not meet the RIS requirements.  The RIS does not contain the required information and the analysis in incomplete in a number of key areas.  For example, some of the proposals to remove ACC entitlements will shift costs onto other government agencies or on to individuals but the RIS does not quantify these costs.  The proposal to introduce experience rating and risk sharing in the Work Account will increase administrative and compliance costs for business and for the ACC Scheme but these costs have not yet been investigated.  In addition, the RIS consultation requirements have not been met.”

Status quo and problem

The ACC Scheme provides, instead of the right to sue, cover and entitlements including compensation to all people currently in New Zealand.  The Scheme is funded by levies paid by employers (Work Account), workers (Earners’ Account) and motor vehicle owners (Motor Vehicle Account) as well as some Crown funding for people who are not working (Non-Earners’ Account).  The Treatment Injury Account is jointly funded by the Non-Earners’ and the Earners’ Accounts.

Claims received before 1 July 1999 are paid for from residual claims’ accounts linked to the Work, Earners’ and Motor Vehicle Accounts.  The residual claims elements of the Accounts were funded by a pay-as-you-go system before 1999 and are required by the IPRC Act to be fully-funded by 2014.

Levies are charged to ensure that the current claims on the Accounts are fully funded.  Levies are influenced by factors such as returns ACC makes on investments, interest rates, and discount factors, as well as numbers of claims, rehabilitation rates, and cover and entitlements.  Cover and most entitlements are set by the IPRC Act and can only be changed by legislative amendment.  Some entitlements are made at the discretion of ACC.  The ACC has responsibility for administering the Scheme.  The way ACC administers the Scheme also has a significant impact on Scheme costs.

The costs of the ACC Scheme are rising rapidly above the rate of inflation (Labour Cost Index).  Some of the increased costs are due to expanded cover and entitlements available under the Scheme.  New claims have increased around 16.7% since 2003/04.  This compares to a population increase of approximately 7.4% over the same period.  The cash cost (does not include the long term liabilities and therefore only has a partial effect on levies) of entitlements and services increased by 12% in the 2007/08 financial year.   Rehabilitation rates for weekly compensation claims have been gradually decreasing since 2004/05 from a 93% 12-month rehabilitation rate to a 91% rate in 2007/08. The number of weekly compensation claims with duration of more than one year has increased from 13,890 at 30 June 2004 to 19,999 at 31 March 2009.  Long-term liabilities have risen because of these factors but also because of decreased investment returns and a decreased discount rate, which means more funding is required to pay off liabilities.  Liabilities have risen from $12,714 million at 30 June 2006 to $21,875 million (as estimated in December 2008) for 30 June 2009.

Changes made in 2008 and previously to the IPRC Act expanded cover and entitlements, thereby increasing Scheme costs and liabilities.  Other existing legislative provisions, such as the requirement to fully fund residual claims by 2014, are also increasing pressure on the Scheme.  Still other existing provisions, such as the inability to use the petrol levy to help fund residual claims, are inflexible.  Costs are also rising for wilfully self-inflicted injuries, hearing loss, and rehabilitation.

The government has asked that all aspects of the Scheme are looked at, to reduce costs by:

The ACC Board is undertaking a value for money exercise and reviewing all ACC’s administrative procedures, purchasing and claims handling to identify areas where costs could be reduced.

The Stocktake of Accounts will examine, among other things, the underlying cost drivers of each Account and strategies to address them.  The Stocktake will also examine where ACC’s interpretation of the IPRC Act has affected costs.  Alongside this work will be analysis of the IPRC Act to identify areas where cover and entitlements have changed over time and caused cost increases.  Recommendations coming out of the Stocktake will be addressed either administratively through the ACC Board or through further legislative changes in 2010/11.

Objectives

The first objective of the Injury Prevention, Rehabilitation, and Compensation Amendment Bill 2009 is to reduce levy fluctuation and increases as a result of the existing requirement to fully fund the residual claims accounts by 2014.

The second objective of the Bill is to contain immediate and downstream costs to the ACC Scheme and to enable better co-ordination of service initiatives across the whole health sector, including ACC.

The third objective is to ensure sufficient flexibility in the levy setting mechanisms to allocate costs fairly, enable the costs of the Scheme to be allocated in a way that matches the sources of risk, and avoids excessive fluctuation in levies.

A fourth objective is to reduce duplication of effort, improve efficiency, and facilitate co-operation between agencies.

Alternative options

Status quo

To retain the status quo would result in large ACC levy fluctuations, restrict the ability of ACC to restrain costs caused by extension of legislated entitlements, and would not achieve the government policy to improve individual risk sharing.

Other options

Other cost reduction measures are occurring at the same time, namely a review of ACC administration, claims’ handling, and purchasing costs.  An example of one result of this review is the renegotiation of high cost contracts with physiotherapists.  ACC is also looking at regulating some payment rates that have previously been made under contract or paid on an ad hoc basis.  ACC is also focused on improving its rehabilitation rates, particularly concentrating on long-term claimants.

Preferred option

There is no alternative to repealing or amending the current legislation for the proposals in the Bill revoking the 2008 amendments and making other changes to reduce costs and enhance collaboration across the health sector.  These proposals collectively are estimated to generate savings of at least $65 million each year across levy accounts and the (Crown funded) Non-Earner’s Account.

The proposal to extend the date by which the Scheme must fully-fund residual claims from 2014 to 2019 will improve affordability in the immediate term by spreading the costs over a longer time period.  This proposal can only be effected by legislative amendment.

Another set of proposed amendments are not about cost containment per se.  These include the disestablishment of ministerial advisory committees that are no longer needed, and enabling provisions to allow Ministers to have flexibility in the way residual claims are funded and to improve application of an ACC levy.  These proposals cannot be achieved other than by legislative amendment.

Costs and benefits of the various proposals are set out in this table.

Implementation and review

Implementation

Amendments to the IPRC Act will be implemented gradually, depending on their complexity.

Likely timeframes and cost involved with systems changes for the proposed reversal of the 2008 weekly compensation amendments is approximately 4-5 months at a cost of $285,000 (plus some contingency).  In addition, the calculator function in EOS (ACC’s claimant management system) would need to be updated at an estimated cost of $432,000.  Other cost-saving mechanisms will be implemented as part of standard operations.

Implementation of the provisions changing collection of the residual Motor Vehicle Levy will be simple and can be incorporated into the levy round in 2009.

Implementation of the enabling experience rating provisions will require further consultation with stakeholders, collection of better claims data, development of methods of experience rating, and probably promulgation of regulations.  Costs are not yet known.

Review

The key parts of this amendment, namely, changes to entitlements and cover, experience rating, and changes to the collection mechanisms for the Motor Vehicle Levy, will be reviewed as necessary.  It is unlikely that the residual claims funding mechanism will be reviewed as it provides for an ongoing means of dealing with any substantive increases in residual claims by folding the increases into the main accounts.

Consultation

Consultation with external stakeholders on most proposed amendments has not yet occurred.  This could result in opposition to parts of the Bill being expressed during the Select Committee process.

Consultation on the proposed content of the Bill occurred with ACC, The Treasury; and the Ministries of Health, Economic Development, Transport, Justice, and New Zealand Customs.

The Cabinet policy paper on which decisions on the Bill’s content are based has been shared with the above agencies, plus the Ministries of Social Development and Women’s Affairs; Te Puni Kokiri; State Services Commission; and the Department of the Prime Minister and Cabinet.

Concerns raised have been included in the Cabinet paper, and individual agencies have made separate comments in that paper.  The primary concerns raised related to the effect on the potential transfer of costs from ACC to the Health and Welfare budgets and the lack of opportunity because of timing constraints for officials to analyse the impact of these flow-on costs.

The only proposal for which flow-on costs have been able to be estimated is the change to the threshold for hearing loss cover.  The Ministry of Health estimates it will bear around $0.5 million p.a. in 2009/10 from this proposal, with costs rising as the population ages.  This is considerably less than what ACC has been paying.

Other areas where costs to the welfare and health budgets might occur but have not yet been estimated are in supporting workers who are on low weekly compensation, supporting families of people who commit suicide who may require benefit support and a funeral benefit, and ongoing support of people seriously injured as a result of wilfully self-inflicted injury (about 4 claimants ach year).  Te Puni Kokiri also expressed a view that a number of the amendments would particularly affect Maori, including those reducing weekly compensation and the “repugnant to justice” amendment.