Truth the casualty of crisis management

It's an old but effective political ploy: before embarking on unpopular change, first persuade the public that there's no alternative.

Create a crisis, if you need to. While the end may justify the means, truth may be a casualty - or at least stretched a little.

Take our accident compensation system, admired internationally for skirting around that fraught legal jungle where accident victims sue for compensation with often outrageous outcomes.

ACC is an institution we love to hate - for all the tales of ACC bludgers playing golf on the taxpayer, there are many more victims scarred by drawn out battles for rightful entitlements.

Employers and workers moan at the levies and motorists resent frequent hikes in car registration fees. But ACC levies are low compared to overseas schemes and studies suggest the bureaucracy, while far from perfect, is comparatively efficient.

The experience of most who suffer run-of-the-mill injuries is that ACC works pretty well, without costing much.

That's not the conclusion a visiting Martian would reach from listening to Government pronouncements about ACC or the reports released to build the case for change.

The language of senior cabinet ministers and Prime Minister John Key is of ticking time bombs, out-of-control spending, cost explosions and insolvency (see 'Putting on the screws', opposite page).

The subtext: unless National pares back Labour's extensions to the scheme, reins in costs and raises levies, the foundations of this $10 billion edifice could crumble.

Last week ACC Minister Nick Smith refused to express confidence in ACC's board and signalled changes. "I'm not satisfied that the current board has the right skills to navigate this very large enterprise out of financial trouble."

Yet most of ACC's financial problems are not of its making, and potentially cyclical. As board chairman Ross Wilson wrote to Smith last week, the increase in ACC's liabilities is being driven largely by lower returns on investments in the recession, bookkeeping changes and policy changes which have broadened coverage. "The previous Government wanted to increase ACC benefits take up and coverage. Now the new Government wants greater cost control."

What irked the board most was the inference that "a significant deterioration in the ACC's financial situation" was due to the board. Wilson's was the first head to roll this week and Smith plans a board clean-out.

ACC has always been a political football - the scope of coverage expanding and contracting with economic cycles or to suit the designs of different Governments. What's unclear is how far National intends to go.

National says it plans only to investigate re-opening the work (employers') account to competition from private insurers (as it did in the late-1990s before Labour restored the ACC monopoly). But even employers seem lukewarm about returning to the era of dealing directly with insurance firms of varying pedigree.

Levies for employers, workers and motorists were raised this week - but not by the alarming figures floated last week by the minister. The increases were in line with those recommended by ACC last September.

The changes to date hardly merit the blowtorch treatment of ACC by senior cabinet ministers, adding fuel to Labour claims that the Government is "softening ACC up for privatisation".

How real is the crisis?
The figures seem frightening, especially in a recession: liabilities rising $2.5 billion this financial year to $21.8 billion; physiotherapy costs soaring from $58 million in 2004 to a projected $225 million in 2012; claim costs rising 12 per cent a year to an expected $3.1 billion this year.

There's also concern that ACC's $10 billion reserve fund - invested to pay for the future costs of ongoing injuries - has been badly hit by the global financial meltdown. But while it's not earning as much as it was, the fund is performing exceptionally well compared to other funds and is currently making money.

Of more concern is rising expenditure on claims and ACC's deteriorating performance in rehabilitation, which have a compounding effect on the long-term liabilities bill. Some of these are beyond ACC's control, including:

* the rise in claimants, associated with the ageing population, worsening injury rates and medical advances allowing people with serious injuries to live longer.
* extensions to ACC coverage by the last Government.
* rising medical costs, which are partly down to wage rises for doctors and nurses.

But the scheme is more than paying its way without substantial levy hikes in recent years. Last year the scheme earned $3.6 billion from levies while the cost of claims was $2.7 billion, allowing reserves to be boosted. This year levies are again expected to more than cover costs.

What about the huge liabilities?
Smith's claim that ACC would be insolvent if it were a commercial insurer - with $21.8 billion in liabilities compared to $10 billion in reserves - is a red herring.

Firstly, ACC acts more like a bank than an insurer, and it is Government-owned. The liabilities are the estimated long-term cost of treatment for existing claimants; costs that will not kick-in for years.

The reserves are invested to meet those future costs; they will not be needed anytime soon. But a 1999 decision to make the scheme fully funded - so it has sufficient reserves to cover the lifetime costs of all existing injuries - by 2014 signals the potential need for substantial levy rises.

A significant part of the increase in liabilities is due to an accounting exercise: a higher risk margin, giving greater confidence in the accuracy of the liability estimate, added $291 million to the figure.

But by far the biggest factor was a $1.8 billion adjustment for anticipated lower yields from investments due to the current lower interest rates. When interest rates start to rise, so should investment earnings and the liabilities should come down.

What will the impact on levies be?
Last week Dr Smith flagged huge levy rises over the next five years to meet the 2014 deadline to make the scheme fully funded. Employers' costs would rise 71 per cent to $2.12 per $100 of liable earnings; workers would pay nearly 200 per cent more - or 4 per cent of liable earnings; while car registration fees would more than double to $585 a year.

This would see a worker on the average income of $48,000 paying $2505 a year for ACC and the average two-car household $3851.

Will levies really rise by that magnitude?
No. Both ACC and the previous Labour Government had identified the looming deadline for full-funding as leading to a blowout in levies.

Former Minister Maryan Street flagged a law change last September to push out the deadline to 2019. This would allow the motor vehicle levy to fall - with the cost of car registration falling from a projected $287 in 2009/10 to $203.

Last week, Dr Smith said he would introduce legislation to delay the full-funding date. However, he says extending the deadline will not solve ACC's financial problems. "The solvency ratios in the accounts do not improve, in fact they deteriorate," he told Parliament.

So, is there a problem or not?
ACC's financial plight may have been overstated but there are areas of significant concern, identified by the Labour Department, independent actuaries PriceWaterhouseCoopers (PWC) - and by ACC itself.

Disturbing trends affecting the scheme's liability include:
* Costs per treatment and per claim. The number of claims is rising at 4 per cent a year but the escalation in the cost of claims is averaging 12 per cent.
* The three-month rehabilitation rate (down to 63.7 per cent), meaning the injured are staying on compensation for longer.
* The cost of social rehabilitation following serious injury (up 26 per cent to $15.7 million) and weekly compensation.
* An increase in the "tail" - claimants receiving compensation for longer than 1 year.

Of the $2.87 billion increase in liabilities estimated for 2008/09 by PWC, $460 million is attributed to escalations in claim costs and longer rehabilitation.

Labour says most of these are "housekeeping" issues. Smith argues that the strong performance of the investment fund in recent years masked ACC's deteriorating financial position. With returns down and liabilities adjusted, the accounts look a lot less healthy.

How much is due to extensions under Labour?
Additions to the scope of the scheme since 2004 added $537 million to ACC's liability.

Labour says these were mainly reinstating "traditional ACC" coverage or improving coverage for those poorly treated in the past, such as self-employed and casual workers.

Extending lump sum coverage to work-related diseases such as asbestos exposure added $190 million to liability.

National is looking hard at many of these extensions, including mental injury arising from workplace trauma.

Labour accepts its introduction of free physiotherapy - designed to shorten rehabilitation - was a mistake, based on estimates that it would add just $8.9 million a year to the bill. The cost is estimated to rise from $58 million in 2004 to $225 million by 2012, an average increase of $20.8 million a year.

What is being done to reverse the trends?
ACC has introduced programmes including a serious injury unit to tailor care to client needs.

Work has begun to improve rehabilitation and reduce the long-term "tail" - particularly those on ACC for three years or longer.

The Labour Department says: "Depending on the success of these programmes and other cost control measures, policy decisions to reduce entitlements and/or increased levy rates would be required."