Debate on Crown Entities, Public Organisations, and State Enterprises — Accident Compensation Corporation

At the time of this debate last year, the Government was trying to convince New Zealanders that the accident compensation scheme was fundamentally broken. It was exaggerating the problems that the scheme had so as to try to justify the very fundamental and negative changes the Government wants to make to the structure of accident compensation, including privatising some of its public functions. How did the Government go about it? A year ago it was saying that the scheme’s liabilities were out of control. It had had some bad luck, I have to admit, occasioned by the international financial crisis decreasing the rate of return on investments. If we have a lower rate of return on investments, and we are reliant on a pool of investments to fund the long-term costs of claims—for example, someone who is a tetraplegic and might be on the scheme for decades—then of course we need a bigger pool of investments in order to meet that future cost.

The increase in the scheme’s liabilities, which is the way that number is expressed, was used as an excuse by the Government to claim that the scheme was fundamentally broken. The Government revalued the long-term cost of care by making some very negative assumptions about the rate at which claims on the scheme would be made, and refused to do what everyone in this House knew needed to be done, which was to extend the date for fully funding old claims. By that I mean that progressively over time the scheme is moving towards having enough money in its accounts to fund the “whole of life” costs of existing claims, rather than paying it on a “pay as you go” basis every year. The Labour Party had campaigned on putting out that date for full funding from 2014 to 2018, I think it was, although it might have been 2019. The National Government knew that needed to be done but refused to do it until finally doing so under the cover of its legislation at the start of this year, I think it was, when it should have done that earlier.

Here we are, a year later, and the Government, through the Minister for ACC, Nick Smith, came to the select committee and said a few things. He said huge progress had been made over the last year—those were his words, “huge progress”—so much so that the scheme is now in a stable financial position, and is expected to make a $2 billion surplus this year, some of which comes from increases in rates of return on investments, but some of which is an operating profit—that is, the scheme is collecting more in levies than the “whole of life” costs of the claims in this year. What a remarkable change we are being asked to believe! The truth is that the Government had been exaggerating the problems with the scheme in the first place, and it has been caught out.

The problem for the Government is how, having been caught out, it can justify the substantial changes it wants to make to the scheme. It wants to privatise what is currently a public scheme. Why? We have to ask ourselves in this Committee why the Government wants to do that. It is not because the scheme costs too much. Even the Treasury report to the Minister of Finance last year stated it was “Not clear that levies are excessive”. Now, we would all like levies to be lower, and maybe they were pushed up too much last year; the scheme has certainly had a surplus this year, so it did not need all of that levy increase. But Treasury is right in stating that it is not clear that levies are excessive. We know that because at the select committee last year, because of the Labour Party inquiries we had some cost comparisons with Australia, and there is nowhere cheaper in terms of total levies than New Zealand.

In addition, we know that with the State-run monopoly, which does not have to make a profit on capital—it just has to cover its costs; it does not have to return a profit to its shareholders—the administration costs of the scheme are the lowest of any in the world. There are none lower. That has been proven by the study that was done by PricewaterhouseCoopers in Australia a couple of years ago. Our scheme is already cheaper. We know it is comprehensive. We know that the no-fault principles that underlie the scheme mean that we do not waste money on insurance company margins and on lawyers’ bills, fighting over liability issues. The money goes into rehabilitation, care, and income-related compensation, so where is the case for privatisation? It is not there. But this is ideology that is driving the Government; it is not reason.

The latest thing we have heard in the last week comes from the Government’s appointee as chair of the Accident Compensation Corporation (ACC), John Judge. What has he said in the last week? He said we should have financial penalties for doctors who have been involved in treatment that has led to accident compensation payments because the treatment did not go properly. Does that not sound remarkably like moving in the direction of the American system? Not only is it litigious and wastes all this money on litigation, which the scheme avoids in the New Zealand system—which is one of its real attributes—but, more important, perhaps, we know what happens in the United States. The United States spends twice as much as a percentage of GDP on health care in America as we do in New Zealand but its people live shorter lives. That is because money is wasted in the health system because there is such a defensive method of medical practice that people do not take any risks. They do not take any risks, for fear of being sued and for fear of the personal consequences to them as doctors and nurses, and, as a consequence, a lot of money is wasted. What does that mean? It means that instead of two people getting a hip operation, the system can afford only to give it to one person. That is why, in simplistic terms, despite spending the US medical system spending twice as much as New Zealand does, people have a lower life expectancy than we have here.

In addition, they do not do things like spend money on prevention. That is another thing that has gone wrong in the last year. The ACC board cut ACC’s accident prevention plans. It cut the Otago medical school - designed falls prevention programme, which delivers services to people who are over 80 years of age who have already had a fall. We know that statistically those people are at risk of having another one. We can reduce that risk, and therefore reduce the risk that they will break a hip and have to get that fixed, with the attendant cost. What happened? ACC cut it. Do members know how much it was saving?

💬 Michael Woodhouse: Nothing; not a thing.

Mr Woodhouse says it was not saving anything, but I tell him that a peer review study showed that for every dollar that was spent, $2 was saved in the first year following the intervention. Do members know why ACC cut it? It was cut because only 70 percent of that $2 cost was on its books and the rest was a cost to the health system. So this Government, which cannot have one person talking to another, cut a programme that saved taxpayers $2 for every $1 that was spent, because only 70c of it was saved in the accident compensations system.

This area of policy is being grossly mismanaged. I have a real fear that the Government will not just still push ahead with privatising some of the management functions and some of the operational functions when it comes to managing claims but have a tilt at privatising levy setting and underwriting, and there is no justification for it. It is not evidence-based. Minister Nick Smith was caught out at the select committee. Last year he said that his justification was that some of the self-employed and the big employers have better rates of rehabilitation. He said that, so we went to ACC under the Official Information Act and said we were very interested in this; please show us the information. The ACC flicked it to the Minister’s office because there was none. The Minister did not have any, either. All he could produce was a press release from one of the private providers saying that it does it well. There is absolutely no evidence that the self-insured pool, which does contract out the management of claims to private providers, does it any cheaper or at any higher rates of rehabilitation—

💬 Michael Woodhouse: Yes, there is. They stay in the programme.

They stay in the programme because they actually contract out of the averaging of levies. That is why they stay in it. It is not because they have better rates of rehabilitation; it is because—

💬 Michael Woodhouse: Yes, there is.

There is no evidence for that, and we have made inquiries on that. That is a mere assertion by that member, and his Government should be ashamed that it is willing to act on assertion rather than evidence, when we know that we already have a good scheme.

It is a pleasure that accident compensation is in far better shape than the pretence of where it was last year. It is notable that the improvement in the scheme’s financial stability and liabilities, and its $2 billion surplus, have been achieved as a publicly owned entity that is operating publicly. There is no need to change the model.

The Hon David Parker lives in denial. Let me just take up some of the points he made. Nowhere have I seen in the report back from the Accident Compensation Corporation’s financial review David Parker registering his concern about the $2.7 billion losses of the accident compensation scheme in the years 2007-08, and the $4.8 billion losses in 2008-09. He said that those were manufactured by a National Government. He forgot that those accounts were signed off by the Office of the Controller and Auditor-General. I challenge Labour to write to the Auditor-General’s office and say that it helped to sign off an account that had a manufactured or exaggerated loss in accident compensation. We do not have to take seriously anything that member says, because he was wrong. The independent Audit Office signed off last year on the fact that accident compensation had made a loss of $4.8 billion.

Why did that loss come about? Quite simply, some of it was out of the corporation’s control, but it was largely due to the incompetent leadership exercised by the Labour Minister for ACC, which was in three areas that I will share with everyone.

First, there was an increase in entitlements without any consideration being paid to the impact on levies. I will draw on the example of physiotherapy; I think most people will remember that. In 2004 the claim cost for physiotherapy was only $55 million. By 2008 that cost had gone up to $144 million. If the National Government did not do anything, that cost was forecast to increase to $232 million. Why? Once again, Labour directed the corporation to provide so-called free physiotherapy. We could see that a lot of clinics had put up signs saying that physiotherapy was free. Well, I am afraid nothing is free; someone has to pay for it.

Second, there is the non-earners account. When National came into Government in 2008 the first news that we heard was that the accident compensation scheme needed a top-up; there was a $300 million deficit in that account. The claim costs for the non-earners account had gone up from $600 million in 2004 to $1.2 billion in 2008.

Third, there is good news about the administrative cost of the Accident Compensation Corporation. At the end of this financial year the administrative costs of the corporation are down by 7 percent. So it was not true when the Hon David Parker said that those costs could not be improved. Under good governance and under good leadership they can be improved. They have gone down by 7 percent in the area of international and domestic travel, and of taxis and parking. In administration, the savings in the head office of corporate overheads has gone into front-line services.

I have good news for Labour members, who keep talking nonsense and saying that the rehabilitation and management of those claims have not improved. One of the biggest problems facing the accident compensation scheme’s $6 billion outstanding liability is related to claims for people who have been on the scheme for 2½ years. What a waste of human resources!

I am very proud to say that although Labour is in denial, we are so proud to have a Minister for ACC, the Hon Nick Smith, who exercises the leadership that is very much needed in steering the accident compensation scheme. I know that Labour members hate to hear this but a former National Government introduced the accident compensation scheme to New Zealand, so we are the very proud party that wants to make sure that any problem caused by Labour will be remedied. We are glad that we have a very capable and able Minister for ACC, who has put the accident compensation scheme back on a sound footing, and who has made sure that everybody is covered.

Mr Chair.

The CHAIRPERSON (Lindsay Tisch): The Labour Party has used its allocation of speeches, so there are none left for the Labour Opposition.

💬 Darien Fenton: Do we only get two?

The CHAIRPERSON (Lindsay Tisch): No, you have used your full allocation; I am just bringing that to your attention. You will have no more speakers for the rest of this debate.

I think I observed the same glint in the eye of the Opposition spokesperson for ACC, David Parker, as he had last week at the estimates review of the accident compensation scheme when he heard that it had started to turn the corner financially and may have improved its financial performance to about a $2 billion surplus. It did not seem to me that Mr Parker’s enthusiasm at that news was genuine applause for what I think has been an excellent turn-round in the scheme; it is more an indication to him and his colleagues that somehow it is now OK to take the foot off the pedal for the scheme’s performance, and that some of the steps this Government has taken were not necessary. Well, nothing could be further from the truth. It is worth remembering that at the time Mr Parker was last involved in a Government that oversaw a result where the scheme had $2 billion in it, it was a $2.4 billion deficit. The previous Government’s response was to make the scheme even more flaccid, particularly in respect of rehabilitation rates. The result for the following year was a $4.8 billion deficit. So although I am really encouraged that the scheme seems to be in the process of a turn-round plan, even if it is something like $2 billion in surplus, it needs to be weighed up in the context of the previous 2 years, which showed an audited and signed-off result of $7.2 billion of deficit. The vast majority of that was overseen by the previous Labour Government.

Mr Parker talked about the Government using unreasonable assumptions to inflate the unfunded liability. I will give members one example of where those assumptions were particularly unreasonable under the previous Labour Government: despite medical and rehabilitation inflation going well above the consumer price index, the consumer price index was the only thing used to measure cost increases. That severely dampened down the unfunded liability, and it just could not continue. The chickens came home to roost when the revaluation occurred, and we saw a blowout of about $10 billion in a couple of years. So no one who knows about the accident compensation scheme can place any sort of credence on the assertions by Labour and Mr Parker that the scheme’s financial position over the last few years has been anything other than very tenuous and that it did require the sort of remedial action that this Government has put in place.

I am delighted to see in such a short period of time the message about improvements in performance not only being received and understood but actively and enthusiastically supported by the staff who administer the scheme. The most pleasing aspects of the sorts of performance indicators that the Minister for ACC, the Hon Nick Smith, talked about in the estimates review last week were in respect of rehabilitation performance. He gave us an update for 11 of the last 12 months. We saw some tanking performance in terms of outcomes in rehabilitation from 2008-09. The 10-week exit rate was below 65 percent. Those administering the scheme set themselves a quite ambitious target of 69 percent. They are now tracking at about 71 percent, well ahead of their target. For the 9-month exit rate, they were down to as low as 89 percent, I think. They set a target of 91.5 percent, and they are now at 93 percent. What does that mean? It means that far fewer people are going into long-term claims. The rehabilitation performance for long-term claims has dropped by about 14,700 claims to 13,500 claims. Those sorts of numbers have a very, very significant impact on the corporation’s financial performance.

Investment performance has been talked about a lot. The scheme has consistently performed above the benchmarks for the market. Even when it made losses in the 2008 year, it was still performing well ahead of the general average and against its budgets, so it simply is not true to say that this massive dip in the scheme’s financial performance in 2008-09 was somehow the result of the dip in investment performance. Yes, there was a little bit of that, but it certainly was not the material factor. I think that the warning bell should be sounded in respect of the fact that the Minister advised the committee that although it is looking pretty strong over the year, there was about a $150 million dip in returns in the last reported month. So that recovery in terms of investment performance is still pretty lumpy.

Overall, I think this is a very, very good news story. People should not be fooled by the smoke screen that Labour continues to throw up in respect of accident compensation performance under its tenure. There is a long way to go before we can achieve the sorts of stability that accident compensation deserves. I look forward to that occurring.

Mr Chair.

The CHAIRPERSON (Lindsay Tisch): Members, the question is that the report of the Transport and Industrial Relations Committee on the 2008-09 financial review of the Accident Compensation Corporation be noted. Those of that opinion will say Aye, to the contrary, No.

I raise a point of order, Mr Chairperson. I sought clarification on speaking slots for this portion of the debate. I was advised that if Government members did not take their calls, we could stand to take a call. My colleague Lynne Pillay stood to take a call when no National member stood. We were following guidance, and without wanting to trifle with the Chair, I point out that you tried to seek closure on this debate. I seek some clarification on that step that you undertook in the Chair.

The CHAIRPERSON (Lindsay Tisch): I thank the member for that. Each party is allocated so many speaking slots in which they can seek calls. Labour has actually used the 12 calls. National still has six calls left for its members to exercise. As they have not exercised their six calls, they can now move on to the next question before the Committee. If, at the end of the debate and within the 3-hour period, there is still time available, then it is open for any party to seek calls. But at this stage we must move on. As the member’s party has exercised its 12 opportunities, we now must move on. That is why I cannot accept a call from the member. We will move on to the next vote, and, as I said, if all parties have exercised their total votes within the 3-hour period and there is still time available, then there is an opportunity for further speeches.

I raise a point of order, Mr Chairperson. I go to the question of whether the allocations are fixed according to the Standing Orders or whether they are a guideline. My understanding is that they are a guideline rather than a fixed allocation. I apologise; I was not in the Chamber when this was first raised, and I have come in and I have been looking for the appropriate Standing Order—if I am pointed to it and I am wrong, I apologise—but my understanding is that they are guidelines as opposed to an allocation by way of the Standing Orders. Although I accept that there will be an opportunity, presumably in a later debate, for people to pick it up, I would appreciate a ruling on the strictness of the allocation interpretation and whether that is fixed in the Standing Orders or whether it is something that is less formal.

The first point that I will raise is that I am surprised that in the middle of a vote we are having this debate. My understanding was that the Speaker’s ruling is that once we have commenced a vote, we should continue with that vote. The second point I raise is that there is a longstanding tradition that this speaking number is based on proportionality, agreed prior to the debate, and that was canvassed. There was plenty of opportunity before the debate to come back and argue the position that members wanted more or fewer calls. We agreed before that National would have 18 and that Labour would have 12.

I would now like to not quite withdraw and apologise but pull back somewhat. I have had time to get advice and have a quick look at the Standing Order; I accept that the ruling you made earlier is correct. I apologise for the interruption.

The CHAIRPERSON (Lindsay Tisch): Just to clarify for members, I tell the Committee that if we look at the consideration of financial reviews, under Appendix A of the Standing Orders, we can see stated that the whole debate will be 3 hours. I understand there is agreement between the whips, and that the proportionality has been worked out. There is agreement between the parties, and I think that Speaker’s ruling 25/6 clarifies the matter. I intend that the decision I made earlier stands; I will put the vote.

Report noted.

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