Wednesday, October 21, 2009

The ACC question

There was recently a useful contribution to the ACC debate in the New Zealand Herald.

In this article Simon Collins sought the opinion of Sir Owen Woodhouse, who chaired the Royal Commission that proposed the Accident Compensation Commission in 1967. This was a useful thing to do. Not because we should necessarily cling to history for history's sake but because it helps us remember why things were done in the first place. In this regard I think the current debate is missing a few important points.

The so-called solutions for the ACC budget blow out include increasing levies (including differential levies for high risk categories) and reducing entitlements. In considering the merit of these solutions we should compare them to the counterfactual, that is to say what might have happened if the ACC hadn't been put in place.

One key point in the debate is that ACC was not put in place because of insurance or funding efficiency. It was put in place to reduce litigation. This is a point made by Sir Owen. The two models at the heart of the debate were either:
  1. A fully socialised accident compensation mechanism with no rights to sue, or
  2. Fully privatised compensation decided through the civil courts.

Hybrid options could also be chosen and one could argue that the opening of ACC to competition or the third party provider scheme were hybrid options in that they partially privatised some of the compensation scheme.

The main reason for choosing the socialised model for ACC was that it was assessed that the reduction in litigation costs would make the ACC scheme the least cost overall. The ACC scheme would also have significant implications for insurance eliminating the need for workers compensation insurance and aspects of medical and public liability insurance.

In all other respects, that is to say, that people would be entitled to full compensation for accidental injury caused by others was held to be roughly equivalent between the two options. This is a very important point when considering the proposal to reduce entitlements (in particular). Reducing entitlements is reducing the rights of people compared to both original major models. To simply reduce ACC entitlements would constitute an reduction of New Zealander's rights. The correct policy option that leaves rights broadly intact is to reintroduce, with the reduction of ACC entitlements, a limited right to sue. If the original Royal Commission was correct (and remains correct) then this would reduce ACC's costs but increase costs to New Zealand overall.

When it comes to the issue of increasing levies then I think the real problem becomes more relevant. In the Herald article Sir Owen makes comment, "Sir Owen said he saw the scheme as part of the social welfare system, not as an "insurance" scheme in which all future costs of this year's accidents needed to be funded immediately." In this I think that Sir Owen misrepresents his own reforms. At the heart of the debate there was no issue of people not being compensated for accidental injury but whether the mechanism would be public or private. The public mechanism was chosen mainly to reduce the total cost of litigation but the ACC scheme also constitutes mandatory socialised insurance. The equivalent counterfactual would be mandatory private insurance. In this regard I think the limited privatised model is superior to Sir Owen's original scheme. ACC, as an insurer, is expensive. It is after all one of our most monolithic bureaucracies. And here in, in my view, is the real problem with ACC.

Thirty years ago a friend of mine made an excalamation in a movie theatre. My friend was in the middle of a personal experience with ACC. For some reason ACC had decided they needed to advertise and had the catchline in television and movie adverts something like getting people back to work is our first priority. On this occasion the advert drew the response, and keeping people tied up in paper work forever is their second. In thirty years they have not improved and this is, I believe, directly affecting their costs and the health of New Zealanders.

It is current conventional thinking, and obvious common sense, that the best results from injury occur when diagnosis, treatment and rehabilitation are done as quickly as possible. The ACC fall well short of the as quickly as possible criteria. They don't even meet the as quickly as reasonable criteria. Not responding quickly to the medical needs of injured people has real and significant consequences. Untreated conditions of even a relatively minor severity can become long-term ailments. In addition, when left without treatment or rehabilitation and in relative isolation, injured people can develop other long-term ailments (such as chronic pain syndrome).

ACC's chronic bureaucracy leaves health professionals with a dilemma. If they treat patients quickly and enthusiastically attempt a comprehensive diagnosis then they risk not being paid. However, if they wait, then the patient is at risk of developing a long-term condition with possible complicating syndromes. As Tim Harford and Steve Leavitt would point out health professionals (in aggregate) rationally respond to their incentives.

I strongly suspect that ACC, and New Zealand overall, is the victim of its own bureaucratic inefficiency. Not just in the huge overhead costs that are incurred but, far more importantly, in the long-term obligations to people whose enduring suffering was entirely avoidable.

Sir Owen and his commission made a well reasoned policy judgement in 1967. On balance, though, I can't help but wonder if mandatory insurance and a few more rich lawyers may actually have been the lower cost.

Back to today. A response to the ACC problem that only looks at increasing levies and reducing entitlements is a cop out. As is policy based on soundbites and populist opinion. This is a major societal issue. What is needed is quick and proper diagnosis, treatment and rehabilitation. But, for goodness sake, don't leave this to the ACC.