Media Release
February 18 2008
New research from UniSA’s Hawke Research Institute has exploded
the myth that outsourcing government services will always make savings.
Research undertaken by economist and workers’ compensation specialist,
Dr Kevin Purse, has shown that the outsourcing of WorkCover's claims’
administration responsibilities has not only failed to meet promised
key financial and other objectives – but costs have actually increased
under the outsourced model.
According to Dr Purse the cost of administering the WorkCover scheme
in 1994, before outsourcing began, was $49.7 million.
“The move to outsourcing was supposed to deliver cost savings of up to
15 per cent a year,” he said.
“Not only was the target never met - there were never actually any cost
savings at all, even though the number of WorkCover claims fell
dramatically from the 39,500 in 1995 to 22,020 in 2007.
“Instead, there was a blow out in scheme administration costs and
by 2007 after adjusting for inflation, South Australian employers
had paid an extra $75 million in administration costs - in effect,
an ‘outsourcing loading’ of more than 10 per cent a year.”
In 1994 the state Liberal government introduced legislation to allow
WorkCover to outsource its core business - workers’ compensation
claims management - to the private sector.
From 1995, claims management was farmed out to nine insurance companies,
then five, then four and now, since 2006, one claims agent.
“At the time, outsourcing was ‘sold’ to the community as something
that would reduce WorkCover’s administration costs, provide greater
choice for employers, improve service delivery, and lift the scheme’s
performance,” Dr Purse said.
“What we know now is that the much vaunted benefits of outsourcing
have simply failed to materialise.”
Dr Purse said the promise of employer choice under outsourcing was
also an illusion.
“Prior to 2006 on average, less than one per cent of employers changed
claims agents a year, and since then of course any semblance of employer
choice has disappeared altogether following the shift to a single claims
agent.”
Dr Purse said service to injured workers has been another area of
ongoing concern.
“This is especially so for those whose injuries make an early return
to work unlikely or more difficult,” he said.
“Claims agents have all too often regarded employers as the ‘customer’
and individual workers as nothing more than a ‘claim’. Consequently,
the level of service to workers has fluctuated between indifference
and aggressive claims management.
“An excessively high turnover of claims managers, currently estimated
at more than 20 per cent, hasn’t helped either.
“Perhaps most disturbingly,” he said, “there has been a conspicuous
deterioration in WorkCover’s financial performance.
“Prior to outsourcing, in June 1995, the average premium rate for
employers was 2.84 per cent of payroll and the scheme had a funding
ratio of 70.7 per cent. But by June 2007 the average premium had
increased to 3.0 per cent and the funding ratio had fallen to 64.7
per cent - even though workers’ entitlements were considerably greater
then than now.”
From his research Dr Purse has concluded that the obvious solution
would be to reincorporate the claims management function within
WorkCover’s operations.
“But this is easier said than done, because in 2006 the WorkCover
Board signed off on a five year contract with the current claims’
agent,” he said.
“As part of the deal though, the agent agreed to cut WorkCover’s
claims liability by up to $100 million annually after two years.
However, if this target is not met the SA Government has an opportunity
to step in and revisit in-sourcing.
“This now needs serious consideration, especially as the scheme’s
claims liability has already increased by over $300 million since
2006.”
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