By Adam Bennett and Nick Perry
Workers' compensation premiums in NSW were between 20 and 60 per cent higher than those in Victoria and Queensland, he told a business lunch to mark his government's first 12 months in power.
He warned that if the state failed to act, employers would be paying up to six times what companies in Victoria and Queensland paid.
Unions and the NSW opposition accused Mr O'Farrell of harbouring plans to slash WorkCover benefits, with Unions NSW threatening strike action.
Mr O'Farrell said cuts to benefits had not been proposed.
"We'll be looking at all things, including trying to reduce the rate of serious injury in NSW, through to the way the funds are managed through to medical costs and efficiencies at WorkCover itself," he told reporters in southwest Sydney.
"There is no proposal to cut benefits, but we're going to have to look at everything because it is simply unsustainable that over the past six months the WorkCover deficit has been $9 million a day.
"We need to address the cost of premiums, we need to address the rate of workplace injury, and we need to ensure that the scheme operates with the maximum efficiency, so we can guarantee to workers the adequate protection and security they deserve if they are injured at the workplace."
WorkCover was "too important a scheme to allow to fail" and the government would announce details of its overhaul within a month, Mr O'Farrell said.
He said the government would sit down with unions to discuss the audit.
Unions NSW Secretary Mark Lennon said he would be prepared to discuss the future of WorkCover only if workers' benefits were not at stake.
"We will always strongly support injured workers, and if it gets to the stage where we have to take action then we'll take the necessary action," Mr Lennon said.
"But at this stage, we say we're prepared to sit down and work through some sensible reforms."
Mr Lennon said claims that workers' compensation premiums in NSW were double those in Victoria were not true.
The state opposition said Mr O'Farrell must guarantee injured workers would not be worse off under the WorkCover reforms.
"This is a scheme that provides an important safety net to everybody who works in NSW," Opposition Leader John Robertson said.
"Barry O'Farrell needs to explain firstly why this change is necessary, and he needs to guarantee that we're not going to see injured workers in NSW worse off as a result of these changes."
The NSW Business Chamber CEO Stephen Cartwright said high WorkCover premiums were a key barrier to economic growth in the state.
"It's in the interests of employers and employees to have a workers' compensation scheme that is fair and financially sustainable and comparable with those in surrounding states," Mr Cartwright said in a statement.
"We don't have that with the current scheme."
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