The government’s rhetoric on ACC has been overheated – but that does not mean there are not major problems with the scheme.

There has been an extraordinary backlash over the past week with a number of commentators claiming the government is planning to “wreck” ACC and the rhetoric around the hole in the accounts is all part of this.

It is true that, when contemplating the performance of Accident Compensation Minister Nick Smith, images of china shops and jersey bulls tend to come to mind.

As noted here a couple of weeks back Mr Smith's claims the ACC scheme is technically insolvent were (a) true (b) irrelevant, because it always has been and (c) not very helpful.

Finance Minister Bill English has lambasted Labour for turning ACC into a political plaything. That is a slight exaggeration, but only a slight one.

The levies were adjusted for political rather an actuarial reasons – and often in the face of actuarial advice.

But you can’t run the line Labour was using the corporation to play politics if your ACC minister then shoulder charges his way into a select committee hearing designed to hear from the corporation, not from ministers.

It also diverted attention away from the points the government could be making and on to Mr Smith’s behaviour.

So, has the crisis come out of the blue, and is it all cooked up by National as an excuse for cuts it wants to make?

No, and probably not.

Here are a few facts, none of which were planted by National, and most of which have been covered by the National Business Review over the past few years:

December 2005: Briefing to incoming Minister Ruth Dyson cites ongoing “boundary” issues between work-related accidents and work related illnesses and advocates moving conditions currently covered by the health budget – work related gradual process injuries, diseases and infections to be covered by ACC.

May 2006: A report to the ACC board by PricewaterhouseCoopers warns of unsustainable cost increases – “payments have increased by an average of 16.5% in the last three years.”

“We are projecting substantial additional increases in medical payments over the next five years … After adjusting for regulation rate increases, we have projected an average increase of 12% per annum over the next three years, which compares with 13.2% per annum observed over the last three increases, with lower increases thereafter.”

This was reported by NBR in November that year. Despite these warnings, the government and the board (they seem to have been remarkably in step with one another throughout) went ahead with a massive extension of the scheme, bringing in about 25 “gradual process injuries” – which included hearing loss, asthma and dermatitis under ACC instead of under the health system.

May 2007: Ministers warned the outstanding claims liability of the scheme is just over $1 billon higher than previously thought. This is kept secret at the time.

December 2007: ministers warned of looming difficulties in ACC’s non earners account (which covers beneficiaries and children) – 10% increase in new claims in the previous quarter, and 17% increase in serious injury claims. Again, this is kept secret.

Feb 2008: employers warn extending the coverage of the scheme to include conditions currently covered by health spending is “extending the social wage back into ACC and getting the employers to pay for it” and the costs are not being properly considered.

There is also concern at the inclusion of traumatic event coverage under the scheme – the government estimates the cost will be somewhere between $7.6 million to $72.2 million a year – a figure described as both “almost meaningless” but also on the low side.

March 2008: PricewaterhouseCoopers report to ACC warns of $1.2 billion increase in liabilities.

April 2008: ACC chairman Ross Wilson meets minister of finance to discuss “the issue of non-earners account funding.”

July 2008: Report to ACC Minister Maryann Street says the assumptions about the newly enacted extensions to the scheme to cover gradual process conditions etc are too optimistic and that a realistic estimate may not be possible.

September 2008:

Actuaries Melville Jessup Weaver are reported in NBR warning the latest figures released by ACC as part of its levy setting process indicate massive increases will be needed in coming years – 14.6% for employers and self-employed, 35% for employees, and 12.6% for the motor vehicle account – and it would be more if ACC hadn’t decided to run down its reserves. The report also notes average claim costs have risen more than 27%.

All that is material generated before the change of government. In essence, the problems faced by the scheme are very real.

They arise for several reasons: one is rehabilitation times have deteriorated (for reasons which have still to be determined); one is that medical costs have increased more than anticipated (but, given medical costs have risen well above the rate of inflation for many years now, and private insurers allow for such increases, why didn’t ACC?).

And the key political reason the problems arise is because the last government radically extended the scheme’s coverage without properly considering how those extensions were to be paid for.

But: where to from here? National’s overheated rhetoric on the issue does of course have a political purpose but it is unlikely to be aimed at undermining the scheme itself.

Radical cuts to the scheme would be political suicide, and – unlike the tail end of the last National government - ministers in this government have not shown much inclination to charge into valleys of political death.

The government has promised to look at opening the scheme to competition but this only applies to workplace accident cover – the part least affected by the cost blowouts.

No, I suspect the reasons were threefold: in ascending order of importance – some National ministers (Mr Smith being the main culprit) are still stuck in the habits of opposition; the usual political drive to discredit one’s opponents; and finally, the impact ACC has on the government’s financial position.

This is the crucial part: ACC is now something of a financial hole, and likely to remain so in the foreseeable future.

That is going to have a substantial effect on the government accounts and is likely to be a significant chunk of red ink when Mr English unveils his first Budget in May.