September 2003

Partnerships for Recovery - The McKinsey Review into the NSW Workers Compensation Scheme

In August 2002 McKinsey and Company was engaged by WorkCover NSW to review the workers compensation scheme and recommend how to improve the scheme’s underwriting and insurance arrangements. The report has now been completed and submitted to the Minister. It is due to be considered by Cabinet. The following is a summary of the key findings. A full report can be found on WorkCover’s website.

The report identifies a number of areas for reform with the dual objectives of providing fair treatment for workers and an affordable and efficient workers compensation scheme for employers.

"The focus of McKinsey is to create a stronger WorkCover Authority of NSW".

McKinsey did not examine the current scheme regime for the payment of workers compensation benefits and entitlements, nor has it revisited any of the significant reforms implemented at the end of 2001 relating to dispute resolution.

Following McKinsey, it appears privatisation has been ruled out, at least until the New South Wales scheme is fully funded, if not permanently.

Appointment of Agents

The most significant recommendation made by McKinsey relates to the restructure and appointment of WorkCover fund managers (agents).

It is proposed there be three types of agents as follows:

  • General agents
  • Tail claim agents
  • Catastrophic claims agent

It is envisaged agents appointed as a general agents will:

  • perform the underwriting function,
  • handle notification of injury and injury management, and
  • manage claims of less than three years duration.

Tail claim agents are earmarked to handle and manage claims which are longer than three years duration.

Only one agent will handle catastrophic claims. This agent will be viewed as a specialist fund manager. It may or may not receive claims from the outset following injury. This will depend on how catastrophic claims are ultimately defined and when a claim becomes classified as catastrophic. It is envisaged some claims which escalate and become catastrophic may well begin with a generalist agent and be transferred to the catastrophic agent later.

WorkCover forsees that a fund manager may be classified as both a generalist and tail agent but will not receive catastrophic claims. Conversely, if a fund manager is appointed as the catastrophic claims agent, there will be no scope for it to be appointed in the other classifications.

Rehabilitation Providers

The role and performance of rehabilitation providers has also been scrutinised by McKinsey. It has been recognised that this sector of the industry has been less than effective in delivering return to work outcomes and tailored solutions for escalating medical costs. Reforms can be anticipated whereby arrangements with rehabilitation providers are more outcome focused in terms of return to work with remuneration tied to results.

McKinsey also recommends over treatment/over servicing by medical and rehabilitation providers be given attention.

Legal Profession and Litigation

The legal profession and litigation also receive treatment in McKinsey. It is anticipated WorkCover will take a more hands-on involvement in the development and implementation of scheme wide legal strategy. In particular, McKinsey recommends WorkCover co-ordindate the analysis, disputation and running of legal matters with precedent value. It is also recommended that one legal provider panel be set up for the scheme as a whole rather than fund managers establishing their own separate legal panels. It is anticipated the legal panel process will involve consultation between WorkCover, its agents and possibly employers.

Other matters to arise from McKinsey include:

  • WorkCover should unbundle investment management and outsource its investment requirements to leading investment managers to obtain advice from specialised asset consultants.
  • It is anticipated WorkCover New South Wales will ramp up its fraud unit with greater resourcing and a larger number of prosecutions being brought.
  • A larger number of audits into all aspects of the scheme can be anticipated.
  • A strict tender process for fund managers applying for the new agent positions will occur. Successful agents can expect fixed term contracts. Open ended fund manager licences could be at an end. Agent contracts may be for 3-4 years. There will be more competition, with the implementation of strict service standards and audits to ensure minimum standards are met.
  • Incentives are proposed for smaller employers to switch to better performing agents. Of course, it should be recognised that employers with poor workers compensation and OHS track records switching to better performing agents have the potential to lower the performance of that agent. It has also been recognised that any employer which switches from agent A to B will take its claims experience within the first three years with it.
  • Remuneration of agents will be more outcome focused.
  • Claims management to be made more professional with the development of:
    • Claims management skills, training and certification.
    • A professional association for claims managers.
  • Consolidation and streamlining of the legislation is also flagged as a goal, but it is recognised this is easier said than done. Currently a multitude of legislation and regulations apply to govern various aspects of the New South Wales workers compensation regime.
  • WorkCover will continue its drive to target recoveries, finalisation of old common law claims and long term claims resolution. Specialist units already operate in relation to these areas within WorkCover. In relation to long term claims, the objective is to get workers back to work.

Commutations

There is no recommendation to bring back unrestricted or less restricted commutations. The NSW Self-Insurers Association is continuing its lobbying for the re-introduction of unrestricted commutations in NSW.

Conclusion

The focus of McKinsey is to create a stronger WorkCover Authority of New South Wales where:

  • the regulator is more active in the management of the scheme;
  • strict tender processes apply in relation to all agents and service providers;
  • minimum standards are established, audited and met;
  • appropriate resources are provided for all aspects of the scheme; and
  • scheme initiatives, policy and strategy are applied informally and consistently throughout.

It is anticipated that any reforms flowing from McKinsey will be implemented over the next 24 months via a steering committee and separate modules backed up by appropriate resources and risk management initiatives.

It remains to be seen how McKinsey is received, interpreted and implemented by Cabinet. Whether or not this latest tranche of proposed reforms addresses and cures the ills of the New South Wales scheme remains to be seen.