In Search of the Magic Pudding

WorkCare Introductory Remarks

Michael Porter

It is a pleasure to introduce the topic of WorkCare, prior to the presentation by my colleague Ian McEwin. It is particularly pleasing that the H R Nicholls Society has chosen WorkCare as a subject for this conference. WorkCare is an example of what can happen when powerful union leaders get together with sectional industry groups and government, to devise a scheme whereby some particular firms and groups of individuals obtain benefits at the expense of the public at large. In this case the expenses are of momentous proportions, with prospects of unfunded liabilities in the range of $4-$5 billion.

To adapt a remark of Adam Smith some two centuries ago, there is a long history of privileged groups conspiring in the name of equity or fairness to diminish the wealth of the public. Tariff protection, centralised wage fixation, many state enterprises and indeed, my own industry, tertiary education, are costly examples of arrangements whereby the mass of citizens, workers and taxpayers unwittingly subsidise the privileged few. The major beneficiaries of heavy state intervention in these industries are:

(1) workers who gain an unfair degree of security, regardless of performance, and who often gain terms of employment out of all relation to their market productivity, and

(2) certain groups of customers who, through political clout, acquire services well below cost, paid for by taxpayers or ratepayers who are kept in the dark, assisted by the ability of state institutions to avoid meaningful accountability.

WorkCare---a misnamed Qango if ever there was one---was introduced by the Victorian Labor Government in 1985, with the stated intention of lowering the costs of accident compensation and rehabilitation, with this cost saving to be achieved by replacing the 'wasteful' activities of lawyers, private insurance companies, and so forth, with a new state monopoly---WorkCare. WorkCare would impose a new set of conditions and obligations in relation to workplace and accident insurance, would seek an emphasis on rehabilitation and would end lump sum common law settlements. Premiums and conditions of eligibility for compensation would be set by WorkCare and not by competition or enterprise level negotiation with insurance companies.

The economic research for WorkCare, or for any form of single monopoly insurer, was virtually non-existent, although there were a variety of actuarial calculations, many of which (for example, those of David Slee) correctly predicted major financial shortfalls, but on a scale rather less than now appears likely. The problem with actuarial calculations is that they tend to assume that behaviour is unchanged, despite massive changes in incentives. To put it crudely, they assume the bull to be unaware of the choice new heifers across the paddock! While the absence of reliable estimates of likely claims, take up rates, rort rates or whatever, in face of new incentives, may justify the conservative estimates of actuaries, this very newness of the system also obliges actuaries involved in devising schemes such as WorkCare to warn of potentially vast errors---and some did.

Those of us who spoke out at the time of the launch of WorkCare made the point that the vast majority of injuries and disabilities in our society are not easy to observe or verify, and we noted the heavy discretionary element in making a WorkCare claim. We need, it was argued, the presence of insurance companies, individuals and others with an incentive to monitor claims, injuries and other activities, in order to make sure that costs are as closely as possible restricted to those associated with genuine injury or disability. Under competitive insurance those companies which do not properly monitor abuse should lose out relative to those who do as employers shift their insurance accounts. Similarly, firms which do not offer innovative packages of premiums and benefits should also lose out. Because it is workers and employers who both ultimately pay the price of work place insurance, at the end of the day it is they who have the greatest vested interest in properly funded accident (or any other) insurance. It is workers and employers, and the consumers of their services, who will ultimately lose most by allowing a monopoly takeover of accident insurance. Yet, in the state of Victoria, the representatives of labour act as if the burden of higher benefits can somehow be paid without cost to workers.

Insurance or Welfare?

It was argued at the time that if workers had the choice between much lower premiums plus some risk sharing---incorporating the principle of co-insurance whereby workers would receive higher post tax and post insurance wages, in exchange for lower premiums and restrictions on claims, which reflected work place risk---this would give them an incentive to make the system work. But as with Medicare, or any other centralised system which confuses insurance and welfare, and which sets uniform charges for non-uniform risk, there is a tendency for the subsidised services to get over consumed and for many services which are under priced to be denied. Furthermore, if valuable services are provided at a user charge close to zero, the cost of providing the service explodes, unless there is chronic rationing of benefits (which is why health care costs so little in the Soviet Union relative to the USA). If we hand out unsound benefits and have no proper incentive to monitor, then we expect eventual fiscal ruin for the parties (private or public) who have been seduced into funding the scheme.

And fiscal ruin is exactly what is happening to WorkCare in Victoria, with much anecdotal, and now documentary evidence of the system being rorted, as a costly minority of individuals finds it highly convenient to be injured and on rehabilitation benefits rather than work in tedious or unrewarding jobs.

Whitlam and Woodhouse

Those of us who worked under the Whitlam Government, and who played a role in assessing the possible contribution of the proposed Woodhouse Accident Compensation Scheme (modelled on New Zealand), took some pride in 1974 in persuading the Whitlam Government not to proceed with a national scheme of accident compensation. The evidence, economic logic and overseas experience, all suggested that any scheme which would offer workers 80% of their previous income in the case of an accident, might produce a nation with an artificially high number of 'retired' Evel Kneivels, 'overstressed' workers, and RSI victims, rather than a highly productive and dynamic workforce.

Any accident compensation system which offers, fairly readily, a secure indexed income from not working, and in proportion to previous income, runs the risk of people choosing precisely the wrong jobs for the wrong reasons---as people sign up for higher risk jobs, at a premium income, and then go 'on compo' later on! Of course, most Australians would not, and do not, behave in such ways. But the point about WorkCare, and about the once proposed Woodhouse Scheme under Whitlam, was that careful modeling of the system was capable of showing that it took a very minor behavioural response to completely devastate the projections of the WorkCare actuaries (a devastation which some actuaries predicted, but which would take some time to be revealed owing to the absence of lump sum settlements, the long term nature of WorkCare liabilities and inadequate provision of information). Regrettably, many in our community do change their habits in suspect ways if the incentives are large enough.

It is disappointing today that we will not be benefiting from the comment of those within the accident compensation and rehabilitation industry in Victoria, since it is they who have been designing and modifying the system. It would also be nice to hear from the actuaries who designed the original system, since it was they who claimed that people like myself and David Slee were grossly exaggerating the likely deficits and disasters which would befall the introduction of WorkCare.

Boredom Versus Bullets

It is apparently a fact that desk workers in the Defence Department in Canberra have much higher accident rates than those driving tanks, battling rough terrain and even facing the odd bullet out in the far east. Presumably, what is going on is that it is extremely boring to be an officer at a desk in the Defence Department, such that the bureaucrats find ways of becoming injured or opting out of the work system, whereas their counterparts engaged in the actual military activity rather like their work and have an incentive to be good at it and to stay on the job.

Similarly, other jobs which are depressing, such as processing tax forms, are jobs likely to have a high proportion of workers who find good reasons for opting out, whereas people with all sorts of actual disabilities are known to be enthusiastic workers for all their lives if the job turns them on, and so they fail to claim! The last thing we need in the current Australian industrial relations system is for workers associated with inappropriate and irrelevant union structures, divorced from the enterprise, to be then given the added and perverse incentive of finding a reason not to work at all. What we need, and what the H R Nicholls Society is all about, is a move to contracts of employment, at the enterprise level, and which give workers a sense of purpose and identification with their enterprise. This same enterprise and its workers, I suggest, wants the freedom to contract-in its own insurance arrangements, and not be slugged for a welfare scheme designed and manipulated by bureaucrats in Spring Street.

Who Bears the Costs?

Finally, lest it be thought that one is making any sort of 'anti worker' comment in criticising the WorkCare scheme, the basic point of economic analysis regarding any of these schemes needs to be repeated. This point is that the costs and inefficiencies of WorkCare are ultimately shared by workers, as well as by owners of businesses, and then passed on to consumers of their services. The capacity of employers to pay workers generous wages depends on profitability, and profitability depends on costs, and costs depend upon premiums to organisations such as WorkCare and the extent to which workers go on WorkCare. Where the government imposes across-the-board and artificially uniform WorkCare levies, and where they impose obligations and costs which firms cannot avoid, this undermines the profitability of business and the employability of workers. WorkCare has the effect of subsidising industries which are high risk and penalises firms which do very well in lowering risks by still charging the common levy for 'their' category.

I should hope the H R Nicholls Agenda, Mr Chairman, can be extended towards the enabling of firms and workers in enterprises to choose competitive forms of workplace insurance appropriate to the risks inherent in the enterprise and the jobs involved. Workers and managers should be designing job specifications, and developing safety habits at the enterprise level. Such specifications will maximise the well-being of workers after allowing for risks, premiums and all related costs, such that the workers and the management do well, financially and physically, out of their joint venture, and without burdens being placed on outside firms and industries owing to the contrived categories of levies imposed by WorkCare. I would like to suggest that what such workers and their managers require, when it comes to accident insurance, is the opportunity to choose between insurers able to provide the best services, and with some, perhaps limited, access to the common law. This entrepreneurship in insurance was, in a belated fashion, and despite much interference and unhelpful regulation, developing prior to WorkCare. But entrepreneurship in insurance is exactly what WorkCare precludes, whereas entrepreneurship in contriving injury, is exactly what it encourages.