I can smell smoke. Is there a fire or is it just a slow burn?

Most of you know that significant legislative amendments were made to the WorkCover Scheme and came into effect on 1 July 2008.

A significant but less well known change occurred when the WorkCover Corporation Act 1994 was amended to require the Corporation to be audited by the Auditor General.

The audited financial report for the Corporation for the year ended 30 June 2012 was tabled in Parliament on 16 October 2012 and it showed a significant deterioration in the WorkCover Scheme’s performance, due in large part to an increase in the outstanding claims liability for the fund.

The key finding was a $412 million deterioration in the underwriting result, with a total comprehensive result for the year of a loss of $437 million, to take the unfunded liability to $1.4 billion.

The poor result comes at a difficult time for the Corporation, which has its own internal problems following the recent resignation of WorkCover SA’s Chief Executive Officer.

The resignation follows a number of departures during the past 18 months, which must have diminished the ability of the embattled organisation to function effectively and deal with the considerable challenges and deficiencies in the WorkCover Scheme.

The former Chief Executive Officer, Rob Thomson, commenced at WorkCover on 15 June 2010, having come from New South Wales, where he was General Manager of the Workers Compensation Division of WorkCover NSW.  He left suddenly on Tuesday 18 September 2012 for “personal reasons”.

Gael Fraser, currently General Manager, Strategy & Policy, was appointed as Acting CEO, but she has indicated an intention to retire at the end of the year and her position was advertised on 6 October 2012, together with the position of General Manager, Scheme Regulation, formerly held by Wayne Potter.

The departure of executives and senior managers commenced in April 2011, when Jeff Matthews (Deputy Chief Executive Officer) and Ian Rhodes (Chief Financial Officer) “separated” from WorkCover.

Richard Hilton (Manager, Vocational Rehabilitation) resigned in October 2011 and Wayne Potter (General Manager, Regulation & Education) “separated” from WorkCover in July 2012.

The sudden departure of so many senior executives in a relatively short period of time after Rob Thomson commenced at WorkCover must raise questions about the culture of the organisation.  To paraphrase someone else “To lose one senior executive in 18 months is bad luck, but to lose six is plain negligent”.

A Cultural Problem?

As with a number of changes to the Scheme that were introduced following the New South Wales experience, it is legitimate to ask whether we have imported a cultural problem from the New South Wales Scheme.

WorkCover in NSW has been the subject of media articles relating to allegations of workplace bullying and harassment of its own employees.  In September 2010, the Minister for Finance requested that the New South Wales Department of Premier & Cabinet undertake an independent enquiry into bullying and harassment at WorkCover and report back to him.  The Department engaged PriceWaterhouseCoopers to undertake the enquiry.  Amongst the key findings was that although “the majority of employees find WorkCover an enjoyable place to work, with a noble vision, positive role in the community and generous employee conditions and benefits”, there were exceptions to these “otherwise generally favourable sentiments” including:

  • many have suffered from behaviour which they described as bullying and harassment;
  • the leadership team has historically not demonstrated leadership capability and action concerning bullying and harassment; and
  • specific cases of bullying and harassment have not been handled to the satisfaction of complainants or have not followed the correct process in all cases.

It was further reported that:

Many interviewees commented at length on, and provided examples of, difficult managers and their respective styles of management over the years.  This behaviour was not limited to certain divisions, but was across the organisation. 

Many interviewees cited aggressive styles and poor management (including assigning meaningless tasks, withholding work and then criticising alleged underperformance) – actions which could amount to bullying and harassment of certain individuals.  These practices have significantly contributed to the erosion in employees’ trust in management capabilities and, ultimately, authority.

It was reported that:

To achieve cultural change, long-term commitment and a concerted focus on culture is required.

In an industry newsletter in May 2011, I postulated that:

With the unfunded liability sitting at $865 million, it is difficult to accept that the position of Chief Financial Officer of this embattled organisation is redundant…and that…with the many financial challenges facing the Scheme and the proposed changes to the employer payment system, one would think that a CFO was an important role in the structure.  Similarly, it is a little difficult to understand how the position of Deputy CEO can be made redundant at this point in time.

It would be reasonable to assume that there has been a difference of opinion on some fundamental matter that has lead to these decisions.

All staff at WorkCover will now be wondering just how safe their own positions are and it will be a difficult task to keep morale up in the current environment”.

With the subsequent further departures of Wayne Potter, Richard Hilton, Rob Thomson and shortly Gael Fraser, it is reasonable to pose the same question again, but with greater emphasis!

End of Financial Year Results

The Auditor General’s report reveals a very significant deterioration in Scheme performance.  The continuation of volatility in world financial markets and falling interest rates have contributed to a deterioration in investment income, but a “significant increase in the outstanding claims liability for the compensation fund” is responsible in large measure for the significant deterioration in the WorkCover Scheme’s performance.

The actuarial estimate of the net outstanding claims liability moved from a $207 million increase at 30 June 2011 to a $662 million increase at 30 June 2012.  This means the increase grew by $455 million.

In large measure, this poor result is reflective of the failure of the introduction of work capacity reviews to remove long-term claimants from the Scheme.

There has been no discernible improvement in front end management of claims and the return to work rate has deteriorated.

The 2008 amendments, and in particular the introduction of work capacity reviews, have not delivered the savings which had been expected.  There is no other effective means of removing long-term claimants from the Scheme and the failure of the 2008 amendments, together with continuing poor return to work rates, lead to the inevitable growth of “the tail” (i.e. claimants remaining in receipt of income maintenance beyond 2.5 years).

It is ironic that a day after the Auditor General’s report was tabled in Parliament, the Australian Financial Review on 17 October 2012 reported that Victoria’s WorkCover authority, “unveiled an operating surplus, secured an actuarial release and continued a run of cutting accident rates”.

The annual report of Victoria’s WorkCover authority was tabled last week in the Victorian Parliament and revealed a surplus of $385 million, up from $294 million the previous year with respect to the performance of the authority from its insurance operations.

In contrast with our Scheme, the underlying fundamentals of the Victorian scheme are said to be “very strong” making it “well placed in both absolute and relative terms”.

Return to Work Rates

The latest Australia and New Zealand return to work monitor reveals that South Australia had the lowest return to work rate of all the States in 2011-12.  It also had the highest proportion of injured workers on compensation.  Just 77% of South Australian workers achieved the goal of a return to work, down from 80% in 2009-10 and 2010-11.

42% of injured workers remained on some form of compensation six to nine months after submitting their claim, which is almost double the rate of some States and compares unfavourably with the national average of 25%.

At the time these figures were revealed, Rob Thomson pointed to recent and ongoing changes, such as the introduction of the Experience Rating System for calculating employer levies and the effect of competition between Employers Mutual and Gallagher Bassett as reforms that could improve return to work rates, but he warned that this would not occur overnight.

In my newsletter of May 2011, I referred to the independent review into the use of vocational rehabilitation services in the Scheme, which was carried out by PriceWaterhouseCoopers.  The report found that there were too many rehabilitation providers in South Australia and that claims were over serviced without corresponding outcomes.  It also criticised claims management by EML, in saying that there was “limited upfront and strategic case management practice” which was exacerbated by inexperienced case managers.  It is difficult to see how the “competition” between EML and Gallagher Bassett will significantly improve claims management in the short term.  The most that can be hoped for is that improvements will be achieved over time.

In the May 2011 Newsletter, I said that:

It should be a source of great embarrassment to WorkCover that the report is so damning of vocational rehabilitation and its effectiveness when vocational rehabilitation underpins the effectiveness of the Scheme as a whole and impacts so dramatically upon the viability of the Scheme”.

The deterioration in the return to work rate underlines and highlights that comment.  The rehabilitation industry is represented by board member Sandra De Poi, who has been a board member since July 2003.  De Poi Consulting Pty Ltd, in which Sandra has an interest, contracts with WorkCover SA for the provision of rehabilitation services and medical expert services to WorkCover SA.   De Poi Consulting Pty Ltd is the largest provider of rehabilitation services. The value of payments to all providers of vocational rehabilitation was $26.25 million in the 2012 year.  That is a little down on the $30.2 million paid in the 2011 year, but about on par with the value of payments during the 2010 year.

It is reasonable to ask what “value” WorkCover SA has seen from these services in light of the deterioration in the return to work rate.

It is rumoured that changes are going to be introduced to promote an “outcome focused” incentive scheme for rehabilitation providers and that these changes will be based upon the Victorian system.

Whatever changes are made will take a long time to have an effect and, as InDaily reported last year in an interview with Rob Thomson, “there was plenty to do”.  Clearly that remains the case.

Plenty to do

The new executive team, when it is finally reassembled, will have much to grapple with.  The transition to two claims agents and the management of that transition, which will commence on 1 January 2013, is a major reform.  Rob Thomson, in his public announcement, properly maintained that:

Our main priority is to ensure that a high level and quality of service is maintained through the transition period.  We will be working closely with both agents to ensure this process is as smooth as possible.

Nobody should underestimate the challenges involved in this process.  Each agent will receive a 50% market share in the first year and registered employers will be asked to nominate which claims agent they wish to use for 2013.  Their wishes “will be taken into consideration”, but that is all.

There will be a period in which performance standards will inevitably decline as injured workers’ files are prepared for transfer and transferred to Gallagher Bassett.  No matter how well Gallagher Bassett prepare for the handover (and I am sure it will), there are considerable logistical hurdles to have all staff and systems in place ready for the influx of files and be able to deal with all of the inevitable enquiries, requests and complaints in a timely fashion.

This will all be occurring at the same time as the rumoured changes to the approach to rehabilitation are unfolding and it is the injured workers who will largely feel the brunt of any shortcomings in the process.

The results of the procurement process for legal providers have also been announced.  This process has been going on in parallel with the claims agent procurement process.

Sparke Helmore will now join Minter Ellison in providing legal services to WorkCover.  The new contracts have “built in performance based incentives” which in part will be based around “faster dispute resolution”

It remains to be seen whether those “incentives” will have a positive impact upon Scheme performance but, based upon previous claims made by WorkCover SA when new initiatives have been introduced to “improve” scheme performance, we have reason to be sceptical!

Experience Rating System

The introduction of the new experience rating system, which was the second of the major reforms unveiled in recent months, is also posing problems for WorkCover SA.  It has been reported that aged care and nursing homes will be forced to cut staff and services because of steep increases in premiums.  Some operators have seen their premiums double and others are reporting increases of nearly $250,000.00 per annum.  Other inherently high cost industries will also suffer.  In September, Rob Thomson was reported as saying that, “It would not be fair or equitable to protect any one industry and force other employers to pay more as a result…We have met with the aged care industry associations…to explain these changes and discuss how injury prevention and management will have a positive impact on their WorkCover premium”.

I have previously warned that there is no evidence of experience rating anywhere it has been tried in the world achieving an improvement in claims experience through good health and safety practices and return to work management.

The fact is that aged care and other not-for-profit organisations are continuously challenged to provide the services that we as a community need because of poor funding.  A degree of cost subsidisation is an essential part of maintaining these services in the community interest.

The cost of doing business in South Australia is already significantly higher than our competitors in New South Wales, Victoria and Queensland.

The Australian Financial Review in September 2011 pointed out that WorkCover premium per $1.1 million in remuneration was $30,250.00 in South Australia, which compared unfavourably to New South Wales ($18,260.00), Queensland ($15,620.00) and even more so Victoria ($14,740.00).  When taken into consideration with payroll tax, land transfer duty and land tax, South Australia ranked fifth out of the five States surveyed by Pitcher Partners State Tax Survey.  Queensland’s impost of taxes and charges was reported as being 34% lower than those in South Australia, which is seen as an encouragement for “small businesses seeking a bigger bottom line by cutting tax bills” to move north.

Aged care and other not for profit organisations providing essential services to the SA community do not have the luxury of relocating to Queensland!  They just have to bear the burden and that will inevitably result in a decline in services.


All of these changes need to be faced by a new executive management team.  The search for a new CEO is complicated by the fact that similar searches have recently been undertaken by New South Wales and Victoria.  Victoria has appointed a new CEO, but New South Wales is still looking.  There is no guarantee that the requisite talent will be attracted to South Australia at a time when we desperately need effective leadership.

Scheme performance has deteriorated markedly over a long period of time, and it is now at an all time low.  Return to work rates are poor, many employers are reporting substantial increases in premium and management is in disarray.

The elephant in the room is the performance of the Board!

As Rosemary McKenzie Ferguson correctly pointed out in a letter to InDaily recently, “injured workers and their families are struggling and South Australia, which was once a world leader in workers compensation, now rates amongst the worst for care of injured workers”.

The Government and the Board must take full responsibility for this decline.  The sad reality is, however, there are few votes in workers compensation!

For more information, please contact:
John Walsh

John Walsh
p.  +61 8 8124 1951
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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