The economics of a fully funded NDIS

Presentation to 3rd Australasian Compensation Health Forum

Thursday, October 10, 2013 Sydney

John Walsh

1. What does “fully funded” mean? a) Conventional welfare and previous disability system

b) The National Injury Insurance Scheme

c) The National Disability Insurance Scheme

2. The “insurance principles”

3. Economic and fiscal benefits

Contents

The “fully funded” NDIS

IYDP 1981 led to legislative reform in the 1980s (Disability Services Act 1986) States and territories enacted similar legislation, and a CSTDA was established, leading to a shared funding agreement with the States paying the larger share. The service model became very much one of devolution to “group homes” in an attempt to support community living rather than institutional care. However, the system was quickly deteriorating to a crisis-driven situation with demand for group home places constantly exceeding funding supply, as families one by one, became unable to continue to provide care and support of their disabled children. Real funding growth was exceeding 7% per annum. The notion of “unmet need” first began to emerge in the late 1990s, with a series of publications from the AIHW.

Disability in the early 2000s

The welfare model – old disability

The main problem was that, in spite of the rhetoric around “rights, needs and function”, service delivery was totally determined by funding supply, with virtually no attempt to understand underlying cost pressures and need. There was no understanding of what “ lie beneath the surface”.

NSW Stronger Together – 2005/6

In 2005 the NSW government sought to develop a “…baseline dataset and modelling tool to facilitate modelling of service levels in the NSW Disability Service System…”.

Disabilityservices data:CSTDA/HACC

Otherservices

data

Census,ABS survey and

other surveydata

Epidemiologicaldata

Waitlist andquery data:

CSTDA/HACC

Baseline Dataset

Potential demand: Disability type / severity, incidence and prevalence rates

Potential demand: Disability type, need and frequency

Potential demand: Likely unmet need

Best estimate of current high-level actual demand, by type and frequency of current services

Disabilityservices data:CSTDA/HACC

Otherservices

data

Census,ABS survey and

other surveydata

Epidemiologicaldata

Waitlist andquery data:

CSTDA/HACC

Baseline Dataset

Potential demand: Disability type / severity, incidence and prevalence rates

Disabilityservices data:CSTDA/HACC

Otherservices

data

Census,ABS survey and

other surveydata

Epidemiologicaldata

Waitlist andquery data:

CSTDA/HACC

Baseline Dataset

Potential demand: Disability type / severity, incidence and prevalence rates

Potential demand: Disability type, need and frequency

Potential demand: Likely unmet need

Best estimate of current high-level actual demand, by type and frequency of current services

Subsequent modelling of the “do nothing” scenario showed a snowballing “death spiral” leading to a system full of high cost supported accommodation places, but with very little low-cost early intervention and preventative support. Stronger Together sought to change this dynamic through pre-emptive funding of a greater number of lower cost supports.

Disability funding reform

The Woodhouse principles

Community responsibility Comprehensive entitlement Complete rehabilitation Real compensation Administrative efficiency Whitlam and Woodhouse 2009

Prior to Woodhouse, most compensation was common law based, with lump-sum settlement the norm. Post Woodhouse this changed: NZ no-fault accident compensation scheme – 1974 to the present Australian Woodhouse scheme – 1974-1976 [injury and “sickness”] NSW LRC (1984) and TransCover 1987 [repealed 1989] Victorian TAC (1986), Tasmanian MAIB, NT MACA Workers compensation reforms – 1986 to 1990 all over Australia

Long-tailed personal injury insurance

In Australia, most very long-tailed schemes are publicly underwritten, mainly due to the term of liabilities, and premiums are collected from “at risk users” – employers, motorists, providers of healthcare, residential and commercial property owners. Most (but not all) schemes aim for FULL FUNDING, and report broadly under APRA guidelines for insurance operations, with risk margins and risk-free investment assumptions. Each year of premium is intended to cover the full cost of injuries which occur in that year, and is accumulated in the “liability” fund. There is some cross-subsidisation and community-rating in pricing, but for the most part these schemes aim to match prices to risk. Reserves are held for outstanding liabilities and solvency margins, but the publicly underwritten schemes have flexibility around both pricing and reserving, and often aim more for stability and timing of major changes.

Underwriting, funding, pricing, reserving

Funding in long-tailed insurance

The Australia’s accident compensation system is not perfect, but has a relatively stable history, with “hic-cups” identified quickly and adjusted through legislative reform – usually moving more towards the Woodhouse approach.

Over the 25 year history since major reform of the sector, premium rates have significantly reduced overall as a % of AWE, due to a combination of improved safety (both transport and occupational) and improved legislative structure and claim management (including rehab and RTW).

Cost pressures emerge through (a) a return to lump sum bracket creep [“supply push”?], which leads to regular scheme reform, and (b) insurer/ claimant mismanagement [“ demand pull”?], which leads to focus on more serious injury. Both these pressures are relevant to the NDIS / NIIS.

In 2003/4 the Ipp Reform identified that common law was inappropriate to major injuries – this led to the PwC “Blue Book”, and eventually the NSW Lifetime Care and Support Scheme, which has been the model for subsequent developments in NDIS and NIIS.

History – pros and cons of injury compensation system

Concept of LTCS => NIIS => NDIS

The state-based NIIS schemes are expected to have most of the characteristics of long-tailed insurance, and FULL FUNDING will probably have the same meaning. However they need not be constrained by some of the APRA and AASB requirements. For example NSW LTCS does not have all the characteristics of an insurance company, is much longer termed, and is able to make more long term assumptions – this helps its fully-funded tests. FULL FUNDING in the NDIS means aggregate pricing based on the expected cost of “reasonable and necessary support” for the prevalent eligible population at any point in time. It is not backward-looking like welfare, nor does it fully-fund in a forward sense like NIIS and long-tailed insurance. BUT IT IS INTENDED THAT IT WILL PROJECT FUTURE EXPENDITURE AS WOULD A TRUE FULLY FUNDED ENTITY.

Funding, pricing, reserving

Funding in NIIS and NDIS

• Universal insurance cover

• Insurance-based governance framework

• Person centred

• Outcome based

• Surety of funding base

• Support based on reasonable and necessary need

• Support focused on the individual and their carers

• Choice and Control

Key features of both schemes – NDIS and NIIS

“FULL FUNDING” – Key points

The economics of the model

NSW experience: Stronger together

The current system outlook - more money, fewer participants, poor outcomes

NSW experience: Stronger together

Without the NDIS the current system would be unsustainable financially and politically

“The bottom line is that benefits of the NDIS would significantly exceed the additional costs of the scheme” (Ch 20). Where do the benefits come from? •The distortionary impacts of raising revenue •Estimated fiscal gains from reductions in DSP beneficiaries and an increase in part-rate DSP payments, reaching the equivalent of a $2.7b dollar (constant price) annuity in the long term •The welfare impacts for people with a disability and their carers - conservatively estimated at the value of implicit income transferred to people with a disability – around $7.8 billion pa •An improvement in employment ratios for people with disabilities to the average OECD benchmark - employment of people with disabilities would rise by between 100,000 (for the more profound) and 320,000 (using a broader definition) by 2050. The impact of this gain could amount to 1% of GDP above the counter-factual, or $32b in extra GDP (constant prices). •An improvement in employment ratios for carers of people with disabilities. The impact of this gain could amount to around $1.5 billion in additional GDP (constant prices) over the long term.

We note that the PC is extremely cautious about these results, and is at pains to point out the difference between economic benefit and fiscal benefit.

Productivity commission findings

The NDIS is the most important enabler to a better life.