The economics of a fully funded

NDIS

John Walsh

Presentation to 3rd Australasian Compensation

Health Forum
Thursday, October 10, 2013 Sydney

Contents
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

The fully funded NDIS

The welfare model old disability

Disability in the early 2000s
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 funding reform

NSW Stronger Together 2005/6
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.
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.

Waitlist and
query data:
CSTDA/HACC

Potential demand:
Likely unmet need

Disability
services data:
CSTDA/HACC

Epidemiological
data

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

Other
services
data

Census,
ABS survey and
other survey
data

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

Potential demand:
Disability type, need and
frequency

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 preemptive funding of a greater number of lower cost supports.

Long-tailed personal injury insurance

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

Funding in long-tailed insurance

Underwriting, funding, pricing, reserving
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.

Concept of LTCS => NIIS => NDIS

History pros and cons of injury compensation system
The Australias 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.

Funding in NIIS and NDIS

Funding, pricing, reserving
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 fullyfunded 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.

FULL FUNDING Key points

Key features of both schemes NDIS and NIIS

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

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

Productivity commission findings

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.

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