Nineteen years ago, South Australia introduced outsourcing of case management for workers compensation claims.  A recent paper by Robin Shaw questions whether this model has achieved its aims, suggesting it has failed to save money or improve service delivery.

In the South Australian system, like in Victoria and New South Wales, workers compensation is publicly funded but privately administered. The regulatory body, WorkCover, sets the premium levels and regulates the payment of compensation. Administration of the claim is carried out by authorised companies known as claims agents.

Even where outsourcing of claims management is not the model in use, it is worthwhile considering its effectiveness.

Outsourcing in South Australia has undergone multiple revisions since its introduction. When outsourcing commenced, nine claims agents were authorised, a number which decreased until a single agent was appointed in 2006.

Under the original contract, WorkCover and the claims agent were equal partners. This model proved to be untenable – WorkCover had little authority over the claims agent but full accountability for the agent’s actions.

In 1997, a new agreement was signed. This contract appointed WorkCover as the principal and the claims agent as a service provider. It also stiffened agent accountability and restructured performance requirements. Fees to the agent under this agreement were based on market share, as well as meeting key performance indicators.

Shaw identifies several issues with outsourcing, most damningly that it has failed to save money. In 1995, the then Attorney-General claimed that outsourcing would save the scheme $5.4 million per year. This was quickly proven incorrect as claims management costs increased 18 percent between 1995 and 2000.

Subsequently, when a sole agent was appointed in 2006, it was predicted that claims liability would be reduced by more than $100 million a year. Instead, claims liability increased 14 percent in the subsequent five years. Far from saving the scheme money, outsourcing has increased costs at a rate far outpacing inflation.

Other criticisms of outsourcing include:

• Favouring employers: The 2002 Stanley Review showed strong evidence that claims agents favour employers. This favouritism was driven by fees based on market-share. The appointment of a single agent eliminated market share competition and arguably removed the bias towards employers.

• More expensive: Outsourcing will be inherently more expensive than in-house management because of the agent’s need for profit, unless a commensurate sum can be saved in cost and liability.
   
• Poor service delivery: Contract terms, performance criteria, market share incentives and other things directly controlled by WorkCover have a heavy impact on the quality of service delivered. Claims agents are commercial businesses. If the contract terms permit malicious compliance or ‘gaming’, claims agents may pursue these loopholes to increase profits.
   
• Cost of oversight: Agents are effectively spending other people’s money, which can lead to sloppy practices. As mistrust between WorkCover and agents grows, spending on surveillance of agent operations increases. Shaw estimates that oversight of claims agents could easily end up costing more than in-house management.

Some advocates of outsourcing argue that claims agents are fundamentally better suited to claims management than a regulatory body such as WorkCover. According to Shaw, claims management in personal injury, such as workers compensation, is a wholly different function to that of other insurance classes. As such, insurance companies and other providers are no better equipped for the work of a claims agent than the regulator itself.

Ultimately, Shaw’s conclusion is that outsourcing comes with more risk to quality control without a corresponding drop in system risk. While outsourcing is certainly not the only cause of the South Australian scheme’s poor performance, urgent reform is needed to fix its defects. WorkCover could pay heed to the old adage: “If you want a job done right, do it yourself.”