The money or the drip: lump sum vs no-fault benefits?
21st Mar 2014
The National Disability Insurance Scheme, when first proposed by the Productivity Commission in 2011, was designed to exist in tandem with the National Injury Insurance Scheme (NIIS), a no-fault national catastrophic injury compensation scheme.
The NIIS was proposed to attempt to cover the lifetime care and treatment needs of those suffering catastrophic injuries in accidents, irrespective of who was at fault and whether there was someone to sue.
For those who could never have sued by proving someone’s fault was the cause of their injury, this is certainly a huge improvement – they will get levels of care and treatment that they could previously only have dreamed of.
However, for those who could prove that someone’s fault caused their injury, there will be a radical change. Instead of a lump sum from litigation, they may now get a lifetime of benefits provided by a government agency.
The national plans for such schemes (to be developed individually in each State) are based on the model of the NSW Lifetime Care and Support Scheme (LTCS), as endorsed by the Productivity Commission. The Productivity Commission appears to have been a fervent believer in lifetime benefits schemes, one wonders whether they have even seen a lump sum they didn’t want to take away.
As the bandwagon rolls forward, it is useful to bear in mind the advantages and disadvantages of lump sum compensation versus lifetime statutory benefits. There is a genuine policy debate to be had that the nation has not yet explored.
The primary argument put forward by proponents of lifetime benefits schemes is that lump sums don’t last. That argument is by and large true. However, the main reason that lump sums don’t last is because governments rig the deck against those pursuing compensation claims.
To understand how, it is necessary to descend into the arcane operation of the discount rate.
Take the example of a person with quadriplegia who requires 24 hour care per day. [In fact, many need more: it takes two carers to get a quadriplegic up, washed and dressed in the mornings, deploying safe handling techniques.]
The care bill for that person is going to run at about $10,000 per week.
Next assume that the anticipated life expectancy for that person is another 20 years. (While this may appear callous, this is part of the process of the courts).
For most of us, the maths is fairly simple – the compensation needed to cover future bills would be $10,000 x 52 weeks x 20 years = $10.4 million.
However, when awarding compensation, the courts take into account that the upfront lump sum can be invested and earn compound interest.
Where governments have really dudded the injured is the forced assumptions regarding interest adjusted for inflation and tax paid on the interest earnings. The product of this calculation is called the discount rate. It is the discount that is applied to future losses to reflect the potential returns on the lump sum.
Where the trickery arises is that the real rate of return on money (i.e. interest minus inflation and tax) is about 2%. Most Australian governments mandate that the courts must use a 5% discount rate, with some States using a rate of 6% or even higher. The commercial reality is that no one can manage their investments to make a 5% return clear of inflation and tax.
To return to the example of a quadriplegic, using $10,000 in care per week, the application of a 5% discount rate reduces the damages awarded to $6.6 million.
In short, it is no wonder that the Productivity Commission found that lump sum compensation regularly runs out: governments deliberately short-change injured plaintiffs.
The Australian Lawyers Alliance has long urged that governments reduce the discount rate to reflect the real rate of return on money: to about 3%, rather than using the unrealistic 5% to 6% rate. Governments are a party to insurers ripping off the injured. The Australian Lawyers Alliance’s advocacy have largely fallen on deaf ears. This is sadly unsurprising, when State Governments are defendants themselves in negligence claims from time to time.
Thus, the prime selling point for no-fault lifetime benefits is that the compensation is guaranteed to last. If a person with quadriplegia lives the full expected 20 years, the care and support won’t run out at 16 or 17 years. Indeed, if they live a further 25 years, they still can access support.
There is also relief for parents with an injured child. If the child is going to outlive the parents, then parents are not relying upon siblings or other family to maintain future care for that child through their adulthood: there is a government agency responsible for their care and supervision. This undoubtedly brings piece of mind to some.
So there are the big selling points of a lifetime benefit scheme: a basic level of services is always available and the money doesn’t run out.
However, there are two very high prices that are paid for this certainty.
The first is the complete loss of freedom to choose. Ask anyone involved in the compensation system as to what causes the greatest level of frustration in pursuit of their claim and the answer will be the stress and trauma of continuing dealings with an insurance company for approval of each and every item of treatment and care for the rest of their lives.
Far too many plaintiffs settle cheaply just to get the insurance company out of their lives.
The lifetime care model locks the catastrophically injured into a lifetime of seeking bureaucratic approval for each and every service they need. The idea of spending 20, 30 or 40 years seeking prior approval for every treatment, chasing reimbursement for travel expenses and filling in forms horrifies most personal injury plaintiffs.
The NSW LTCS Authority has held out the promise of limited independence: pre-approving smaller lump sums for specific periods and allowing scheme participants individual choice as to how funds were deployed over that period. For example, someone might be given the funds to cover their care for a year and then be allowed to spend it as they see fit. However, this offer appears fairly illusionary for most. After six years of operation, the NSW Scheme has over 600 participants and only two of them have ever been given the freedom of periodic funding arrangements.
One of the touchstones of human existence is our right of self-determination and individual freedom of choice. A lifetime care scheme is the slow drip and there is no doubt for some that it becomes the equivalent of Chinese water torture.
The second major drawback of lifetime schemes is that whilst they may start with the best of intentions, their long-term future seemingly involves less and less by way of services.
The best case study is New Zealand’s no-fault compensation scheme, the Accident Compensation Corporation, which has been running for over two decades. It is now characterised by the restrictive availability of services and long delays in their provision. What started with the noblest of ideas is beset by budgetary difficulties and a consequential penny-pinching approach to service provision.
Early signs of slipping service standards are appearing in the NSW scheme. For example, care is being provided by the cheapest tenderer, rather than the best qualified agencies.
There is no doubt that a no-fault scheme to provide lifetime services for catastrophic injuries has its benefits. However, if over time, service standards decline and if scheme participation comes at the cost of individual freedom and choice, then the lifetime service becomes a whole lot less valuable compared to the lump sum rights that have been foregone.
Andrew Stone is the President-Elect of the Australian Lawyers Alliance and NSW Director. A barrister practicing from Sir James Martin Chambers, Sydney, he specialises in personal injury law and insurance law, including motor accident and public liability cases.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).