The NSW Workers Compensation Scheme is in financial strife. A rapidly growing $4 billion deficit has led the O’Farrell government to make several changes capping damages and medical expenses as well as reducing the amount and access to weekly entitlements of injured workers.

“The NSW Workers Compensation Scheme is unsustainable as it is currently priced,” said an internal briefing note to the NSW Finance Minister Greg Pearce uncovered by AAP. “The bill will improve return-to-work outcomes, increase compensation for seriously injured workers and reduce the annual cost of the scheme by around 25 per cent.”

The changes haven’t gone down well; some have called them “disastrous” and “sad”. Michelle Burgess, from the Injured Workers Support Network, told Crikey: “These measures will have a significant effect both physically and mentally on injured workers. In the past few days we have fielded over 100 calls for help from injured workers agonising if or when they are going to have benefits cut off.”

In many ways, the controversy exists because while worker compensation entitlements have just been cut or reduced, injury claim numbers have more than halved in NSW in the past 15 years. ABS figures indicate the number of major injuries in NSW workplaces alone dropped from 62,000 in 1996 to 30,000 last year. While there is a $4 billion deficit, employer premiums have had at least $5 billion cut off their premiums since 2005, according to WorkCover NSW.

The NSW Chamber of Commerce and Industry told the preceding NSW Workers Compensation Scheme inquiry that NSW still has higher premiums than Victoria and Queensland — and said that Victoria has almost half the number of workplace injuries than NSW. But NSW Treasurer Mike Baird said: “NSW workplace safety outcomes are similar to Queensland and Victoria, yet our workers compensation premiums costs on average are around 20% to 60% more. Increasing premiums to address the scheme’s poor experience would only exacerbate the current discrepancy to the detriment of jobs growth.”

A spokesperson for Unions NSW told Crikey: “In the five-year period to June 2009, the annual NSW frequency rate for serious injuries was between 27% and 42% higher than that in Victoria. In these circumstances it is appropriate premiums are higher.”

WorkCover NSW told the inquiry that any cuts to employer premiums would be unwise because of the adverse economic impact.

There is no disputing the NSW scheme is in trouble. It has been operating on deficit for 10 of the past 13 years. All the other major state and national schemes have strong surpluses. Between June and December 2011, the scheme lost a record $1.7 billion.

But the major causes of the $4 billion deficit are not inflated compensation payments or a flood of people suing their employers. Rather, ballooning medical costs for injured workers have caused the scheme’s liabilities to go up and the global financial crisis caused the value of its assets to go down.

The NSW government-commissioned report on the scheme concluded that 50% of the scheme’s deficit is a direct result of the GFC’s hit on the markets. The scheme did actually operate in surplus in the three years before 2008, before returns on its investments took a massive hit.

Medical liabilities under the scheme have increased from about $1.8 billion in 2008 to more than $3.3 billion in 2011 — accounting for at least another 30% of the deficit. For injured workers with less than “30% whole-person-impairment” — medical, hospital and rehabilitation services will no longer be paid for.  So does this just mean many of the costs will now be borne by Medicare?

Some of the main subjects of the changes — lump-sum payments and recipients of weekly benefits — account for less than 10% of the current deficit and about 10% of the deficit in past six months of 2011.

Weekly payments have been reduced and tapered; the NSW government says this will provide an incentive for injured workers to return to work earlier. It may not be as simple as that. WorkCover insurance company GIO complains that there is simply nothing in place for insurance companies to “get people off benefits once they have been restored to health, if no suitable jobs are available”. Employers are not always willing to accommodate an injured worker.

The inquiry was also provided with evidence showing WorkCover’s administrative costs have increased nearly tenfold from $70 million in 1999 to more than $630 million in 2009. WorkCover remuneration to its seven agency work-injury insurance companies is also hundreds of millions a year higher than 2001 levels (although it now appears to be decreasing) as the number of work injury claims has rapidly receded.

“The performance of some of WorkCover’s largest agents has been deteriorating,” said the government-commissioned report. Front-of-house injured workers complain that WorkCover and their insurance agencies can be bureaucratic, petty-minded, incompetent and rendered useless and adversarial by their conflicting list of statutory roles. Claim rejections and dispute costs are also rising — the number of Australian employees who applied for workers compensation, and did not receive it, doubled between 2005.

O’Farrell mentioned WorkCover fraud as a cause of an increase to scheme costs when discussing the amendments on ABC TV.  “Cheating the system” was not a contributing factor identified in the reports by PWC or the committee’s report.  Most people injured at work never actually make a worker compensation claim. Workers are bearing the costs of their own injuries more and more. ABS figures show that in 2009-10 567 500 employees were injured while working but only 38% received compensation.

By way of contrast, one key aspect of the new laws is that families who were once entitled to up to $425,000 compensation for the death of loved one at their work, will now be entitled to nothing.