Compensating Permanent Workplace Injuries

A study of California's vast workers' compensation system found that workers who suffer workplace injuries resulting in a permanent disability experience large and sustained wage losses. Moreover, drawing on data from 1991 and 1992 claimants, researchers concluded that permanent partial disability (PPD) benefits, on average, compensated 40 percent of those lost wages. Injured workers with minor permanent impairments received less compensation—from about 12 to 35 percent of lost wages.

Researchers at the Institute for Civil Justice conducted an evaluation of the California system that comprises both a qualitative portrait of the system's effectiveness and a ground-breaking wage-loss study that sheds new, empirical light on the experiences of injured workers, the adequacy of benefits to compensate lost wages, and the disability ratings process. This work was performed at the request of the California Commission on Health and Safety and Workers' Compensation, a politically balanced group established in 1993 to oversee the workers' compensation system and improve its operation.

Qualitative Portrait Highlights Lingering Problems Alongside Many System Improvements

In 1989 and 1993, California implemented major statutory changes that restructured the medical-legal process; limited compensation for psychiatric, post-termination, and vocational rehabilitation claims; increased benefits for moderate and serious disabilities; increased fraud deterrence; and deregulated insurance rates. Interviews with system participants indicated how the reforms have affected the system's functioning and outcomes. Researchers interviewed applicant and defense attorneys, medical examiners, administrators, insurers, self-insured firms, and staff at relevant state agencies, including the Disability Evaluation Unit, the Industrial Medical Council, the Workers' Compensation Appeals Board, and the Division of Workers' Compensation.

The consensus of those interviewed was that the reforms generally improved the system, but that serious problems linger. Workers' compensation premiums, insurers' costs, and the number of PPD claims have decreased; medical costs have fallen sharply; and abusive claims practices have been reduced. However, stakeholders agreed that the system remains highly adversarial and litigious, is excessively complex, and delivers modest benefits at high costs.

A particularly contentious area is the process for rating permanent disability. Currently, injured workers who have suffered a permanent disability begin to receive PPD benefits when (a) they have returned to work or (b) their condition is judged unlikely to improve, even with additional medical treatment. PPD payments are meant to compensate workers for their lost ability to compete in the labor market. Since this lost ability is impossible to measure directly, payments are determined by a disability rating schedule. Essentially, the schedule converts a doctor's description of the injury and resulting impairment into a number between 1 and 100. The higher the rating, the more weeks of benefits a worker receives.

Most PPD claims have ratings below 25 and are therefore considered "minor." These minor disabilities account for 90 percent of PPD claims, 80 percent of medical benefits, 70 percent of indemnity benefits, and 60 percent of legal fees. Injuries that are assigned minor ratings, however, can include the loss of ability to perform heavy lifting (a rating of 20), the loss of the sense of smell or taste (a rating of 5 for each), or the loss of a finger (a rating between 3 and 16, depending on the digit and joint of amputation).

In addition to medical findings, the California disability rating system uses "subjective" information such as an injured worker's level of pain or reduced ability to lift heavy objects in an attempt to describe the impact on a worker's ability to continue work. However, system participants allege that this process results in ratings that vary substantially among individuals with similar injuries; ratings of individual workers also vary according to the doctor who evaluates them and the person who rates them.

This variability is a source of dispute. Employers and insurers want a more consistent and predictable rating system, arguing that the current system increases litigation and costs. Some applicants' attorneys argue that subjective ratings are desirable because they provide individualized justice. Although all agree that disability ratings should be informative, some system participants fear that if ratings are based solely on objective, medically determined conditions, many claimants may no longer be eligible even if they are truly disabled.

Wage-Loss Study Finds Significant Uncompensated Losses

To estimate the financial impact of a workplace injury, researchers linked two state databases, one for wages and the other for workers' compensation claims. These matched records allowed them to track the earnings of injured workers five years before and after injury and then assess disability ratings, benefits, and postinjury wages. These data were collected for 30,000 PPD claimants injured between 1991 and 1994, although postinjury analyses focused on 1991–1992 claimants.^[1]

The next step was to estimate what workers would have earned had they not been injured, a task accomplished by identifying a matched control group of uninjured workers in the same firms at the same time who made similar wages. A comparison of these two groups revealed that over the five years before the workplace injury, average quarterly earnings for PPD claimants and control workers were virtually identical. No evidence, based on prior work experience, suggests that PPD claimants are predisposed to low wages or excessive time out of work.

But the experiences of injured workers and their counterparts diverge markedly after the injury. First, PPD claimants experience substantial time out of work even after their initial return. Figure 1 illustrates that these reductions begin with the quarter of injury and continue for five years afterwards. Workers with higher disability ratings have more time away from work. Five years after an injury, 10 percent of those with the lowest disability ratings remain out of work; about half of those with high ratings do.

Back on the job, PPD claimants also make lower wages than their uninjured coworkers. When time out of work is included in the calculation of wage loss, injured workers are shown to experience substantial losses, as seen in Figure 2. Together, the shaded areas in this graph represent the full measure of earnings lost from reduced wages and increased time out of work. PPD claimants injured in 1991–1992 received approximately 40 percent less in earnings over the four to five years following their injuries than did their uninjured counterparts.

The study also found that workers' compensation benefits—including total temporary disability (TTD), permanent partial disability, and vocational rehabilitation maintenance allowance (VRMA)—cushion workers from reduced wages and time away from work only for a short period after the injury (see the dark gray area in Figure 2). Because wage losses persist and because benefit payments run out, benefits compensate slightly less than 40 percent of workers' full losses over a five-year period after an accident. If lost wages are calculated by considering post-injury earnings only during quarters at work, PPD benefits replace about half of these losses.

Researchers checked these findings by conducting sensitivity analyses that simulated the effects of taxes, an extension of the period after injury to ten years, and a 1996 revision of the benefit schedule. Individually, these adjustments significantly raised or lowered the replacement rate, but their combined impact did not appreciably change the results.

Ratings Process Falls Short of its Objectives

These results enabled researchers to assess the disability ratings schedule. Their analyses found that PPD ratings for low-rated claims are especially problematic. Simply put, ratings do not predict wage losses for those with minor claims. While applicants with the highest disability ratings have higher proportional wage losses than those with less seriously rated injuries, minor-injury ratings do not reflect actual wage losses. Table 1 shows that over a five-year period following an injury, disabled workers with ratings in the lowest categories—1–5, 6–10, and 11–20—all experience comparable wage losses, whereas the requirement that ratings reflect the loss of ability to compete itself suggests that wage losses should increase incrementally by category.

The adequacy of workers' compensation benefits also differs between major and minor claims. Benefits most fully replaced lost wages for claimants with disability ratings above 20 (Table 1). In contrast, for workers with minor disabilities, benefits replace a small fraction of lost wages. For instance, for workers with disability ratings 1–5, 12 percent of wage losses are replaced.

That wage losses are so large among workers with minor claims is perhaps the most surprising and poorly understood result of this research. Unfortunately, researchers do not know if the injuries and resulting disabilities associated with the low ratings are, in fact, not as minor as the ratings suggest, or whether even modest workplace injuries have consequences far beyond the resulting impairment—for example, disruption of career development, or strain on worker-employer relations because of the injury or the claim.

One reason for these findings may be that ratings are assigned inconsistently. To assess the variation of ratings, researchers compared ratings for the same injury assigned by raters at two different state agencies. Figure 3 shows that claims with a rating of 10 given by insurance adjusters to 1663 workers received ratings ranging from 2 to 82 at the state evaluation unit. This spread illustrates why many believe the process is both unpredictable and inequitable; in turn, these criticisms may make the system unnecessarily litigious.

Policy Recommendations

In view of these findings, the researchers recommended that the Commission create a task force to improve the validity, reliability, and efficiency of the PPD rating process and to overhaul the disability schedule used in that process. This task force was established in the fall of 1997, and researchers then urged members to consider additional policy recommendations:

• Revise the PPD schedule based on a wage-loss approach.
• Review strategies for increasing return to work; determine why injured workers have a low rate of return and why they experience alternating episodes of employment and unemployment after their return.
• Implement an elective fast-track system to provide a timely, objective resolution of minor claims with fixed, predictable payments.
• Develop a database on closed PPD claims to track how they are resolved and to help ensure consistency among raters and resolutions; make this information available to all system participants.
• Improve the consistency and predictability of the rating process, perhaps by instituting routine consistency tests among raters.

Effecting Change

Historically, workers' compensation in California has been highly politicized, with policy arising from anecdotes and interest groups. The ICJ's objective, empirical research has helped the Commission continue its work of identifying improvements to the system and building consensus for reform.

Notes

• [1] This study used data representing 70 percent of workers' compensation claims in the state between 1991 and 1994. Data for employees at self-insured firms were not available.

Topics

• Health Economics