Permanent Disability at Private, Self-Insured Firms: A Study of Earnings Loss, Replacement, and Return to Work for Workers' Compensation Claimants
Jan 1, 2001
Raising Questions About Adequacy and Equity of Benefits
Workers who file claims for permanent partial disabilities from job-related accidents at private self-insured firms in California recover less than half of their injury-related wage losses during the first five years after injury. These losses closely track those of injured workers at smaller, insured firms in California. Self-insured firms do a better job of returning workers to work than insured firms. However, on average, workers' compensation benefits at both self-insured and insured firms did not meet the commonly applied standard for adequacy, which is to replace two-thirds of pre-tax earnings.
The RAND study, funded by California's Commission on Health and Safety and Workers' Compensation, focuses on 68 private self-insured firms and compares the wage losses, benefits, and replacement rates of their workers with workers injured at insured firms. Self-insured firms are large employers that have demonstrated to the state that they can bear the full costs of their workers' compensation claims. They account for 21 percent of claims at private employers in California.
Researchers estimated workers' total lost earnings after injury, including wages lost while out of work. The estimates revealed significant and sustained earnings losses for permanent partial disability (PPD) claimants at self-insured firms. For example, the average earnings of workers injured in 1993 were 21 percent lower in the first quarter after injury in comparison with a control group of uninjured workers who previously earned comparable wages. Five years after injury, the average earnings of injured workers were still significantly lower than those of comparison workers. Over the five years after injury, self-insured claimants lost a total of 23 percent of both pre- and post-tax earnings. The proportional wage losses of workers injured at insured firms were higher—32 percent. Many of the differences observed in proportional losses between claimants at insured and self-insured firms can be accounted for by the differences in claimants' pre-injury earnings and by the size of the self-insured and insured firms.
Although lower proportional losses for those at self-insured firms suggest that replacement rates would also be higher, in fact they are not because workers at self-insured employers have higher earnings. Higher pre-injury earnings imply larger total losses. Five years after injury, average total losses for an injured worker at self-insured firms ($39,500) are higher than total losses at insured firms ($33,200).
The benefits at self-insured firms are comparable to those at insured firms, and workers at both types of firms are subject to the same maximum indemnity caps. Therefore, because total losses are higher at self-insured firms, the replacement rates are lower. In comparison with the five-year replacement rate of 48 percent at self-insured firms, the replacement rate is 53 percent at insured firms.
Higher dollar losses at self-insured firms were driven by higher wages before injury, and lower replacement rates were driven by benefits that do not increase with higher income. At the same time, post-injury employment was unambiguously better at self-insured firms: After injury, PPD claimants at self-insured firms were more likely to continue to work, less likely to drop out or retire, and more likely to work at the at-injury employer than their counterparts at insured firms.
Figure 1 summarizes the post-injury employment of both self-insured and insured PPD claimants. The figure reports the percentage of workers injured in 1993 who were employed in each quarter relative to the percentage of employed comparison workers.
Workers at self-insured firms returned to work sooner and were less likely to experience subsequent time out of work, at least initially. As time passed, however, differences between the two groups disappeared.
Because self-insured employers bear the full cost of a workplace injury, these employers have incentives to return an injured worker to the workplace as soon as possible. Consequently, self-insured firms are more likely to have return-to-work programs, and because they are bigger they are better able to offer modified work or hold a position open during a worker's recovery period.
At least one difference between self-insured and insured firms does result in lasting differences in outcomes for injured workers. If they are working after their injuries, PPD claimants at self-insured employers are likely to continue to work at the at-injury employer, in which case these employees see their wages quickly recover to the level of comparison workers.
One of the key issues motivating workers' compensation research and policy debate in the state of California is whether the current system provides adequate and equitable benefits to injured workers. With regard to adequacy, replacement of only one-half of pre-tax income losses is generally not regarded as being adequate. In addition, differences across groups defined by severity of injury and pre-injury wages also raise issues of equity.
In general, as earnings increase, both proportional wage losses and replacement rates (before and after taxes) decrease. The injured workers who fare best in the California system (in terms of the highest replacement of lost earnings) are the lowest-paid workers at insured firms. Those with the lowest replacement rates are the highest-paid workers at both self-insured and insured firms. The four columns on the right side of the table show differences in the impact of a workplace injury on proportional wage loss and replacement rates according to pre-injury wages.
|Pre-Injury Earnings Percentile (within group)||Annual Salary ($)||5-Year Earnings Losses ($)||5-Year Potential Uninjured Earnings ($)||Indemnity Paid by Year 5 ($)||5-Year Proportional Loss (%)||Replacement Rates (%)|
|5-Year Pre-Tax||5-Year After-Tax||10-Year After-Tax|
|0–25||Up to 23,000||31,170||81,136||18,121||38||58||74||49|
|0–25||Up to 13,000||16,278||49,473||14,703||33||90||112||84|
Another approach to assessing the adequacy and equity of benefits is to view them according to the severity of injury. Figure 2 summarizes the wage loss remaining after benefits are paid (that is, uncompensated wage loss) for insured and self-insured claims above and below the median indemnity payment ($13,595) by pre-injury earnings quartiles. Claims above the median indemnity payment can be regarded as more severe than those below it. Figure 2 shows that losses are higher for more-severe claims, as expected. The figure also shows that uncompensated losses tend to increase with earnings, especially in the case of high-indemnity claims.
The exception to the pattern of uncompensated losses increasing with wages is found in the low-indemnity claims at self-insured firms, which show no particular relationship between uncompensated losses and pre-injury earnings quartiles. Generally, workers in this group are most likely to recover from their injuries and are the easiest to accommodate; therefore, at self-insured firms, they are most likely to return to work successfully.
In addition, workers at insured firms with high-indemnity claims who are in the lowest earnings quartile are compensated over 100 percent. For these workers, pre-injury earnings are likely to fall below the benefit caps. As a result, despite losing close to half of their earnings, the indemnity paid over five years after injury exceeds their losses.
The uncompensated losses of those with high pre-injury earnings and high-indemnity claims at both self-insured and insured firms are striking. At the self-insured firms, the top quartile of pre-injury earnings has uncompensated losses of $58,500 over the five-year period after injury. The comparable amount at insured firms is $43,000. These two groups reveal the collective weaknesses of the workers' compensation system. Because they are the more seriously disabled claimants, they are harder to accommodate despite the return-to-work programs at self-insured firms. Additionally, as high-earnings claimants, they are subject to indemnity caps and receive benefits no greater than those in any other earnings category despite considerably higher dollar losses. Outcomes in these groups seem least adequate when measured either by replacement rate or uncompensated losses.
These results on the adequacy of compensation do not lend themselves to simple solutions. For instance, one solution may be to raise benefits for low-rated claims. Although low replacement rates are observed among low-indemnity claims, they do not necessarily imply that uncompensated losses are especially high in this group. Using alternative measures of adequacy, high-earnings low-indemnity claims at self-insured firms are well compensated. Another solution is to increase compensation for high-rated claims. However, once again, by any reasonable measure, the high-indemnity claims with the lowest pre-injury earnings at insured firms are well compensated, with replacement rates in excess of 100 percent five years after injury. A third potential solution, raising caps to target high-earnings claimants, would raise benefits for one group of workers already among the workers' compensation successes—those with low indemnity and high earnings at self-insured firms.
The lack of simple solutions should not stand in the way of policymakers' addressing clear issues of adequacy (such as high uncompensated losses among high-indemnity, high-wage workers) and equity (such as low replacement rates among the lowest-rated claims, particularly at the insured firms).
But whereas fine-tuning the compensation structure may be appropriate in the short run, the lack of obvious policy levers for this purpose suggests that more-fundamental solutions need to be considered. In particular, further efforts are required to improve return to work, particularly among smaller firms. In addition, disability ratings, which determine most of the differences in compensation, need to be revised to more accurately target individuals with greater losses. Alternative approaches to setting benefits should be considered, such as increasing benefits for workers who do not receive an offer of return to work. In addition, if the resulting approach to setting compensation were more consistent, the amount of litigation might be reduced and confidence in the system restored.