Following California's 2012 bill to enact major reforms to the state workers' compensation system, RAND researchers assess trends in earnings loss and permanent partial disability benefits between 2005 and 2012, including analysis of the Great Recession's impact on outcomes for injured workers, and examine how the reforms might affect injury compensation going forward.

Cover: Benefits and Earnings Losses for Permanently Disabled Workers in California
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Benefits and Earnings Losses for Permanently Disabled Workers in California

Trends Through the Great Recession and Effects of Recent Reforms

by Michael Dworsky, Seth A. Seabury, Frank W. Neuhauser, Ujwal Kharel, Roald Euller

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Research Questions

  1. To what extent have the benefit increases enacted under SB 863 changed compensation for permanently disabling workplace injuries?
  2. Do PPD benefits compensate workers at an adequate level?
  3. Are benefits delivered in an equitable fashion across different types of workers and injuries?

In 2013, California began implementation of major reforms to the state workers' compensation system, which were enacted in 2012 as part of Senate Bill (SB) 863. These reforms included several changes to permanent partial disability (PPD) benefits. To monitor the success of SB 863, the California Commission on Health and Safety and Workers' Compensation (CHSWC) contracted with the RAND Corporation to assess recent trends in earnings loss and PPD benefits and how injury compensation will be affected by SB 863. This report provides early evidence on how these reforms have affected disability ratings and benefits and compares PPD benefits to the earnings losses experienced by permanently disabled workers. Because SB 863 changed benefits in part by modifying the disability rating system, we also evaluate the impact of these changes on the equity of PPD benefits.

We find that permanently disabled workers experience large earnings losses, with earnings reduced by 28 percent on average in the second year following the injury. Workers who were injured during and after the Great Recession of 2008–2009 experienced substantially higher earnings losses than those injured before the recession. Impairment ratings and benefits increased over this period as well, but the fraction of earnings losses replaced by benefits declined between 2005 and 2012 due to increased earnings losses. Increased benefits and ratings under SB 863 will yield replacement rates higher than those observed in 2005 even if earnings losses remain elevated. Impacts on equity were detectable but small.

Key Findings

SB 863's Benefit Increases Have Done Much to Restore Compensation for Disabled Workers in California

  • Permanently disabled workers injured after the beginning of the Great Recession experienced much more severe earnings losses than workers injured before, suggesting that the economic downturn disproportionately affected injured workers relative to uninjured workers.
  • For the average worker who was injured between 2005 and 2012, the benefit increases enacted under SB 863 would have significantly increased replacement rates of lost income compared to what they were under a prior statute: The portion of after-tax earnings losses replaced by benefits would have risen by 21.4 percentage points, from 58.8 percent to 80.2 percent.
  • While SB 863 will lead to higher benefits, much of this benefit increase is offset by the increases in earnings losses that followed the Great Recession.
  • Both changes in ratings and increases in the maximum weekly wage led to substantial increases in benefit adequacy. The return-to-work benefit, a new benefit aimed at workers with severe earnings losses, had a more modest effect on average. However, the return-to-work benefit had the largest effect on wage replacement rates for the lowest-wage workers. Since other provisions of SB 863 led to larger benefit increases for middle-income and high-income workers, the return-to-work benefit has an important role to play in preserving the progressivity of PPD benefits.
  • Alternative methods for rating disabilities that were explicitly authorized by SB 863 led to substantially higher impairment ratings. The implications of alternative ratings for benefits and system costs remain unclear, however, as it is unknown how often these ratings are upheld in court.

Recommendations

  • Future study should explore benefit design options that do more to smooth out the kind of fluctuations in wage replacement across the business cycle that we identified in this report.
  • Policymakers considering how benefit design could be made more responsive to the business cycle should, however, think carefully about the financing of any such benefits, as policies that that would necessitate premium increases while the labor market is slack could lead to adverse effects on hiring.
  • Future research should consider whether the differences in the relationship between earnings losses and ratings across body parts could be alleviated. It should also seek to establish a consistent, objective, and empirically-based system for incorporating age and occupational adjustments into the rating schedule.
  • California may wish to monitor the use of alternative ratings and their impact on benefits paid. In addition, it would be important and relatively straightforward to evaluate, on claims for which both American Medical Association and alternative ratings are performed, which of the two types of ratings more accurately predicted future wage loss.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Policy Background

  • Chapter Three

    Methods

  • Chapter Four

    Outcomes for Disabled Workers Through the Great Recession

  • Chapter Five

    Wage Replacement and Benefit Adequacy Under SB 899 and SB 863

  • Chapter Six

    Effects of SB 863 on Disability Ratings and Benefit Equity

  • Chapter Seven

    Conclusions and Policy Recommendations

  • Appendix A

    Methods and Supplemental Results for Chapter Three

  • Appendix B

    Methods and Supplemental Results for Chapter Four

  • Appendix C

    Methods and Supplemental Results for Chapter Five

  • Appendix D

    Methods and Supplemental Results for Chapter Six

This study was sponsored by the California Commission on Health and Safety and Workers' Compensation (CHSWC) and conducted by the RAND Institute for Civil Justice, a part of the Justice Policy Program within RAND Justice, Infrastructure, and Environment.

This report is part of the RAND Corporation Research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

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