This report explores how the expected value of workers' compensation benefits interacts with the decision to settle a claim. The authors analyze the relationship between the expected value of benefits and the probability of settlement before and after a 2005 policy in Oregon that changed the value of permanent disability benefits. The findings do not show evidence that changes in potential benefit values result in strategic decisions to settle.
- Who are the main stakeholders involved in a workers' compensation claim, and what are their main objectives in resolving the claim?
- How might the value of workers' compensation indemnity benefits influence various stakeholders' incentives to settle a claim?
- Did the changes in SB 757 influence settlement behavior after they took effect in 2005?
The process of determining appropriate workers' compensation benefits can be costly and complicated. In some cases, the process can lead to extended negotiation or disputes to determine the appropriate benefit and can potentially result in a claim settlement in lieu of benefits. In this report, the authors explore the ways that the expected value of permanent workers' compensation benefits and settlements interact. In some cases, a worker who settles relinquishes the right to pursue permanent partial disability (PPD) or other indemnity benefits. As a result, changes in the value of the PPD benefits that a worker anticipates that he or she might receive could affect the worker's decision to settle. The authors review the general law and economics literature on settlements and analyze a policy change in Oregon as a case study. In 2005, Oregon Senate Bill 757 (SB 757) made substantial changes to PPD benefits. This policy change resulted in some claimants receiving substantially larger PPD benefits than they would have received prior to the policy change and in others receiving substantially smaller benefits. The authors examine the relationship between the expected value of the benefit and the probability of settlement before and after the policy change to explore whether these changes in permanent disability benefits affected workers' decisions to settle the claim. The findings do not show evidence that changes in potential benefit values result in strategic decisions to settle a claim.
Workers and employers have different incentives to pursue a settlement
- Workers face a trade-off between weekly benefits payments and a potentially smaller lump-sum settlement payment, and must also consider whether they need cash in the short term. On the other hand, the employer aims to minimize the costs associated with the claim as quickly and cleanly as possible.
Changes in permanent disability benefits in Oregon do not appear to have led to significant changes in settlement behavior
- While the number of initial settlements increased immediately after the policy change in 2005, there is no evidence that this increase resulted from strategic behavior in response to potential changes in benefit values.
Possible reasons for the lack of significant alterations in behavior include uncertainty about the changes' effects and other, unrelated factors
- Uncertainty about the expected value of the permanent disability award may have prevented workers and attorneys from responding strategically to the policy change.
- Other claim factors, such as liquidity constraints, may also have affected decisions.
- The observed increase in settlements could indicate the beginning of a learning process. The composition of settlements and permanent partial disability beneficiaries may gradually change over time with increased understanding of the implications of the policy change.
Those involved need to understand the implications of such changes and find them important
- Even in the case of large policy changes, not all actors in the system may immediately understand the detailed effects and implications of policy changes.
- Incentives to change settlement behavior need to be salient to individuals for them to respond.