Executive Summary

 

Impact of the 1993 Reforms on

Payments of Temporary and Permanent Disability

 

Prepared by: Frank Neuhauser, Survey Research Center,

University of California at Berkeley

 

The 1993 reforms made several adjustments to the levels of benefit that are received by injured workers.  These changes raised Temporary Disability Benefits (TTD) for workers with relatively high average weekly wages (AWW).  The reforms also increased the maximum weekly permanent disability payments used in the calculation of permanent disability payments to disabled workers with impairments rated at >15%. 

 

This analysis estimates the total impact of these adjustments on the amount of indemnity payments made to injured workers in each year since reform. 

 

Several estimates are given.  These reflect different assumptions about the impact of reform.  For example, higher benefits may increase utilization raising the impact of the benefit increases.  Similarly, the other aspects of the 1993 reforms could affect benefit levels.  For example, giving presumption to the treating physician could result in higher or lower permanent disability awards. Consequently, we estimate the impact of reform under several alternative assumptions.  These assumptions are outlined in the methods section.

 

The best estimate of the impact of reforms on total payments of TD and PD for the periods subsequent to reform is that total payments increased by $197 million for the 1994/95 period rising to $474 million for 1997/98.  Since changes subsequent to 1996/97 reflect only the impact of wage growth, the percent change in indemnity payments attributed to the reforms will change only slowly from the current 14-15%.

 

 

 

 

 Estimated Benefit Increase ($millions)

 

 

 

1994/95

1995/96

1996/97

1997/98

Temporary Disability

 

87

128

177

198

Permanent Disability

 

110

186

258

276

 

 

 

 

 

 

Total 

 

197

314

435

474

Percent Change

 

7.9%

11.7%

13.7%

14.1%

 

 


 

Estimation

Increases in the maximum level of benefits relative to Average Weekly Wage lead to higher benefits given the same underlying characteristics in the population of injured workers (average weekly wage [AWW] and severity [weeks of TD or PD rating]).  The number of claimants also affects the total increase.  If the frequency of reported disabling injuries declines, the amount of the increase will be less. 

 

We do not have available mature data on the characteristics of claims (TD duration and PD rating) for claims from all calendar years affected by the benefit adjustments.  Consequently, we have used data for injuries occurring in the 1993 and 1994 calendar years.  These data were adjusted as described below to make them comparable to the 1994-1998 claim years. In particular, the wages of the workers within the sample are adjusted up each year to reflect trends in the wages of California workers.  This adjustment has the affect of increasing the impact of the benefit increase because that increase focused on higher wage workers.

 

Issues

Utilization: Increases in the benefit level are expected to lead to increases in utilization.  That is, a higher replacement rate for TD will lead to more weeks of TD, all else being equal.  There have been studies of this utilization effect. Bruce Meyer, et. al., “Workers’ Compensation and Injury Duration: Evidence from a Natural Experiment,” American Economic Review 85:3 find an effect on utilization of temporary disability benefits of .3-.4 (a 10% increase in benefits increases the average weeks TD per claim by 3-4%).  Ward Brooks, “A study of Changes in Frequency and Severity in Response to Changes in Statutory Workers’ Compensation Benefit Levels, WCIRB, 1998 finds an increase in the frequency of claims (.2-.3) but not severity.  Preliminary work on the data set used here suggests a utilization affect (.2) at the low end of these estimates. PD is likely to demonstrate a different utilization effect than TD.[1]

 

For the purposes of this analysis we have included an examples that apply a utilization effect in the midrange of these studies (.3).  That is, in examples 2, 3 and 4 we estimate that average weeks of TD per claim will increase by 3% of each 10% increase in the weekly benefit rate experienced by that worker in the micro-simulation model.  Similarly, PD payments are estimated to increase by 3% of reach 10% increase in the PD weekly benefit level for workers in the micro-simulation model that are impacted by the PD benefit increase.

 

Severity: Other changes legislated in 1993 may have had an effect on claims that would make our 1993-1994 claim sample different from claims from later periods.  For example, changing custom within the rating or medical-legal community could lead to higher ratings or underlying injuries may have gotten more or less severe due to changes in the industry mix of California employment.  Alternatively, the introduction of presumption for the PTP could have the effect of increasing the average rating.  These changes would impact the ‘severity’ of PD claims.  That is, the distribution of PD ratings as estimated in the 1993-94 claims would under estimate the ratings that were actually underlying awards for claims in later injury years.

 

Consequently, we offer two estimates of the impact of a change in severity on the total increase in benefits paid as a result of the benefit level increase.  That is, we have modeled an independent increase in severity and estimated the impact on the difference between benefits paid under rules in effect prior to 7/1/94 and those in effect in subsequent years. 

 

The Example 3 assumes that changes in severity resulted from changes in the system that were driven by forces other than the reform (e.g., changes in industry mix).  Under this assumption, an increase in severity has a small effect on estimates of changes in total benefit payments due to reform since the calculation of benefits under the pre-reform schedule also include this increase.

 

The Example 4 assumes that any severity increase is a product of the reform legislation (e.g., presumption).  Under this assumption, the change in benefits is substantially higher since benefits calculated under the pre-reform regime do not include the severity adjustment. 

 

 

It should be noted that for the preferred estimate we also assume a utilization effect on TD and PD as a result of the benefit increase.  This in effect applies a ‘severity’ adjustment to the TD and PD estimates that is modeled as a result of the reform, but only as a result of the change in maximum benefit levels. 

 

Consequently, to the extent that one feels that severity changed as a result of factors independent of reform or that reform itself caused a change in ‘severity’ that was independent of the increase in benefit levels, this estimate would be low.  However, it is incumbent on those who would argue for a reform caused severity increase to support this with sound arguments and data.
Results

Estimates of the impact of the benefit level increases on total benefits paid to injured workers are given for four measures:

1.      Adjusted for wage growth

2.      Adjusted for wage growth, and

Adjusted for possible changes in utilization due to benefit increases

3.      Adjusted for wage growth,

Adjusted for possible changes in utilization, and

Adjusted for changes in severity that were not the result of reforms

4.      Adjusted for wage growth,

Adjusted for possible changes in utilization, and

Adjusted for changes in severity that were the result of reforms

 

Other estimates are possible based on higher or lower estimates of the changes in severity of underlying injuries of higher or lower estimates of the impact of benefit increases on utilization.

 

 

 

Example 1. Impact of reforms on TD and PD adjusting for wage growth.

·        assumes no changes in utilization as a result of increased benefits.

 

 


Example 2. Impact of reforms on TD and PD benefits

·        adjusting for wage growth

·        estimating the higher benefits will increase utilization.


  

 


Example 3. Impact of reforms on TD and PD benefits

·        adjusting for wage growth

·        estimating higher benefits will increase utilization

·        estimating the average severity for PD claims increased 10% as a result of changes other than reform (e.g., more generous attitudes toward rating, or changes in industry mix)



 


Example 4. Impact of reforms on TD and PD benefits

·        adjusting for wage growth

·        estimating higher benefits will increase utilization

·        estimating the average severity of PD claims increased 10% as a result of reform (e.g., impact of presumption accorded treating physician)

 


 



[1] The severity impact of benefit increases on PD maybe higher or lower than that observed for TD.  In addition, prior studies of TD have focused on the duration of claims or the frequency of claims, but have generally not resolved both issues simultaneously.  It is likely that TD utilization, combining  both the effect on claim frequency and duration in weeks is closer to .5. However, the impact of benefit increases on PD has never been adequately tested.