Workers' Compensation: Rx for Policy Reform

Policy Reports | Welfare

No. 287
Wednesday, September 13, 2006
by N. Michael Helvacian


  1. "Survey of Employer Participation in the Texas Workers' Compensation System," Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers' Compensation Research Group.  Available online at  In Texas, in 2004, a significant percentage of employers - 38 percent, covering about 24 percent of the workforce - chose not to subscribe to the statutory system. 
  2. U.S. Department of Labor, "State Workers Compensation Laws: Table 6.  Benefits for Temporary Total Disability Provided by Workers Compensation Statutes in the U.S." Available online at; accessed on March 16, 2006.
  3. Ibid.
  4. Ibid.
  5. Figures on average claim costs by state in this and following bullets, as well as those in the tables, are from the NCCI Annual Statistical Bulletin, 2004 Edition, Exhibit XI, page 331.
  6. Ibid.
  7. For the latest figures and more detailed analysis on claim frequency see Tony DiDonato and D. Brown, "Workers Compensation Claim Frequency Down Again," NCCI Research Brief, Vol. 1, 2005. 
  8. John F. Burton Jr., "Workers' Compensation Benefits and Costs in 2003," Workers' Compensation Policy Review, September/October 2005, pages 15-25.
  9. "Basis of Rates (1/1/2006 Relatives)" Texas Department of Insurance, Division of Workers' Compensation; available online at; accessed on March 22, 2006.
  10. For detailed information on workers' compensation systems by state, see "Workers Compensation," Insurance Information Institute, March 2006; available online at
  11. "High and Low Manual Rates for Selected Classifications," The Maine Bureau of Insurance; available at; accessed on March 27, 2006.
  12. Total benefit costs in the system primarily determine the employers' premium, and are made up of frequency of claims (number of claims per covered employee) times average claim costs times the number of covered workers (see sidebar "Glossary of Terms). 
  13.   These are incurred costs, which include payments for medical benefits, wage replacement or indemnity benefits, and permanent disability, as well as claim reserve amounts for open cases.
  14. Exhibits X, XI and XII, in the NCCI Annual Statistical Bulletin, 2004 Edition.
  15. The negotiations are often conducted between attorneys representing the employees and insurers, and in the case of self-insurance, employers.
  16. Harry Shuford, "Carpal Tunnel Claims Rank Second Among Major Lost Time Diagnoses," NCCI Research Brief, Vol. 3, April 2005. 
  17. Richard Butler, D. Durbin and N. Helvacian, "Increasing Claims for Soft-Tissue Injuries in Workers' Compensation: Cost Shifting and Moral Hazard," Journal of Risk and Uncertainty, Vol. 12, 1996, pages 379-93.
  18. "Legislative Guide to Determining Compensability in Workers' Compensation: Report and Public Policy Recommendations," National Federation of Independent Business Research Foundation, September 2005.
  19. Ibid.
  20. Ibid.
  21. Benefit increases may also affect employees' behavior with respect to workplace safety.  Butler and Worrall argue that employees may respond to benefit increases by taking greater risks in the course of performing their jobs, which would result in greater injuries. Richard Butler and J. Worrall, "Claims Reporting and Risk Bearing Moral Hazard in Workers' Compensation," Journal of Risk and Insurance, Vol. LVIII, 1991, pages 191-204.  This real effect, however, may be offset by change in the employers' behavior to avoid injuries and even greater future increases in the insurance premiums. 
  22.   Butler and Worrall also found that a 10 percent increase (or decrease) in weekly indemnity benefits is associated with a corresponding 6.8 percent increase (or decrease) in the number of claims filed.  Richard J. Butler and John D. Worrall, "Claims Reporting and Risk-Bearing Moral Hazard in Workers' Compensation," Journal of Risk and Insurance, Vol. 58, No. 2, June 1991, pp. 191-204. 
  23. John D. Worrall and David Appel, "The Wage Replacement Rate and Benefit Utilization in Workers' Compensation Insurance," Journal of Risk and Insurance, Vol. 49, No. 3, September 1982, pages 361-71.
  24. Alan B. Krueger, "Incentive Effects of Workers' Compensation Insurance," Journal of Public Economics, Vol. 41, No. 1, February 1990, pages 73-99. 
  25. John W. Ruser, "Workers' Compensation and Occupational Injuries and Illnesses," Journal of Labor Economics, Vol. 9, No. 4, October 1991, pages 325-50.
  26. Alan B. Krueger, "Workers' Compensation Insurance and the Duration of Workplace Injuries," National Bureau of Economic Research, Working Paper No. 3253, 1990.
  27. Bruce D. Meyer, W. Kip Viscusi and David L. Durbin, "Workers' Compensation and Injury Duration: Evidence from a Natural Experiment," American Economic Review, Vol. 85 No. 3, May 1995, pages 322-340.
  28. If a worker receives permanent total disability benefits from workers' compensation and qualifies for Social Security disability, Social Security benefits will be limited so that the total does not exceed 80 percent of the worker's current average wages.  See "How Workers' Compensation And Other Disability Payments May Affect Your Social Security Benefit," Social Security Administration, SSA Publication No. 05-10018, January 2004.  Available at
  29. Alan B. Krueger, "Incentive Effects of Workers' Compensation Insurance," page 95. 
  30. States often use the achievement of maximum medical improvement (MMI) as a criterion for ending temporary total disability payments.  Wokers with residual impairments may then be awarded PPD benefits.   
  31. Virginia Code Annotated 65.2-503.
  32. For a more thorough discussion of PPD benefits, see P. S. Barth and M. Niss, "Permanent Partial Disability Benefits: Interstate Differences,"Workers Compensation Research Institute, 1999.
  33. This issue received considerable attention in California following enactment in 2002 of a workers' compensation law that sharply raised PPD benefits. California statute AB 749 significantly increased maximum and minimum wage replacement for PPD benefits, and also the number of weeks of PPD payments for each percentage point of permanent impairment. This enactment became a central issue in the gubernatorial recall election, and a new law (SB 899) was approved following the election of Gov. Arnold Schwarzenegger. The new law did not reverse the benefit increases in AB 749, but revised the methods for computing the degree of permanent impairment.  This is also the central issue addressed in P. S. Barth, M. Helvacian and T. Liu, "Who Obtains Permanent Partial Disability Benefits: A Six-State Analysis,"Workers Compensation Research Institute, 2002. For a more extensive analysis of interstate differences in PPD costs, see N. Michael Helvacian, "Permanent Partial Disability Claims:  Policy Recommendations to Reduce Frequency and Costs," Journal of Workers Compensation, Vol. 15, No. 2, 2006.
  34. Average cost of a PPD claim with both medical and indemnity components included is $84,735 in California and $54,569 in Texas for 2000 policies in the NCCI Annual Statistical Bulletin, 2004, Exhibit XI.
  35. N. Mike Helvacian and K. Shim, "Attorney Involvement in Lost-Time Claims," Journal of Workers Compensation, Vol. 8 No. 2, 1999.
  36. In these cases, the claimant generally signs an agreement with the insurer/employer whereby he or she releases the insurer/employer from any future liability for indemnity and medical benefit payments related to the case in exchange for a lump-sum payment. The degree of PPD impairment, along with the PPD wage replacement rate, generally determines the lump sum awarded, often negotiated between the claimants' attorney and the insurer/employers.  The amount of payment may be subject to approval by the state agency.  Some states, among them Texas, do not encourage lump-sum payment of PPD benefits.    
  37. David Durbin, D. Corro and N. Helvacian, "Workers' Compensation Medical Expenditures: Price vs. Quantity," Journal of Risk and Insurance, Vol. 63, No. 1, March 1996, pages 13 -33.
  38. Ibid., page 17.
  39. Twenty-four states changed their statutes to allow managed care programs. Among these states are California, Florida and New York. But notable exceptions remain, including Illinois and Texas, where payment for medical services is still only on a fee-for-service basis.  
  40. In addition to the usual medical services associated with treating work-related injuries, such as physical therapy and chiropractic manipulation for palliative care, many states cover treatments for such work-related (but not necessarily work-caused) illnesses as mental stress and carpal tunnel syndrome.
  41. Richard J. Butler, Robert P. Hartwig and Harold Gardner, "HMOs, Moral Hazard and Cost Shifting in Workers' Compensation," Journal of Health Economics, Vol. 16, No. 2, April 1997, pages 191-206.
  42. Richard Victor and M. Helvacian, "Targeting More Costly Care: Area Variation in Texas Medical Costs and Utilization," Workers Compensation Research Institute, 2002. 
  43. These states give employers either the choice or initial choice of physician: Alabama, Arkansas, California, Colorado, Florida, Idaho, Indiana, Iowa, Kansas, Maine, Michigan, Missouri, New Jersey, New Mexico, North Carolina, Oklahoma, South Carolina, Utah and Vermont. For 1999-2000 policies, average incurred medical claim costs were 8.6 percent less in the employer-choice states than in the employee choice states ($3,865 vs. $4,230). These figures do not control for types of injury and other state features that can affect medical claim costs.   
  44. A large body of recent economic literature published by researchers at the RAND Corporation and their associates explores the percentage of wage loss replaced by PPD benefits over the PPD recipients' work life. This research concludes that PPD benefits to employees who lose significant time from work replaces about 50 percent of the employees' wage loss over a 10-year period.  The analysis is based on a comparison of the income of employees who received PPD benefits with their cohorts who were not injured and lost no time from work.  For a representative study, see R. T. Reville, L. Boden, J. Biddle and C. Mardesich, "An Evaluation of New Mexico Workers' Compensation Permanent Partial Disability and Return to Work,"RAND Corporation, 2004.   
  45.   James R. Chelsius and Robert S. Smith, "Firm Size and Regulatory Compliance Costs: The Case of Workers' Compensation Insurance," Journal of Policy Analysis and Management, Vol. 6, No. 2, Winter 1987, pages 193-206.
  46. "Survey of Employer Participation in the Texas Workers' Compensation System," Public Policy Research Institute at Texas A&M University and the Texas Department of Insurance Workers' Compensation Research Group.  Nonparticipating, or nonsubscribing, firms are by definition self-insured.  However, in Texas they are not required to have reserves to pay losses. 
  47. Richard J. Butler, "Lost Injury Days:  Moral Hazard Differences Between Tort and Workers' Compensation," Journal of Risk and Insurance, Vol. 63, No. 3, September 1996, pages 405-33. 
  48. A number of econometric studies have measured the workers' valuation of wages compared to workers' compensation benefits.  For example, see W. Kip Viscusi and Michael J. Moore, "Workers' Compensation: Wage Effects, Benefit Inadequacies and the Value of Health Losses," Review of Economics and Statistics, Vol. 69, No. 2, May 1987, pages 249- 61.
  49. Currently, in 24 states employers can use the same managed care plan that covers their employees' regular health care, but they are not allowed to charge employees copayments or deductibles.  (Fee-for-service coverage is required in 26 states.)  Managed care plans lower medical costs and claims frequency in states where they are now used. 
  50. Currently, Florida requires a $10 copayment for all medical services after the claimant achieves maximum medical improvement, and Montana has a $25 copayment for each subsequent hospital emergency room visit.
  51. HSAs and "cafeteria plans" are gaining wider acceptance and use in group health plans and offer employees a real choice in selecting a health plan that best fits their needs. 
  52. The account could also be integrated with an individual unemployment insurance account. See William B. Conerly, "Chile Leads the Way with Individual Unemployment Accounts," National Center for Policy Analysis, Brief Analysis No. 424, November 12, 2002.  Available online at
  53. Joseph Shields, Xiaohua Lu and Gaylon Oswalt, "Workers' Compensation Deductibles and Employers' Costs," Journal of Risk and Insurance, Vol. 66, No. 2, June 1999, pages 207-18.
  54. HSAs are potentially available to every nonelderly American due to provisions of the Medicare Modernization Act of 2003.

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