Compensation and Ratings for Permanent Disability in California Workers’ Compensation: Theory and Practice Robert T. Reville, RAND October, 2006
Permanent Disability in Workers’ Compensation • It is at the heart of the workers’ compensation social insurance mission – Protecting the most seriously injured • It is a driver of costs and disputes – In 2004 in California, Permanent Partial Disability (PPD) claims were • 90% of indemnity costs • 80% of medical costs • Longstanding source of controversy in every state, as well as in comparable federal programs • By 2004, in California, controversy was coming to a head A4897h-2 09/03
In California, Much of the Controversy Has Focused on the Disability Rating • Rating converts medical information to a number (0-100) that measures extent of disability • Ratings are used to – Determine eligibility for benefits – Target benefits to those with greatest loss of ability to compete in the labor market • A good rating system should reduce disputes A4897h-3 09/03
More Than 40 Percent of CA Workers with Lost-Time Claims Received PPD (1990s data) 45 40 35 Percent 30 of lost- time 25 claims 20 with PPD 15 10 5 0 CA NM WA WI OR California’s rating approach determines eligibility A4897h-4 09/03
California Had the Highest Fraction of Disputed Claims (1990s data) Percent of Lost-Time Claims with Attorney Involvement 32 28 24 20 Percent 16 12 8 4 CA NM WA WI OR Lost-time claims with PPD A4897h-5 09/03
California’s Replacement Rate Ranked Third of Five in Study from 1990s 50 40 Percent 30 replacement rate 20 10 0 CA NM WA WI OR A4897h-6 09/03
Summing Up the Situation in 2004 • California had the highest workers’ compensation costs in the country • RAND studies for CHSWC showed that California had bad outcomes for injured workers – Inadequate benefits – Low return to work • Increasingly, stakeholders focused on changing PPD ratings as the key to fixing the system. • CHSWC funded a study by RAND on how to improve the system A4897h-7 09/03
Overview • RAND evaluation of permanent disability ratings in California • Changes in Ratings in SB 899 and Barriers to Implementation • Impact of the Reforms • Conclusions A4897h-8 09/03
California’s Approach to Rating Was Unique Objective & Objective & Subjective Subjective California Age and Criteria Age and Criteria Benefit Detailed Benefit Detailed or Delivery Occupation Delivery Occupation Adjustments Work Adjustments Work Capacity Capacity Guidelines Guidelines Other States Largely Modest Largely Modest Objective Benefit Adjustments for Objective Benefit Adjustments for Criteria (AMA Delivery Non-medical Criteria (AMA Delivery Non-medical Guides) Factors Guides) Factors No system has ratings based on data on injured worker outcomes A4897h-9 09/03
Analytic Approaches in RAND Evaluation • Matched data on 300,000 PPD ratings to wage loss data and compared ratings to observed earnings outcomes – Since both measure the “loss of ability to compete” (statutory compensation goal of PPD), we argued that both measures should be similar • Also compared defense and applicant ratings on the same case – Wide disparity in ratings for the same injury encourages litigation over ratings A4897h-10 09/03
Earnings Losses for Similarly Rated Impairments for Different Body Parts Varied Dramatically Proportional earnings loss 60% Shoulder 50% Knee Loss of grasping power (GP) 40% Back 30% 20% 10% 0% 1 to 5 6 to 11 to 16 to 21 to 26 to 31 to 36 and 10 15 20 25 30 35 up Final rating A4897h-11 09/03
There Were Significant Differences Between Physician Assessments Average Ratings in Same Cases with Applicant and Defense Ratings Applicant Rating Defense Rating 35.98 26.85 Difference in applicant and defense 9.12 (+34%) ratings: N = 17,638 A4897h-12 09/03
Losses Are Lower When Workers Return to the At-injury Employer 100 All PPD claimants 90 At original employer: 80 At year 1 70 At year 2 60 Proportional At year 3 earnings 50 loss 40 30 20 10 0 1 to 11 to 21 to 31 to 41 to 51 to 61 to 71 to 81 to 91 to 10 20 30 40 50 60 70 80 90 100 Rating group A4897h-13 09/03
RAND’s Recommendations • Adopt a more consistent underlying basis for ratings • Combine changes in ratings with incentives to employers to increase return to work – Specifically recommended a “two-tier” system • Set rating for different impairments to reflect empirical estimates of differences in average wage loss A4897h-14 09/03
RAND’s Recommendations • Adopt a more consistent underlying basis for ratings • Combine changes in ratings with incentives to employers to increase return to work – Specifically recommended a “two-tier” system • Set rating for different impairments to reflect empirical estimates of differences in average wage loss A4897h-15 09/03
Basing Ratings on Wage Loss • Two approaches to compensating permanent disability – Prospective – Concurrent, or retrospective • Prospective approaches estimate future disability using a rating system (such as California’s old system or the AMA Guides) – Criticized as being inequitable • Concurrent approaches pay benefits to workers currently out of work – Criticized as discouraging employment • Using data on earnings loss can incorporate information on labor market outcomes without discouraging return to work A4897h-16 09/03
Overview • RAND evaluation of permanent disability ratings in California • Changes in Ratings in SB 899 and Barriers to Implementation • Impact of the Reforms • Conclusions A4897h-17 09/03
Be Careful What You Recommend • California amended the Labor Code so that – Ratings “incorporate the descriptions and measurements of physical impairment and the corresponding percentages in the [AMA Guides]” – Consideration shall be given to the employee’s “diminished future earnings capacity” where this shall be a “numeric formula based on empirical data” on the “average percentage of long-term loss of income resulting from each type of injury for similarly situated employees. The administrative director shall formulate the adjusted rating schedule” using data from the “RAND Institute for Civil Justice, and upon data from additional empirical studies.” • Several return to work incentives were adopted as well – Including two-tier system A4897h-18 09/03
Policy and Empirical Barriers to Implementation • Legislature did not provide guidance regarding scale of disability ratings – Pegged to old system, holding benefits on average constant? – Pegged to estimates of proportional wage loss? • No crosswalk between AMA Guides and estimates of wage loss were available – No empirical basis to determine how AMA Guide ratings should be adjusted by diminished future earnings capacity • Rapid implementation timeline A4897h-19 09/03
Overview • RAND evaluation of permanent disability ratings in California • Changes in Ratings in SB 899 and Barriers to Implementation • Impact of the Reforms • Conclusions A4897h-20 09/03
Stunning Reduction in Employer Costs from Recent Reforms • Sixty percent reduction in employer costs since January 2004 (SF Chronicle) – January 2004: Premium was $5.39 per $100 of payroll – January 2007: Recommendation from Rating Bureau is $2.03 per $100 of payroll – Recent reforms include multiple changes • WCIRB estimates SB 899 reforms expected to cut permanent disability costs by 38%, explaining 12% of overall reduction A4897h-21 09/03
Average Ratings Have Fallen Also Average Ratings 2005 PDRS Pre-2005 PDRS Difference Summary 11.4% 19.9% -42.8% Consults 18.6% 32.7% -43.1% CHSWC-UC Berkeley analysis A4897h-22 09/03
The Result is Dramatic Reductions in Average PD Awards Average Indemnity Award 2005 PDRS Pre-2005 PDRS Difference Summary $ 9,824 $22,046 -54.6% Consults $19,374 $38,846 -50.1% CHSWC-UC Berkeley analysis A4897h-23 09/03
Tremendous Need for Continued Data and Evaluation • CHSWC-UC Berkeley found that inequities across impairment categories remain after FEC adjustments • Unknown impact on return to work – Possible to increase return to work by enough to offset decline in benefits? • Ultimately, we will want to know the impact on wage loss and fraction of wage loss replaced • Unknown impact on other key outcomes, including – Fraction disputed – Fraction of temporary disability receiving permanent disability A4897h-24 09/03
Conclusion: California’s experiment with empirical PD ratings is promising but difficult • California is leading the way in designing a more equitable rating system – First system based upon empirical data on worker outcomes – The leading edge of a modern system for permanent disability workers’ compensation • Policy is outpacing the empirical data – Politics fill in the gap A4897h-25 09/03
A4897h-26 09/03
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