Compensation and Ratings for Permanent Disability in California - - PowerPoint PPT Presentation

Compensation and Ratings for Permanent Disability in California Workers’ Compensation: Theory and Practice

Robert T. Reville, RAND October, 2006

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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

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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

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More Than 40 Percent of CA Workers with Lost-Time Claims Received PPD (1990s data)

45 40 35 Percent

• f lost-

time claims with PPD 30 25 20 15 10 5 CA NM WA WI OR California’s rating approach determines eligibility

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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

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California’s Replacement Rate Ranked Third

• f Five in Study from 1990s

50 40 Percent replacement rate 30 20 10 CA NM WA WI OR

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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

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Overview

• RAND evaluation of permanent disability ratings in

California

• Changes in Ratings in SB 899 and Barriers to

Implementation

• Impact of the Reforms
• Conclusions

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California’s Approach to Rating Was Unique

Objective & Subjective Criteria Objective & Subjective Criteria Work Capacity Guidelines Work Capacity Guidelines Largely Objective Criteria (AMA Guides) Largely Objective Criteria (AMA Guides) Age and Detailed Occupation Adjustments Age and Detailed Occupation Adjustments Benefit Delivery Benefit Delivery Modest Adjustments for Non-medical Factors Modest Adjustments for Non-medical Factors Benefit Delivery Benefit Delivery

• r

Other States California

No system has ratings based on data on injured worker outcomes

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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

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Earnings Losses for Similarly Rated Impairments for Different Body Parts Varied Dramatically

0% 10% 20% 30% 40% 50% 60% 1 to 5 6 to 10 11 to 15 16 to 20 21 to 25 26 to 30 31 to 35 36 and up Shoulder Knee Loss of grasping power (GP) Back Proportional earnings loss Final rating

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There Were Significant Differences Between Physician Assessments

9.12 (+34%)

N = 17,638 Defense Rating Applicant Rating Difference in applicant and defense ratings:

26.85 35.98

Average Ratings in Same Cases with Applicant and Defense Ratings

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Losses Are Lower When Workers Return to the At-injury Employer

100 All PPD claimants At year 2 At year 3 At year 1 At original employer: 90 80 70 60

Proportional earnings loss

50 40 30 20 10 1 to 10 11 to 20 21 to 30 31 to 40 41 to 50 51 to 60 61 to 70 71 to 80 81 to 90 91 to 100

Rating group

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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

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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

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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
• ut of work

– Criticized as discouraging employment

• Using data on earnings loss can incorporate information
• n labor market outcomes without discouraging return to

work

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Overview

• RAND evaluation of permanent disability ratings in

California

• Changes in Ratings in SB 899 and Barriers to

Implementation

• Impact of the Reforms
• Conclusions

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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

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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

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Overview

• RAND evaluation of permanent disability ratings in

California

• Changes in Ratings in SB 899 and Barriers to

Implementation

• Impact of the Reforms
• Conclusions

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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

• f 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

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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

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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

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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

• ffset 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

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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

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