Nachemson Lecture 2011 - Robert T. Reville - Research informing public policy: Workers' compensation in California

Research Informing Public Policy:Workers’ Compensation in California 2011 Nachemson Lecture Robert T. Reville RAND

Politics and Research-Informed Public Policy • Politics involves compromise between divergent interests • Politicians are skilled at staking out extreme positions and then splitting the difference • In the absence of facts, the scope for extreme differences is larger • Policy analysis reduces the range over which compromise is needed IWH 10/11 Reville IFDM 2 9-10

Four Examples in Workers’ Compensation Permanent Disability• Earnings Losses for Permanent Disabling Occupational Injuries• The Value of Return to Work• The Targeting of Benefits• Substitutability of Return to Work and Benefits IWH 10/11 Reville IFDM 3 9-10

What Happens After a Permanently Disabling Injury? • Permanent partial disability (PPD) is an ongoing source of policy disagreement within workers’ compensation • In California, in the mid-1990s, two contradictory positions were often stated as fact: – Injured workers frequently return to work at their previous jobs and then receive their permanent disability awards – Injured workers are inadequately compensated for the chronic losses that they experience • The State of California (CHSWC) sponsored research to examine the long-term consequences of permanently disabling injuries IWH 10/11 Reville IFDM 4 9-10

Injured Workers Suffer Significant and Sustained Losses 8000 6000Wages/quarter 4000 $ 2000 PPD Claimants Comparison Workers 0 -19 -15 -11 -7 -3 1 5 9 13 17 Quarters from Injury Source: MG-258-ICJ Quarterly earnings before and after injury, PPD claimants with 1994 injuries and comparison workers IWH 10/11 Reville IFDM 5 9-10

Benefits Were High But Inadequate• While California historically paid high benefits (relative to other jurisdictions), benefits did not replace losses – Low return to work was driving results• California proposed various incentives to improve return to work• A new factual dispute arose: – Return to work programs are better than benefit increases because return to work benefits both employers and workers – Early return to work hurts workers in the long run by forcing them to work injured, aggravating their disability• CHSWC sponsored a research program on return to work IWH 10/11 Reville IFDM 6 9-10

Losses Are Lower When Workers Return to the At-injury Employer 100 90 All PPD claimants At original employer: 80 At year 1 70 At year 2Proportional 60 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 Source: MG-258-ICJ IWH 10/11 Reville IFDM 7 9-10

A Clear Opportunity for Policy Consensus• RAND analyzed “sustained” return-to-work (RTW) outcomes comparing large firms with RTW programs to those without programs• Comparing PPD claimants with RTW programs to those without – The median time to sustained work was reduced by 47% (18.8 weeks) – Ten percent lower probability of subsequent injury – No difference in employment at five years• The reduction in Temporary Disability (TD) benefit costs exceed the cost of the program on average.• Results suggest that RTW benefits both injured workers and employers IWH 10/11 Reville IFDM 8 9-10

We Agree On Return to Work, But How Do We Set Benefits? • There are two ways to set indemnity benefits for permanent disability – Wage loss approach: Pay benefits as losses are experienced – Disability rating approach: Predict losses using characteristics of the injury and other information • Wage loss systems are considered more equitable • Rating systems are believed to encourage return to work • California used a rating system that was intended to capture the “loss of ability to compete in the labor market,” incorporating – Information on occupation and age in addition to injury to improve targeting – “Subjective” elements such as pain and work restrictions • Question: How did it work? IWH 10/11 Reville IFDM 9 9-10

Reasonable Vertical EquityProportional earnings loss 100% Standard Rating Standard 80% Final Rating Final 60% 40% 20% 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 Source: MG-258-ICJ Rating IWH 10/11 Reville IFDM 10 9-10

Troubling Horizontal EquityProportional earnings loss 60% Shoulder 50% Knee 40% Loss of grasping power (GP) 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 Source: MG-258-ICJ Final rating IWH 10/11 Reville IFDM 11 9-10

Taking Steps Toward a 21st Century Disability Rating System• RAND recommended an empirically-based rating system as the best of both worlds – Improved targeting using estimates of wage loss drawn from empirical analysis – Avoiding the employment disincentive effects of a true wage loss approach• Our recommendation was (partially) adopted in 2004 – “Future Earnings Capacity” adjustment – Five-year updates• The FEC adjustment with updating incorporates data analysis directly into policy parameters IWH 10/11 Reville IFDM 12 9-10

2004 Reform Legislation Encouraged Return to Work and Significantly Cut Benefits • In response to the highest workers’ compensation costs to employers in the United States, California adopted significant reforms in 2004 • Adoption of AMA Guides led to dramatic benefit reductions • Permanent disability rating system was also modified to improve equity and return to work – FEC Adjustments – Two-tier rating system • A new factual dispute arose – Benefit reductions made workers worse off – RTW incentives offset benefit reductions IWH 10/11 Reville IFDM 13 9-10

We Found Significant Improvements in Return to Work (RTW) 0.80 Lowest severity SB 899 Relative 0.70employment: at-injury employer 2 Middle severity years after 0.60 injury 0.50 Highest severity 0.40 2000 2001 2002 2003 2004 2005 2006 Injury quarter Source: MG-1025-CHSWC IWH 10/11 Reville IFDM 14 9-10

Cumulative Earnings Losses Declined 60,000 over Time 50,000Cumulative earnings losses Actual RTW (dollars) 40,000 30,000 2000 2001 2002 2003 2004 2005 2006 Injury quarter Source: MG-1025-CHSWC IWH 10/11 Reville IFDM 15 9-10

Drop in Losses was Driven by 60,000 Return-to-Work Gains 50,000Cumulative Low RTW earnings losses Actual RTW (dollars) 40,000 30,000 2000 2001 2002 2003 2004 2005 2006 Injury quarter Source: MG-1025-CHSWC IWH 10/11 Reville IFDM 16 9-10

Benefit Cuts Still Led to a Substantial Decline in Replacement Rates 60 50 Actual RTWReplacement rate 40 30 20 2000 2001 2002 2003 2004 2005 2006 Injury quarter Source: MG-1025-CHSWC IWH 10/11 Reville IFDM 17 9-10

Decline Would Have Been Worse Without 60 Return-to-Work Gains 50 Actual RTWReplacement rate 40 Low RTW 30 20 2000 2001 2002 2003 2004 2005 2006 Injury quarter Source: MG-1025-CHSWC IWH 10/11 Reville IFDM 18 9-10

Does Improved Return to Work Substitute for Benefits? • The 2004 changes lowered employer costs • Injured workers experienced important gains in post-injury employment • Benefits in California, inadequate prior to the reforms, were less adequate after the reforms • The challenge today is to improve benefit adequacy without sacrificing the gains in post-injury employment IWH 10/11 Reville IFDM 19 9-10

The Future of Public Policy Analysis• Policy analysis can improve workers’ compensation public policy in many ways – Reducing the range over which compromise is needed – Identifying problems – Debunking myths – Evaluating reforms• Providing public policy research to policymakers is only the beginning• In the future, there are promising opportunities in the convergence of public policy and policy research analytics – Data-driven updates in policy parameters – Constant evaluation of changes – More frequent and smaller data-driven policy adjustments IWH 10/11 Reville IFDM 20 9-10

Nachemson Lecture 2011 - Robert T. Reville - Research informing public policy: Workers' compensation in California

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