Monday, March 7, 2016

Attempting Fairness

One of the biggest challenges in engineering a workers' compensation system is addressing fairness.

Not only must the balance between how much an employer pays to ensure its workers have injury/illness protection to address, but also disparity between beneficiaries themselves - in general higher wage earners are less impacted by the disruption of an injury or illness than lower wage earners; those earning more have a greater ability to compensate.

A lot of states address this later fairness issues with some sort of progressive benefit system - the more you earn the greater your weekly benefit amount, up to a cap at which point it's assumed that one earns enough that there should be some savings or other financial backup to address any loss of earnings.

Even though a system design may address benefit fairness, execution may be lacking - a point made last week when it was revealed that California's $120 million supplemental return to work fund had hardly paid out any money relative to its forecasted need.

Research think tank Rand Corp. released its Commission on Health Safety and Workers' Compensation contracted report on benefit fairness and adequacy post SB 863 and found that disparity among worker situations conflated the impact of benefit imbalance.

From 2005 to 2012, permanent disability benefits on average replaced 58.8% of workers' earning losses as a result of injuries, according to the report. But if measured under SB 863's benefit structure, indemnity benefits would have replaced 76.8% of lost earnings.

Add the $120 million fund to the mix and the lost earning replacement for workers injured between 2005 and 2012 would have been 80.2% under SB 863, according to the report.

The Great Recession had a disproportionate impact on wage replacement. During 2008 and 2009 permanent disability benefits replaced only 57.1% of lost earnings. Immediately following the post-recession period, permanent disability benefits replaced a little more than half of what workers lost as a result of an on-the-job injury, or 52.4%.

Had those benefits been distributed under SB 863 permanent disability benefits during the recession would have offset 77.6% of lost earnings, and 69.8% of lost earnings in the post-recession period.

What does all this mean?

"First, both the increased maximum wage and the changes to ratings translate into sizable increases in wage-replacement rates, while the impact of the return-to-work benefit on overall wage replacement rates is more modest," the report says. "Second, none of the policies enacted under SB 863 would have stabilized wage-replacement rates over the great recession. Although we estimate that return-to-work benefit payments would have increased sharply in response to the trends in employment and earning losses over the great recession, the relatively small dollar value of the benefit ($5,000) means that even sizable increases in the probability of return-to-work benefit payments lead to fairly small impacts on overall benefit adequacy."

The Rand authors find that the impairment rating formula adopted under California's earlier reform, SB 899, established equity across injury types; SB 863's dispensation of the Future Earnings Capacity modifier furthered that equitable outcome.

But one of the most important aspects of SB 863 for low wage earners is the supplemental return to work payment of $5,000.

"[T]he return-to-work benefit has the largest impact on wage-replacement rates for the lowest-wage workers," the report says. "Since the other provisions of SB 863 lead to larger benefit increases for middle-income and high-income workers, the return-to-work benefit has an important role to play in preserving the progressivity of PPD benefits."

WorkCompCentral reported on Friday that since the Return to Work Supplement Program went live in April 2015, it has issued just 3,955 checks for $5,000, paying out a total of $19.775 million 10 months into the program.

California has one of the most complex systems for determining and delivering indemnity benefits - the purpose of that design was to increase fairness across worker economic levels.

Based on Rand's research, the California design can achieve greater equity than other programs without that complexity.

But execution is another matter - with complexity of design comes complication in execution: disputes arise in determining impairment, allocating impairment across injury liabilities, applying for a supplemental payment, etc.

Fundamentally, workers' compensation can not be everything to all people.

For those living paycheck to paycheck, though, it IS everything. The real bottom line (see the Rand chart): get hurt at work and your post injury earnings go down...

The Rand report is here.

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