Wednesday, April 6, 2016

PD Inequity

Yesterday I opined that the new minimum wage rates in California and New York would increase the disparity in income levels for permanently injured workers - i.e. the gulf between pre-injury earnings and post-injury indemnity would be even more pronounced than it is now leading to even more people on the edge of poverty.

A Rand Corp. report released Friday makes the point less dramatically because it does not deal with the new minimum wage law in California, but compares post-injury earnings over a period of time and as affected by the two major reforms since its first 2003 study: SB 899 and SB 863.

On average, a worker with a permanent disability will have a 28% reduction in earnings in the second year following an injury, concludes the report, "Benefits and Earnings Losses for Permanently Disabled Workers in California: Trends Through the Great Recession and Impacts of Recent Reforms."

Admittedly my math is rough and probably flawed, but if PD while the minimum wage is $10 an hour replaces only 72% of pre-injury earnings, then in 2022, when the full minimum wage of $15 an hour is the law, PD will replace only 36% of pre-injury earnings - and that's a chasm that is going to be political fire.

Rand researchers also point out that the reduction in earnings hits low wage earners more radically than those on the higher end of the scale. Changes implemented in 2012 by SB 863 to how permanent disability indemnity was calculated skews increases more acutely to impairments that had lower Future Earnings Capacity modifiers in the schedule prior to that reform because SB 863 normalized that modifier in the rating string to a standard 1.4.

Thus, the two lowest-ranked groups, impairments of the hand or finger and impairments of the knee, saw the largest increase in wage-replacement rates under SB 863.

Rand found that PD benefits under SB 899 replaced less than half of the wages lost by workers with hand or finger injuries, and about 30% of wages lost by workers with knee injuries. Post SB 863, those claims get the full 1.4 FEC modifier so benefits for hand or finger claims replace about 90% of lost wages, while benefits for knee conditions replace nearly 60% of lost wages.

But this is not an apples to apples comparison because other changes in the 2012 reform also affect PD.

Rand talks about "horizontal equity" - the notion that similarly situated workers should be treated similarly.

“Our analysis strongly rejects the hypothesis that the FEC factors as implemented under SB 899 led to horizontal equity across different types of impairments," Rand notes, "and we conclude that SB 863 does not systematically enhance or degrade the horizontal equity of the rating and benefit system.”

In other words, the FEC modifier didn't change things much, so standardizing it at 1.4 simplified calculating PD, which should have resulted in less litigation over the issue since prior to SB 863 it was found that the FEC modifier was a significant source of dispute.

That was a flawed assumption; litigation rates didn't change much...

But perhaps most alarming to me is that California's system of determining PD indemnity is probably one of the most horizontally equitable out of all the states - great pains were taken in the political and regulatory processes to make the system as fair across injuries and occupations as possible. Most states don't account for all those factors, if any at all.

Reading between the lines, what the research is really saying is that the base rate, the dollar number used for the weekly indemnity rate, will need to be increased, and this will become more acute and evident as the minimum wage increases.

If all else remains equal, then the maximum PD rate, now $280 per week for the most severe injuries, will need to be almost $500 per week just to remain in parity with 2016 wage replacement levels. And if Rand's research is taken at face value, that level is already inadequate to replace lost earnings.

Everything is lining up just nicely for the normal reform cycle of about 7 years...

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