Chapter OutlineChapter Outline16.1 Overview Of Workers’ Compensation Laws

16.2. Workers’ Compensation BenefitsMedical BenefitsDisability Benefits

Total Disability BenefitsPermanent Partial Disability Benefits

Survivor Benefits

16.3 Why Have Workers’ CompensationWho Pays for Injury Costs?Benefits and Costs of Different Arrangements

No Mandatory Benefits and No Tort LiabilityNo Mandatory Benefits with Tort LiabilityWorkers’ Compensation: Mandatory Benefits without Tort

LiabilityMandatory Benefits with Tort Liability

Chapter OutlineChapter Outline

16.4 Workers’ Compensation Insurance and Self-insuranceDescription of Insurance CoverageInsurance Pricing, Residual Markets, and State Funds

PricingResidual Markets and State Funds

Self-insurance and Large Deductible PoliciesSecond Injury Funds

16.5 Problems and Reforms in Workers’ Compensation16.6 Government Safety Regulation and Other Sources of

LiabilityThe Occupational Safety and Health ActAmericans with Disabilities ActOther Sources of Liability

16.7 Summary

Overview of Workers’ Overview of Workers’ Compensation LawsCompensation Laws

Most important features:

– Employers pay specified benefits: for ________losses (no pain & suffering) for work related __________________ _________ regard to fault or negligence When are _______ work related?

– Employees __________ employers under tort law (exclusive remedy)

Employee suits still exist against other parties (e.g., product liability suits)

Overview of Workers’ Overview of Workers’ Compensation LawsCompensation Laws

Other features

– Participation is __________ for most types of employment except in Texas

– Employer must either purchase ________ or ________ as a self-insurer

Overview of Workers’ Overview of Workers’ Compensation LawsCompensation Laws

Historical Development

– States began adopting in 1910s– All states had a law by 1948– Prior to workers’ compensation laws

Worker injuries handled by tort law– Employer defenses

– Employer liability laws in 1880s• prohibited use of certain defenses

Workers’ Compensation Workers’ Compensation BenefitsBenefits

Three main types– _____________– _________ Income (Disability)– __________(Survivor)

WC Medical BenefitsWC Medical Benefits

Important features

– No __________ or coinsurance

– Moral hazard is controlled in part by

_________ choice of physicians

_________ for physicians

_________ care (e.g., employer or insurer approves treatment

WC Disability BenefitsWC Disability Benefits

– Total Disability

– Benefit = max(2/3 of wage, state’s average wage)

____________ total disability

– benefits end when return to work

_____________ total disability

– benefits end when reach retirement age– some states have caps– lump sum settlements

WC Disability BenefitsWC Disability Benefits

– ___________ Partial Disability

Benefits based on

– Benefit schedules

• e.g., $50,000 for loss of a thumb

– Estimated reduction in earnings capacity

• difficult to measure• disputes are common

WC Survivor BenefitsWC Survivor Benefits

– Burial costs

– Benefits to surviving spouse and dependent children

similar to total disability

Why Have Workers’ Compensation?Why Have Workers’ Compensation?(SKIP 11 to 14)(SKIP 11 to 14)

Why have mandatory benefits and exclusive remedy?

– Alternative systems exist (e.g., tort liability as in pre-WC law period)

Economic rationale rests on

– Safety issues

– Compensation issues

– Transaction costs (legal & administrative costs)

Why Have Workers’ Why Have Workers’ Compensation?Compensation?

First, who pays for injury costs?

– In the long run, employees pay

If benefits increase

==> the total cost of hiring an employee increases

– ==> lower compensation on other dimensions

– ==> reduce employment

– ==> raise product prices

Why Have Workers’ Why Have Workers’ Compensation?Compensation?

– Thus, employees should want a system that

(1) provides proper safety incentives– employers– employees

(2) provides the amount of compensation (insurance coverage) that employees are willing to pay for

(3) keeps administrative/dispute resolution costs low

– Consider alternative systems

Why Have Workers’ Compensation?Why Have Workers’ Compensation?

Alternative Methods of Dealing with Workplace Injuries

Mandatory Tort Safety Adm/DisputeBenefits Liability Incentives Compensation Resolution Costs

No No Inadequate if employees Inadequate Low

underestimate risk No Yes Adequate Excessive if e’er negligent

High otherwise inadequate

Yes No Adequate w/ labor mkt incentives and safety regulation About right

Moderate

Yes Yes Adequate or possibly Excessive if excessive e’er negligent

Highest

WC Insurance Coverage WC Insurance Coverage Most states require purchase of a policy similar to

that developed by NCCI

– NCCI National Council on Compensation Insurance provide analysis for the insurance industry

– Policy consists of two parts

_________ compensation coverage– pays WC benefits required by the state

___________ liability coverage– coverage for tort liability suits for injuries not covered by WC

WC Insurance PricingWC Insurance Pricing Jobs are categorized into about 500 classes

__________ loss costs per $100 of payroll are forecasted for each class (usually by NCCI)

__________ = prospective loss cost plus a loading that incorporates expenses, investment income, profit

_____ rates often are subject to prior approval

All states mandate _________ rating

Some states allow schedule rating and dividends

WC Residual MarketsWC Residual Markets

– Without price regulation, insurers would be expected to offer coverage to almost all employers

– Price regulation might hold prices too low to cover costs

Insurers will not voluntarily offer coverage

But insurance is mandatory

– Therefore, residual markets exist to provide coverage

WC Residual MarketsWC Residual Markets

– Types of Residual Market Mechanisms

Some states have __________ state funds ==> no need for residual market

Some states use a ________ state fund as a residual market

– State fund also competes with private insurers

Remaining states ____________ employers who cannot obtain coverage in private market to insurers operating in the state

– Insurers in turn form a pooling arrangement using a number of servicing carriers

WC Self InsuranceWC Self Insurance– Requirements for self insurance generally allow only

_______________ to self insure

Most self insurers purchase excess coverage

– Smaller employers can form _______

– __________ often use TPA (third party administrators)

– Use of large deductible policies has increased

insurer pays all claims seeks reimbursement from employer

Second Injury FundsSecond Injury Funds Insurers and self insurers can be reimbursed for

benefits paid to workers who had a __________

Why?

– Second injury is more ________– Encourage __________ of injured workers

Problems

– reduces __________ to identify fraudulent (questionable) claims

Problems in WC during 1980s and 1990sProblems in WC during 1980s and 1990s

Claim costs increased due to

Increased ___________ costs

Growth in benefits

Compensation for injuries not previously ___________– repetitive motion– stress

Increased dispute resolution costs for soft tissue injuries

Increased fraud

Problems in WC during 1980s Problems in WC during 1980s and 1990sand 1990s

WC insurance rates did not keep up with costs

Residual market premiums as percent of total WC premiums

1213 13

12

10

8

66

10

16

1920

22

24

26

2928

24

17

10

0

5

10

15

20

25

30

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Percent

Problems in WC during 1980s Problems in WC during 1980s and 1990sand 1990s

Residual market premiums

as a percent of total WC premiums by state

RIME

LAMA

NMMS

ARKYAL

TNSCVT

KSMO

FLVA

GASD

NCNB

IAINAK

DCDECTILMI

HANJ

ORAZID

NH

0 10 20 30 40 50 60 70 80 90 100

State

Percent

Reforms in WC in 1980s and Reforms in WC in 1980s and 1990s1990s

– Attempts to reduce claim cost growth

adoption of medical fee schedules adoption of managed care programs to encourage injured workers to return to work restrictions on compensation for stress -related claims increased detection of and penalties for fraud

– Changes in insurance prices

allowed rate increases reduced discounts to large employers in residual market increased use of experience rating

Safety Regulation and OSHASafety Regulation and OSHA

OSHA

– Occupational Safety and Health Act (1971)

– Issues

Is it effective in improving safety? Is it cost-effective?

American With Disabilities Act American With Disabilities Act (ADA)(ADA)

Enacted in 1990

Main features

– _________to discriminate against qualified employees with disabilities

– Make _________ accommodations for those with disabilities

Enforced by tort liability claims

Other Sources of Liability to Other Sources of Liability to EmployeesEmployees

Examples of sources of liability

– wrongful _____________– ____________harassment– _____________discrimination

Insurance coverage

– Employment practices liability (EPL) coverage