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Workers Compensation
Workers compensation is meant to protect employees from loss of income and to cover extra expenses associated with job-related injuries or illness. Accidents in which the employee does not lose time from work, accidents in which the employee loses time from work, temporary partial disability, permanent partial or total disability, death, occupational diseases, noncrippling physical impairments, such as deafness, impairments suffered at employer-sanctioned events, such as social events or during travel to organization business, and injuries or disabilities attributable to an employers gross negligence are the types of injuries and illnesses most frequently covered by workers compensation laws. Since 1955, several states have allowed workers compensation payments for job-related cases of anxiety, depression, and certain mental disorders. Although some form of workers compensation is available in all 50 states, specific requirements, payments, and procedures vary among states.
Certain features are common to virtually all programs: The laws generally provide for replacement of lost income, medical expense payments, rehabilitation of some sort, death benefits to survivors, and lump-sum disability payments. The employee does not have to sue the employer to get compensation. The compensation is normally paid through an insurance program financed through premiums paid by employers. Workers compensation insurance premiums are based on the accident and illness record of the organization. Having a large number of paid claims results in higher premiums. Medical expenses are usually covered in full under workers compensation laws. It is a no-fault system; all job-related injuries and illnesses are covered regardless of where the fault for the disability is placed.
Workers compensation coverage is compulsory in all but a few states. In these states, it is elective for the employer. When it is elective, any employers who reject the coverage also give up certain legal protections. Benefits paid are generally provided for four types of disability: permanent partial disability, permanent total disability, temporary partial disability, and temporary total disability. Before any workers compensation is reorganized, the disability must be shown to be work-related. This usually involves an evaluation of the claimant by an occupational physician. One major criticism of workers compensation involves the extent of coverage provided by different states. The amounts paid, ease of collecting, and the likelihood of collecting all vary significantly from state to state.
After a decade of yearly double-digit increases in the cost of workers compensation, in the early 1990s at least 35 states began to make changes in their workers compensation laws. These changes included tighter eligibility standards, benefit cuts, improved workplace safety, and campaigns against fraud. Recent data indicate that these changes are paying off. The rates of increases in the cost of workers compensation have slowed considerably, and in 1993 the cost actually declined. From 1993 through 1996, the cost of workers compensation insurance continued to decrease.
State and federal workers compensation insurance is based on the theory that the cost of industrial accidents should be considered as one of the costs of production and should ultimately be passed on to the consumer. Individual employees should neither be required to stand the expense of their treatment or loss of income nor be required to be subjected to complicated, delaying, and expensive legal procedures. In most states, workers compensation insurance is compulsory. Only in New Jersey and Texas is it elective. When compulsory, every employer subject to it is required to comply with the laws provisions for the compensation of work injuries. The law is compulsory for the employee also. When elective, the employers have the option of either accepting or rejecting the law. If they reject it, they lose the customary common law defenses assumed risk of employment, negligence of a fellow servant, and contributory negligence.
Workers compensation laws typically provide that injured employees will be paid a disability benefit that is usually based on a percentage of their wages. Each state also specifies the length of the period of payment and usually indicates a maximum amount that may be paid. In addition to the disability benefits, provision is made for payment of medical and hospitalization expenses to some degree, and in all states, death benefits are paid to survivors of the employee. Commissions are established to adjudicate claims at little or no expense to the claimant. Two methods of providing for workers compensation risks are commonly used. One method is for the state to operate an insurance system that employers may join and are required to join. Another method is for the states to permit employers to insure with private companies, and in some states, employers may be certified by the commission handling workers compensation to handle their own risks without any type of insurance. Under most state and private insurance plans, the employer and the employee gain by maintaining good safety records.
Disability payments from other sources do not affect your Social Security disability benefits. But, if the disability payment is workers compensation or another public disability payment, your Social Security benefits may be reduced. After the reduction, your total public disability benefits should not exceed eighty percent of your average current earnings before you became disabled. These include your combined family Social Security benefits, your workers compensation payment and any other public disability payment you receive. The workers compensation payment and another type of public disability payment are kinds of payments that affect your Social Security disability benefits. Workers compensation payment is one that is made to a worker because of a job-related injury and illness. It may be paid by federal or state workers compensation agencies, employers or insurance companies on behalf of employers. Public disability payments that may affect your Social Security benefits are those paid under a federal, state or local government law or plan that pays for conditions that are not job-related. They differ from workers compensation because the disability that the worker has may not be job related. Examples are civil service disability benefits, military disability benefits, state temporary disability benefits and state or local government retirement benefits that are based on disability.

The higher costs of providing workers’ compensation benefits in risky occupations may lead employers to improve safety in order to lower their insurance costs. The 75th anniversary of the Federal Employees’ Compensation Act (FECA) is an opportune time to reflect on broad policy issues of no-fault work injury liability statutes. Policy discussions regarding occupational safety and health usually are divided into two distinct parts with government standards established under the Occupational Safety and Health Administration (OSHA) as the regulatory device for encouraging prevention and workers’ compensation considered as the program for providing benefits to disabled workers. The much debated standards approach established under the Occupational Safety and Health Act draws attention to the role of workers’ compensation as apart of the policy mix for improving the health and safety of employees. General issues of safety and health and their effect on employers and employees are first considered in this article. Then the mechanics of determining workers’ compensation benefits in the private sector and how this process relates to employer prevention incentives are briefly reviewed. Evidence on the effect of workers’ compensation on safety and health is also discussed. Finally, the specific arrangements by which Federal agencies are charged for the work injury liabilities of their employees are compared with arrangements used in the private sector to determine whether the Federal arrangements are consistent with the objective of encouraging prevention of injury and illness.
All workers’ compensation systems in the United States require employers to guarantee that compensation to injured workers will be paid. Some large employers may self-insure but most employers meet this obligation by purchasing insurance. Several States offer workers’ compensation insurance in competition with commercial carriers, while other States have a monopoly insurance fund. The largest source of workers’ compensation, however, is insurance purchased from private companies. Workers’ compensation insurance rates are based on the riskiness of the firm’s industrial classification within each State. Approximately 600 groupings are used to determine the firm’s “manual” rate, which is stated as a percent of payroll. If a firm is large enough, the manual rate will begin to be adjusted by the experience of the individual firm. The larger the firm’s payroll, the larger will be the degree of this experience rating. In a typically risky industry, firms with approximately 1,800 employees will have premiums based on their own experience. It is obvious from this cursory review of the rate-setting procedure, that the system is quite subtle in its attention to the accident and disease experience of the individual firm. Within the workers’ compensation community, experience rating is often viewed as a matter of equity–firms with poor claims experience are charged a premium that reflects poor performance and firms with good experience are charged less.
However, the potential for using this scheme to regulate behavior is also apparent. Considering the significance of occupational safety and health as a regulatory concern, it is somewhat surprising that so few studies have examined experience rating. It is a complex area to study, largely because of the complicating factor of the employee’s response to higher benefits. A straightforward prediction about the effect of experience rating on employers is that higher statutory benefit levels should encourage more prevention. Benefit levels vary across States and are regularly increased within States. However, higher benefit levels are associated with higher reported levels of accidents. Higher levels of benefits apparently encourage employees to report accidents. It is very difficult to remove this employee effect from any effect higher benefits might have on the employer. More attention should be paid to how liability arrangements can be improved to create a better workplace environment. Suggestions have been made to allow, or even require, all employers to self-insure deductibles for workers’ compensation, and thus sharpen the immediate reward for reduced injuries and disease. Other possibilities for refining the incentives of the experience-rating system are to simplify the relationships between experience and premiums. The current formula is a complex array of actuarially important factors that are beyond the comprehension of most safety and health professionals. Perhaps some elements of the relationship between experience and premiums could be simplified so as to make the reward for improved safety and health more apparent to decision makers. The use of claims experience from the first 3 of the last 4 years is another reason that the linkage between experience and premiums is more obtuse than is desirable.
A final suggestion for improvement in the experience-rating scheme concerns the workers’ compensation rate regulation system used in most States. Workers’ compensation rates are still heavily regulated in most States, and although there are several mechanisms through which competition can manifest itself, pricing is not explicitly and visibly competitive in most States. This results in a marketplace that is not as effective as one would expect under open competition–and this lack of creative tension is manifested, in part, by producing few new ideas in experience rating. Regulated rates also often subvert the potential of experience rating by holding rates below the level established by the benefit levels and claims. In an effort to please worker groups, State legislators frequently set higher benefit levels, but then seek to appease employers by keeping rates below the level implied by those benefits. This eventually results in rates that make many employers unprofitable customers for insurers, which leads to employers being unable to obtain voluntary insurance. Because employers are legally obligated to have insurance, they are forced into assigned risk pools. Assigned risk pools, with rates that do not fully reflect benefit levels and claims experience, further diffuse the relationship between experience and premiums, and thus distort the incentives of workers’ compensation.
Federal employee work injury and disease benefits are paid by the employing agency through regular payroll funding during the 45-day period of pay continuation and then through an annual bill that accounts for benefits paid to the agency’s work- disabled employees. This is essentially self-insurance, with extended claims administered through the Office of Workers’ Compensation Programs, the Department of Labor agency responsible for administering FECA. This arrangement avoids the imperfections of the experience-rating system, because employers are fully rewarded or penalized for their claims experience. Although employers pay the full amount due, there are some problems. For example, it is not clear that anyone at the “insurer’s” level is inclined to encourage disabled employees to return to work. Another potential problem is that agencies must deal only with the one authorized “insurer.” In most private insurance markets, the amount of prevention services is used as a device to attract and retain customers. It is not clear whether the Office of Workers ‘Compensation Programs has any incentive to offer these key services. Occupational health and safety is as important a regulatory issue today as it was in the early 20th century, when it was at the vanguard of government intervention in the labor market. We should clearly be using all available devices for improving the operation of the labor market. Because employees will be compensated for their occupational injuries, it is necessary to take full advantage of the financing of that compensation system in order to create incentives for prevention. The financing arrangements now in use are quite strong, but reinforcing prevention incentives has never been viewed as their primary purpose. Recognition of this preventive incentive role and attention to its improvement will serve to improve the occupational health and safety of American workers.

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