The Journal of Risk and Insurance, 1998, Vol. 65, No. 1, 81-99.
Factors Affecting Permanent Partial Disability Ratings
in Workers’ Compensation
David L. Durbin
Jennifer Kish
ABSTRACT
Using a new and rich data source on permanent disability claims, this article
explores two issues relating to permanent partial disability (PPD) benefits.
First, the process of determining the final disability rating, which affects the
actual level of PPD benefits, is modeled. Differences between the initial
impairment rating provided by the treating physician and the final disability
rating are investigated to determine what factors, in addition to physical
impairment, influence the determination of the final permanent, partial
disability rating and, hence, the amount of indemnity benefits. This
investigation highlights and measures some of the equity concerns inherent in
establishing PPD benefits. Second, the influence of the final disability rating
on the dollar amount of the permanent partial and total indemnity benefit
award is measured. The empirical findings suggest that the same injuries, as
measured by a physician impairment rating, may receive very different final
disability ratings and thus have very different claim costs as a result of factors
unrelated to the injury. These differences are magnified across states.
INTRODUCTION
The adequacy and equity of benefits for permanently disabled workers continues
to be a vexing problem for workers' compensation insurance. The 1972 National
Commission on State Workers' Compensation Laws offered the view that
permanent partial benefits "are the most controversial and complex aspect of
workmen's [sic] compensation cases.” The National Commission also observed
that for no other type of benefit are there more variations among states or more
divergence between statutes and practice. Even after 20 years of significant
reforms, these issues remain unresolved today.
David L. Durbin is Senior Vice of Economic Research at Swiss Re and Jennifer Kish
is an actuary at St. Paul Re.
This research was conducted while the first author was Vice President and Director of
Research at the National Council on Compensation Insurance. The authors thank David
Appel, Richard Butler, Jack Worrall, and participants at the 1995 American Risk and
Insurance Association Annual Meeting for helpful comments. Errors remain ours.
82
The Journal of Risk and Insurance
Moreover, recent studies have suggested that a substantial portion of the
significant cost increases in the 1980s into the early 1990s in workers'
compensation may be due to higher costs associated with permanent disability
cases. Permanent partial disability (PPD) benefits account for approximately twothirds of the total costs of workers' compensation disability benefits (Berkowitz
and Burton, 1987). Not surprisingly, the proportion of total benefits accounted for
by permanent partial compensation also has been shown to be positively correlated
to employer premiums (Krueger and Burton, 1990).
Both the frequency and average cost of PPD cases have increased
significantly in recent years. During the six-year period from 1988 to 1994,
average PPD costs increased 25 percent, an increase of approximately 4 percent
per year, while the frequency increased almost 29 percent or 4.4 percent annually.
These increasing average costs and frequencies have resulted in an increase in the
permanent partial cost per worker of approximately 52 percent (over 7 percent
annually) over the same six year period. (National Council on Compensation
Insurance, 1989-1995).
Despite the importance of permanent partial benefits as a contributing factor
to the increase in workers' compensation costs, little research has examined the
factors that influence the costs of permanent partial disability claims. Using a
new and rich data source on permanent disability claims, this article explores two
issues relating to permanent partial disability benefits.
First, we model the process of determining the final disability rating, which
affects the actual level of PPD benefits. In this analysis, differences between the
initial impairment rating provided by the treating physician and the final
disability rating are investigated to determine what factors, in addition to physical
impairment, influence the determination of the final permanent partial disability
rating and, hence, the amount of indemnity benefits. This investigation highlights
and measures some of the equity concerns inherent in establishing PPD benefits.
Second, we measure the influence of the final disability rating on the dollar
amount of the permanent partial and total indemnity benefit award. The empirical
findings suggest that the same injuries, as measured by a physician impairment
rating, may receive very different final disability ratings and thus have very
different claim costs as a result of factors unrelated to the injury. These
differences are magnified across states.
After a review of relevant aspects of workers' compensation systems, we
discuss theoretical concerns and briefly review the literature. The next two
sections discuss data and empirical results. Finally, we conclude with policy
implications.
CHARACTERISTICS OF WORKERS’ COMPENSATION SYSTEMS
Workers' compensation insurance provides benefits to workers for on-the-job
injuries and work-related diseases. These benefits include unlimited medical
benefits, wage replacement (or indemnity) benefits, and vocational rehabilitation.
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
83
Indemnity benefits are typically classified, according to the nature and degree of
disability, into five categories: fatal, permanent total, permanent partial,
temporary total, and temporary partial.
In general, any worker with an injury resulting in time loss from work (not
including medical-only cases) receives either temporary total, or temporary partial
disability benefits (benefits paid during the healing process). Temporary benefits
are typically paid until the claimant reaches the point of so-called "maximum
medical improvement" (MMI) or is given a medical release to return to work
(actual practice of this will vary by state). If the worker suffers some permanent
impairment as a result of the injury, permanent partial benefits (or permanent
total benefits if 100 percent disabled) are typically awarded after MMI has been
reached.
Most states determine permanent partial benefits based upon whether an
injury is "scheduled" or "nonscheduled" (Virginia and Kentucky are exceptions).
Scheduled injuries, typically involving limbs, eyes, and ears--are often
compensated by an amount based solely on medical impairment, without regard
for loss of earning capacity. To arrive at the award, the number of weeks listed in
the schedule for each body part is multiplied by the percentage of functional
impairment.. In Tennessee, for example, a knee sprain resulting in a 20 percent
impairment rating to the leg would receive 40 weeks of benefits (20 percent of the
scheduled 200 weeks for loss of a leg) at 66 2/3 percent of the claimant's preinjury
wage (subject to state-specified minimum and maximum restrictions).
In contrast, nonscheduled injuries are usually injuries to body parts, typically
internal organs, the trunk, neck, or head that are not specified in the schedule, as
well as psychological claims (classifications vary by state) and are compensated
either by an amount based on functional impairment or on predicted loss of
earning capacity. For example, a Tennessee claimant given a 20 percent
impairment rating to the whole body (either due to physical impairment or loss of
earnings) for a back injury, would receive 80 weeks of benefits (20 percent times
400 weeks for disability of the whole person) at 66 2/3 percent of the claimant's
preinjury wage (again subject to state restrictions).
Where applicable, loss of earning capacity benefits are paid to those
claimants who either do not return to work, or return to work at a wage that is less
than their preinjury wage. In some states, claimants may choose to have
permanent partial benefits awarded based on either physical impairment or
projected future (loss of) earnings (Georgia, for example). Other states base
awards on physical impairment in addition to wage loss (Arkansas) while some
states base awards only on physical impairment (Virginia).
The determination of physical impairment is, at least conceptually, fairly
straightforward. Physical impairment ratings are awarded by the treating
physician, often in accordance with the American Medical Association's Guides to
the Evaluation of Permanent Impairment. In contrast, loss of earning capacity
rating procedures tends to be much more loosely defined. Many states have no
written rules about how to arrive at a rating. Earning capacity ratings are
typically determined by comparing the claimant's preinjury earnings with
84
projected future
The Journal of Risk and Insurance
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
85
earnings. A variety of factors may be considered including age, education,
experience, previous occupation and earnings, and the claimant's willingness and
ability to train for an occupational change.
Typically, the awarded degree of permanent disability, either based on
impairment or loss of earnings or both (the final disability rating), along with the
claimant's preinjury wage, determines the dollar value of the permanent partial or
permanent total disability award. However, the methods used to determine
permanent disability ratings differ by state, and often include other factors beyond
the treating physician's determination of impairment, such as age, educational
level, or the predicted future loss of earnings. Quite frequently, the final disability
rating and award are codified in a settlement agreement between the injured
worker and the employer/insurer. Additional amounts may be added to the final
award, generally in non-scheduled cases, as "incentives to settle" (sometimes also
called clinchers) or for coverage of any future medical or vocational rehabilitation
costs.
THEORETICAL CONSIDERATIONS
A neutral third party, either the State Workers’ Compensation Board or the courts
theoretically determine the degree of permanent partial disability awarded. In
practice, however, the award is often determined by a settlement agreement
between the insurer and the claimant. Although in theory, this determination is
based on the presence or absence of medical symptoms (i.e., the physician's
determination of physical impairment), the claimant may influence the size of a
permanent partial disability rating (and hence the permanent partial award) in
several ways. These include: (1) claimants must first decide whether to apply for
permanent partial benefits, and (2) claimants may seek to influence the
compensation board or insurer by investing in resources designed to influence
either the board's decision or the insurer's offer. Legal counsel as well as
additional medical and vocational rehabilitation evidence may affect the workers'
compensation board decision or the willingness of the insurer to settle the claim.
The extent of permanent partial disability also may be influenced systematically
by a number of factors such as age, sex, pre-injury wage, and preexisting
conditions.
Stated differently, although in most states statutory language governs the
determination of permanent partial disability awards, in practice these awards
may be affected by other considerations. For example, the state may either
implicitly or explicitly promote income distribution to "poorer" workers through
the workers' compensation system. Workers' compensation systems also have
appeared to evolve (both statutorily and through case law) in response to moral
hazard problems inherent in the system (see Durbin and Butler, 1998) and the
rent seeking activities of some of the participants. It is important to note that
these theories may not be mutually exclusive: states may seek to redistribute
86
The Journal of Risk and Insurance
income, and there may be rent seeking.
1
Previous Research
Several studies examine the probability that a workplace injury becomes a
permanent partial disability claim. Thomason uses a sample of New York
compensation claims occurring from 1972 to 1977 to show that the probability of
a permanent partial disability claim is positively related to increasing permanent
partial benefits. This result, though, is statistically significant for only
nonscheduled claims, which in New York, received awards based on wage loss.
Worrall et al. (1993) uses data on individual claims from Massachusetts and
Illinois to estimate the probability that a claimant who receives temporary total
benefits will go on to receive permanent partial benefits. This study indicates that
the claimant's preinjury wage is negatively related to the probability of receiving
permanent partial benefits, and the level of compensation benefits is positively
related, although these results were not always statistically significant. The focus
of these studies is measuring the moral hazard implications of rising workers'
compensation benefits.
There is growing research on the determinants of attorney involvement and
litigation in workers' compensation. (Borba and Appel, 1987, and Boden and
Victor, 1994, provide representative examples) hypothesizes that workers will
retain legal counsel if the expected benefits of doing so outweigh the costs (both
monetary and psychic). There is evidence that attorney involvement significantly
increases workers' compensation claim costs, although the effect may vary by type
of injury (Durbin, Helvacian, and Butler 1995). Litigation or its threat appears to
increase total claims costs (including the benefit award) for more objective injuries
like fractures, amputations, etc. For more subjective injuries such as sprains and
strains, litigation increases the total costs, but much of the increase is for attorney
fees; the injured worker may not actually receive any different net award. For
more objective injuries, attorneys may serve a negotiation role in the sense of
trying to gain larger settlements. For the subjective injuries, attorneys may act
more as workers' compensation system navigators assisting workers in receiving
awards.
Research on the Canadian workers' compensation system (Sinclair and
Burton, 1994) takes a slightly different approach. Workers, both healthy and
injured, evaluate their quality of life postinjury. These evaluations are then
correlated by type of injury with the American Medical Association (AMA)
impairment ratings. The results suggest that workers place a higher value (loss)
on an injury than is compensated by the impairment ratings. The researchers
suggest that noneconomic loss from an injury is significant and
undercompensated.
However, little previous research has explored factors involved in the
determination of the final disability award. Thomason, using a sample of New
1
We are indebted to an anonymous referee for clarifying the alternative theories.
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
87
York closed claims occurring between 1978 and 1984, found that, although higher
permanent partial benefits increase the probability of a permanent partial
disability award, they are negatively related to the size of the award. From these
results, Thomason concludes that the claimant can increase the probability of a
permanent partial disability award but not the award size. This study also
suggests that the process of determining whether a claimant is permanently
disabled is fundamentally different from that determining the size of the award.
There has been no previous attempt to explore the income redistribution versus
rent seeking theories and their potential impact of workers' compensation awards.
RESEARCH METHODOLOGY
The Closed Claim Sample
The data used in this study was collected through the National Council on
2
Compensation Insurance’s (NCCI’s) Closed Claim Study Initiative. This study
examines random samples of high cost claims from major workers' compensation
3
insurers in ten states. The intent is to identify and measure the forces affecting
the significant growth in workers' compensation claims costs. The data were
assembled through a detailed review of individual claim files; more than 200
pieces of information were collected on each claim. Besides basic demographic
information, the data consist of detailed information on the amount and type of
benefits, whether litigated or settled, and information on the adjudication process.
Workers' compensation insurers were asked to participate in each state based on
their share of the market.
In addition, the data contain information on medical impairment ratings,
whether these ratings are disputed, alternative medical ratings, final disability
ratings, and whether final disability ratings are determined based on medical
impairment or loss of earnings. In order to facilitate comparisons between states,
medical impairment and final disability ratings are converted to a "whole body"
basis using the AMA’s guidelines. For example, 50 percent impairment rating to
the hand translates into 27 percent impairment to the whole body, using the
AMA's Guides to the Evaluation of Permanent Impairment.
The claims used in the analyses are major indemnity (lost time) cases closing
in specifically selected time periods (for each state, two periods are selected -either 1989 or 1991, or 1990 and 1992). The indemnity thresholds used to select
claims vary by state and closure year. Thresholds were chosen to ensure that the
percentage of claims meeting the threshold would be roughly constant by state and
2
The NCCI, headquartered in Boca Raton, Florida, provides data base products,
software, publications, and consultation services to state funds, independent bureaus,
agents, regulatory authorities, and more than 700 insurers.
3
The ten states are Arkansas, Georgia, Kentucky, Missouri, New Hampshire, North
Carolina, South Carolina, Tennessee, Virginia, and Wisconsin.
88
The Journal of Risk and Insurance
4
closure year. After data editing, the final number of claims for each state ranged
from 598 cases for Wisconsin to 796 cases for New Hampshire. A total of 6,297
claims were available for analysis. After restricting the sample to those claims
with both a medical impairment rating and a final disability rating, the final
database used in the analysis contained 4,265 claims.
Descriptive Statistics
Table 1 contains the mean values of the medical impairment rating, the final
disability rating, and the mean value of the difference between the ratings for each
state studied. Despite similar samples of high cost claims, these mean values
differ significantly by state. The average final disability rating ranges from 16.6
percent of the whole body in Georgia and Virginia to 39 percent in Tennessee.
Similar differences are observed by state for medical impairment ratings. Even
more notable is the significant variability between the medical impairment and
final disability ratings. Georgia and Virginia exhibit virtually no difference
between the two (medical impairment is actually higher), while the final disability
rating is more than double the impairment rating in Tennessee.
4
The state thresholds were chosen so that the indemnity portion of the population of claims
above the threshold would account for more than 80 percent of the state's total indemnity costs
(based on a review of claims reported under the NCCI Unit Statistical Plan).
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
89
Table 1
Mean Impairment Ratings, Final Disability Ratings, and Difference Between
Ratings by State
State
Arkansas
Physician
Impairmen
t Rating
16.3
Correlation
Between
Impairment
and
Disability
Ratings*
Final
Disability
Rating
Difference
Between
Ratings
Percent of
Claims with
Impairment
Rating
Percent of
Claims
with
Disability
Rating
23.3
7.1
91.9
94.6
0.591
Georgia
16.7
16.6
-0.1
46.8
38.0
0.839
Kentucky
18.4
30.3
11.8
66.8
74.6
0.346
Missouri
25.3
28.8
3.6
75.1
75.4
0.745
New
Hampshire
14.0
15.3
1.3
34.4
41.4
0.722
North Carolina
21.8
24.1
2.3
90.1
87.1
0.701
South Carolina
19.0
23.4
4.4
89.7
92.2
0.454
Tennessee
16.1
39.0
22.9
87.2
90.8
0.438
Virginia
17.3
16.6
-0.8
38.0
35.2
0.929
Wisconsin
14.6
24.7
10.1
42.8
93.1
0.638
Average
18.2
25.6
7.4
66.4
71.8
0.583
* All correlation coefficients significant at p <.001
The percentage of sample claims that receives a medical impairment rating
from the treating physician also varies by state. Only 34 percent of claims in New
Hampshire have an impairment rating given, compared to 91 percent in Arkansas.
The percentage of the sample claims with each type of rating is shown in
columns 4 and 5 of Table 1.
The correlation coefficient between the impairment rating and the final
disability rating was determined to be 0.583 on average across the entire sample
(based on claims with both an impairment rating and a final disability rating).
This suggests that, while significantly positively correlated, other factors in
addition to physical impairment are involved in the determination of final
disability. States vary significantly in the correlation between their impairment
and disability ratings, further illustrating problems in designing permanent partial
disability systems. The lowest correlation (0.346) is observed in Kentucky; the
highest correlation is observed in Virginia (0.929).
EMPIRICAL ANALYSIS
This section uses multivariate regression models to identify and measure factors
related to the size of the final permanent partial disability rating and determines
90
The Journal of Risk and Insurance
how the size of this rating influences the total indemnity cost of the claim. The
research plan controls for the nature, severity, and type of injury and observes how
other factors may systematically influence the final disability rating and claim
costs.
Model 1: Size of Final Disability Rating
The final disability rating for permanent partial injuries is determined at a point
in time, typically either at the date of maximum medical improvement or when a
settlement agreement is negotiated. Given the panel nature of the data, the
process of determining the final disability rating may be modeled as follows:
Yijt=βXijt + uj + Γt + ejt
(1)
where Yijt = size of the final disability rating (percent of whole body times
100) for person i, in state j, accident year t,
β = vector of model parameters,
X = vector of variables influencing the rating size,
Uj = omitted state effects,
Γt = omitted effects that vary across time but not across states, and
ejt = independent and identically distributed random variable.
This fixed effects specification allows the model to be estimated using
ordinary least squares and will provide unbiased parameter estimates. However,
as Thomason demonstrates in the context of litigation and claim settlement
decisions, and since the data are by definition limited to claims with both final
disability ratings and medical impairment ratings, the regression models are
subject to selectivity bias. In the empirical analysis, Heckman's two-step
estimation procedure is used to correct for sample selection bias (see Heckman,
1979 and Greene, 1981 for relevant discussions).
This model estimates the effect of selected variables on the size of the final
disability rating with the aim of measuring and identifying those factors with the
largest impact on the final rating. The dependent variable is the size of the final
disability rating. The regressions include the claimant's age, sex, preinjury
weekly wage, weekly temporary total indemnity benefit, claimant attorney
representation, whether there is a dispute over indemnity or medical/rehabilitation
5
benefits, and whether the final disability rating is based on loss of earnings. The
model also includes control variables for the nature of injury, the body part
injured, whether surgery is involved, and the extent of medical costs (severity
control variables), as well as dummy variables for the state and accident year (the
5
The loss of earnings base variable is a claim-specific dummy variable indicating whether
the PPD award was primarily based on the claimant's loss of earning capacity as opposed to
physical impairment. Most states allow awards to be based on either loss of earnings or physical
impairment.
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
91
fixed effects) in which the claim was initiated. The sample means and standard
deviations for the selected variables are shown in Table 2. Similar to other
workers' compensation databases, most claimants are male, in their mid-to-late
30s, with a large proportion of back injuries (32 percent). Since these claims are
mostly permanent disabilities, there are some other notable features. Most of
these claims (78 percent) involve attorney representation, many involve surgery
(68 percent), most of the claims are closed by agreement (90 percent lump sum),
and 31 percent involve a pre-existing condition. The total average cost
(indemnity plus medical) of these claims is $58,583. Again, these claims are
serious high cost claims, which although atypical, account for a disproportionate
6
share of costs.
Consistent with previous research, the models are estimated in natural
logarithmic form. In addition, since de jure in many instances the impairment
rating should equal the disability rating, or at least be jointly determined,
simultaneous equation models are estimated. Two-stage least squares models are
used to jointly estimate the impairment and disability rating awards. Statistical
7
tests indicate the appropriateness of considering a jointly determined model.
Because similar injuries to older workers are likely to have more serious
consequences, we expect age to be positively correlated to the final disability
rating. Claimant attorney involvement and disputes over benefits also are
expected to be positively correlated to the final disability rating, consistent with
the hypothesis that claimants are able to affect their ratings through investing in
legal resources and disputing benefits. Claim severity measures should likewise
be positively correlated with the disability award.
6
According to the NCCI Unit Statistical Plan Data, permanent partial injuries account for
approximately 8 percent of claims and 75 percent of all indemnity costs.
7
The Wu-Hausman test rejects the null hypothesis of separate equations at the 0.001 level of
significance.
92
The Journal of Risk and Insurance
Table 2
Sample Means and Standard Deviations
(N = 4265)
Variable
Wage
Weekly Benefit
Age
Male
Attorney Representation
Dispute Over Indemnity Benefits
Dispute Over Medical/Rehabilitation Benefits
Loss of Earnings Basis
Lump Sum Award
Physician's Impairment Rating
Final Disability Rating
Pre-existing Condition
Surgery
Head Injury
Neck Injury
Low Back Injury
Trunk Injury
Lower Extremity Injury
Upper Extremity Injury
Multiple Body Part
Sprain or Strain Injury
Fracture Injury
Total Indemnity
Total Medical
Sample
Mean
375.13
224.68
39.06
0.79
0.76
0.78
0.06
0.28
0.90
18.12
25.56
0.31
0.68
0.03
0.03
0.32
0.11
0.16
0.24
0.10
0.43
0.21
39,114
19,469
Standard
Deviation
168.58
74.99
11.13
0.41
0.43
0.42
0.23
0.45
0.30
17.96
21.72
0.46
0.47
0.16
0.17
0.47
0.31
0.37
0.43
0.31
0.49
0.41
24,101
19,435
Table 3 contains the estimated coefficients from the simultaneous equation
model where the impairment rating and the final disability rating are jointly
determined. The estimated parameters are consistent with the predictions, and,
overall, the regression model explains roughly 59 percent of the variation in the
8
disability ratings. As expected, older workers received higher disability ratings
and impairment ratings: For every 10 percent increase in age, the impairment
rating is 2.3 percent higher and the final disability rating is approximately 0.9
percent higher. Men receive 1.7- percent higher impairment ratings and 0.4
percent higher disability ratings. Attorney involvement is associated with higher
disability awards, but with lower impairment ratings. Disputed claims also give
8
The regression coefficients may be interpreted as elasticities. For continuous variables that
enter the model in the natural logarithmic form, the coefficients represent the percentage change
in the outcome measure given a percentage change in the individual explanatory variable.
However, for the qualitative or dummy variables that enter the model as either zero (no) or one
(yes), the elasticity is measured as eb - 1. See Halvorsen and Palmquist (1984) for discussion on
the interpretation of dummy variables in semilogarithmic specifications.
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
93
rise to higher disability awards. These results support the notion that many
factors, in addition to physical impairment, affect the size of the final disability
rating. The estimated coefficient for the impairment rating is 0.748, implying
that a 10 percent increase in the impairment rating gives rise to a 7.5 percent
increase in the final disability award. This finding, which comes from models
that control for the other factors typically considered in settlement proceedings, is
statistically different from one.
Table 3
Physician’s Impairment Rating and Final Disability Rating
Two Stage Least Squares Regressions (with Sample Selection Correction)
(N = 4265)
94
The Journal of Risk and Insurance
Variables
Physicians
Impairment Rating
Coefficient
t
Statistic
Physician's Impairment Rating
Final Disability
Rating–
Coefficient t Statistic
0.748*
23.080
Wage
-0.007
-0.092
0.134**
2.519
Weekly Benefit
-0.320*
-3.099
-0.322**
-4.592
Age
0.232*
5.255
0.085*
2.805
Male
0.173*
5.145
0.044**
*
1.932
-0.067**
2.130
0.061**
2.855
0.064**
2.405
0.070**
*
1.902
Loss of Earnings Base
0.576*
22.551
Lump Sum Award
0.053**
*
1.663
Attorney Representation
Dispute over Indemnity Benefits
Dispute over Medical/Rehab
Benefits
Total Medical Cost
0.091
5.582
0.057*
4.867
Surgery
0.003
0.082
0.023
1.122
-0.125*
4.279
0.033
1.492
-0.088*
2.701
Pre-existing Condition
Release to Work
Sprain or Strain
Part of Body Controls
Yes
Yes
No
No
State Controls
Yes
Yes
Yes
Yes
Accident Year Controls
Yes
Yes
Lambda
-0.266**
2.120
F statistic
26.6*
Adjust R2
0.161
Yes
0.472*
Yes
5.304
207.1*
0.592
* Significant at .01 ** Significant at .05 *** Significant at .10
Thus, as might be expected from reading the statutory intent, there is not a one-toone relationship between impairment and final disability ratings. Moreover, while
statistically significant, the adjusted R2 of .59 indicates the existence of
considerable noise or unaccounted-for factors in determining the final disability
ratings.
The estimated weekly benefits coefficients are -0.32 for both the impairment
and disability equations. This is consistent with the income redistribution
hypothesis; when everything else is the same, including injury severity and
impairment rating, workers with lower temporary total benefits receive higher
final disability ratings. Preinjury wages are not different from zero in the
impairment rating model but positive and significant in the final disability rating
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
95
model. This suggests that, for a 10 percent increase in wages, there will be a
corresponding 2.3 percent increase in impairment ratings and a 1.3 percent
9
increase in disability ratings after controlling for injury severity. In addition, a
final disability rating that is based on loss of earnings rather than physical
impairment results in a significantly higher (78 percent) final rating than one
based solely on physical impairment.
The coefficient on the sample selection correction variable (lambda or Mills
ratio) is statistically significant, confirming the need to consider the probability of
a claimant receiving an impairment and a disability rating. Unlike the previous
research, the underlying probit model looks at the probability that a high cost
claim receives both types of rating and not the probability that a lost time claim
10
11
will receive a PPD award. (The Probit results are presented in the Appendix.)
State differences are particularly revealing. The set of state dummy variables
is jointly significant, confirming that state differences significantly influence the
determination of final disability ratings. Table 4 presents the estimated
coefficients for the state control variables for the jointly determined model with
12
sample correction. As might be expected, state differences are not as important
for the physician's impairment rating once other factors are considered; only three
individual state coefficients are statistically significant. State coefficients vary
widely for the final disability rating model (Column 3, Table 4). Seven of the
individual state parameters are statistically significant with the largest coefficient
observed for Tennessee (1.019). The implication is that, even after controlling for
injury severity, other demographic characteristics, and the impairment rating,
there is tremendous interstate variation in final disability ratings.
9
Wages are generally a measure of opportunity cost and are typically negative in duration
models. Here, we are looking at the impact on ratings and disability award; thus, the opportunity
cost argument is not relevant.
10
The Mills ratio is entered positively into the regressions; the coefficient may be interpreted
directly.
11
The Probit models are estimated using dummy variables that represent the insurers,
which serve to properly, identify the system of equations.
12
The state of New Hampshire was used as the base.
96
The Journal of Risk and Insurance
Table 4
State Variable Coefficients and t-statistics (New Hampshire is the base.)
(N=4265)
Physician's Impairment
Final Disability
Rating
Rating
Coefficient
t-ratio
Coefficient
t-ratio
Arkansas
-0.280**
2.437
0.659*
8.122
Georgia
-0.054
-0.694
-0.036
-0.660
Kentucky
0.067
0.705
0.553*
8.209
Missouri
0.270*
3.178
0.542*
8.985
North Carolina
0.045
0.426
0.552*
7.392
South Carolina
-0.005
-0.047
0.691*
8.678
Tennessee
-0.068
0.635
1.019*
13.569
Virginia
0.048
0.662
0.031
0.615
Wisconsin
-0.401*
-5.285
0.312*
5.810
* Significant at .01 ** Significant at .05 *** Significant at .10
13
For example, given the "average" claim profile of a 38-year old man with a
back strain injury treated with surgery, who retains an attorney, disputes his
indemnity benefits, receives a physician's impairment rating of 12.4 percent of the
whole body, and has a final disability rating that is based on physical impairment
(i.e., not based on loss of earnings), the estimated parameters from the regression
model predict that the claim will receive a final disability rating that varies from
9.5 percent of the whole body in New Hampshire to 26.4 percent in Tennessee
(see Table 5).
Table 5
Estimated Final Disability Ratings By State For Average Claim
Profile
Arkansas
Georgia
Kentucky
Missouri
New Hampshire
North Carolina
South Carolina
Tennessee
Virginia
Wisconsin
13
Predicted Final Disability Rating by State
18.4
9.2
16.5
16.4
9.5
16.5
19.0
26.4
9.8
13.0
The mean values used in the prediction are in some cases the means of variables in
logarithmic form and may not correspond exactly with the sample means in Table 3.
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
97
Model 2: Effects of Final Disability Ratings on Total Indemnity and Permanent
Partial Benefit Costs
Models are then estimated to measure the influence of the final disability rating on
the dollar amount of the permanent partial benefit award and the total indemnity
benefit award. As expected, these models indicate that the final disability rating
has a significant effect on both permanent partial and total indemnity benefit
costs.
Since the final disability rating and claim costs are in some fashion jointly
determined, simultaneous equation models are estimated. The effect of the final
disability rating on the total permanent partial benefit cost and on the total
indemnity benefit cost are modeled as two-stage least squares with simultaneous
estimation of the impairment rating, the final disability rating, and the total
permanent partial benefit cost. We also simultaneously estimate the impairment
rating, the final disability rating and the total indemnity benefit cost. The model
estimates are presented in Table 6. Once again, the coefficient on the sample
selection correction variable for the permanent cost model is insignificant,
indicating that it is necessary to consider the probability that a claimant receives
both an impairment rating and a disability rating.
The first cost model (Column 2, Table 6) estimates the effects of selected
variables on the permanent partial benefit award (corrected for sample selection
bias). The second model (Column 3, Table 6) estimates the effects on the total
indemnity benefit award. The regressions include the final disability rating; the
claimant's age and preinjury wage, claimant attorney representation, dispute
variables, and whether the claimant returned to work prior to claim closure. The
models also include control variables for state and accident year (the fixed effects).
The final disability rating along with the claimant's preinjury wage are
expected to have the greatest effect on the permanent partial and total indemnity
cost. This is because of the typical method employed to calculate a permanent
partial benefit award (a percentage of the preinjury wage times the disability
rating times the number of weeks in the schedule). Attorney involvement and the
presence of disputes are also expected to be positively correlated as they may affect
additional amounts added to the final award, such as "incentives to settle." State
effects are also important, since state statutes vary regarding wage replacement
rates and the number of weeks awarded for each type of impairment.
The results from the models show that, as expected, the final disability rating
has a significant effect on both permanent partial benefit costs and total indemnity
costs. Therefore, the factors shown to have an impact in the determination of
final disability ratings also will have an effect on permanent partial benefit and
total indemnity benefit costs, resulting in significant disparities in benefit costs
among claimants with similar kinds of injuries and preinjury wages. For
example, female workers receive lower disability ratings, on average, and
therefore lower benefits than their male counterparts, when comparing similar
injuries as measured by the treating physician's impairment rating. Older workers
appear to benefit; age is positively correlated with final disability award, again
when comparing similar injuries as measured by a physician's impairment rating.
98
The Journal of Risk and Insurance
Also, as hypothesized, claimant attorney involvement and claim disputes are
positively correlated with disability ratings and claim costs, suggesting that
claimants are able to increase the size of their permanent partial benefit award by
investing in legal council and disputing the indemnity award.
99
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
Table 6
Results of Two Stage Least Squares Regression (with Sample Selection
Correction) for Final Disability Rating and Total Permanent Partial Cost,
Total Indemnity Cost.
N = 3982
Variable
Final Disability Rating
Physician's Impairment Rating
Total Permanent Partial
Cost
Coefficient
t. Statistics
0.551*
20.706
Coefficient
0.390*
t. Statistics
18.230
--
--
--
Wage
0.024*
0.464
0.001*
10.036
Weekly Benefit (Temporary
Total)
0.454*
6.691
0.514*
9.334
Age
0.051***
1.780
-0.036
-1.519
--
--
--
Male
--
Total Indemnity Cost
--
Attorney Representation
0.098*
4.485
0.112*
6.329
Dispute Over Indemnity
Benefits
0.098*
4.352
0.117*
6.401
-0.003
0.085
0.037
1.309
Loss of Earnings Base
--
--
--
--
Lump Sum Award
--
--
--
--
Total Medical Cost
--
--
--
--
Surgery
--
--
--
--
Pre-existing Condition
--
--
--
--
Dispute Over
Medical/Rehab. Benefits
Release to Work
Return to Work
Sprain or Strain
Part of Body Controls
State Controls
Accident Year Controls
--
--
--
--
0.113*
6.024
-0.140*
-9.167
--
--
--
--
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Lambda
0.209*
--
--
-0.038
F statistic
78.9*
--
--
53.30*
Adjust R2
0.329
* Significant at .01 ** Significant at .05 *** Significant at .10
0.247
100
The Journal of Risk and Insurance
The results from the cost models suggest that a 10 percent increase in final
disability rating increase permanent partial benefit costs by about 5.5 percent and
total indemnity costs by approximately 3.9 percent. Other findings are consistent
with the prior results and hypotheses. Wages are positively correlated with costs
but negatively correlated with the disability rating. Attorney involvement
increases both the disability rating (10.3 percent) and the total permanent partial
award (11.9 percent). Formal indemnity disputes also increase disability awards
14
and permanent partial costs (by 7 percent and 10 percent, respectively).
However, although all of the models are robust with the key variables
2
statistically significant, it is again notable that the adjusted R s are not higher,
given legislative intent and the statutory structure of indemnity benefits. As
mentioned above, the final disability-rating model explains only approximately 59
percent of the variation in the data, while the permanent partial cost model
explains only 33 percent. This is further collaboration of how "noisy" the process
is.
The simultaneous cost equations are also estimated separately for each state
in the sample in order to observe the variation in the estimated impact of both the
impairment and the disability ratings on costs. The results show a significant
difference by state, as shown by the estimated coefficients for the final rating for
the separate state cost models shown (see Table 7). For example, the estimated
coefficients vary from 0.729 in South Carolina to 0.102 in Kentucky for the
permanent partial cost model, suggesting that permanent partial costs in South
Carolina are affected more by disability ratings than those in Kentucky. Stated
differently, not only does the determination of disability ratings vary by state after
controlling for injury severity, the physician's impairment rating, and
demographic characteristics, but also an increase in the disability rating itself has
a differential impact on the final claim costs. These findings directly illustrate the
difficulties in designing equitable permanent disability systems. Even taking into
consideration that states may use PPD benefit design to redistribute income, moral
hazard incentives, rent seeking activities, and other random circumstances have a
significant impact on the determination of PPD benefits.
CONCLUSIONS
Compensating permanent partial injuries remains one of the most complicated
aspects of workers' compensation insurance. Despite widespread concern over the
adequacy and equity of permanent partial benefits, little research examines the
factors that influence the cost of permanent partial workers' compensation claims.
Using a new and rich data source on workers' compensation claims, this study
14
For continuous variables that enter the model in the natural logarithmic form, the
coefficients represent the percentage change in the outcome measure given a percentage change
in the individual explanatory variable. However, for the qualitative or dummy variables that
enter the model as either 0 (no) or 1 (yes), the elasticity is measured as eb - 1.
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
101
explores these factors. The results show that impairment ratings are only one of a
variety of factors that systematically influence the size of a final disability award.
Specifically, even for cases with benefits awarded for noneconomic loss, in
addition to the treating physician's determination of physical impairment, the
determination of the degree of permanent disability appears to take into account
factors such as age, sex, preinjury wage, weekly temporary total benefits, and
whether an attorney is involved in the case. Moreover, even after these other
factors are considered, a less than one-to-one relationship exists between
impairment and final disability ratings, which might be expected.
Table 7
Estimated Impact of the Final Disability Rating on Costs by State
(Percent Increase in Benefit Costs Given One Percent Increase in Final
Disability Rating)
Permanent Partial Costs
Total Indemnity Costs
Percent
Absolute
Percent
Absolute
Increase
t Ratio
Increase
t Ratio
Arkansas
0.405*
5.313
0.274*
2.673
Georgia
0.662*
5.530
0.570*
5.489
Kentucky
0.102*
0.641
0.114
0.887
Missouri
0.153*
3.031
0.100**
2.252
New Hampshire
0.557*
3.788
0.417*
4.194
North Carolina
0.488*
9.589
0.318*
7.894
South Carolina
0.729*
12.258
0.423*
4.281
Tennessee
0.580*
5.863
0.608*
9.645
Virginia
0.309*
3.773
0.084*
1.306
Wisconsin
0.433*
5.339
0.196*
3.884
*Significant at .01; **Significant at .05; ***Significant at .10
Although previous research suggests that impairment ratings do not
adequately compensate injured workers for non-economic loss, it is clear that state
systems have developed procedures that allow for additional compensation.
However, equity concerns still remain. The empirical findings suggest that the
same injuries as measured by a physician impairment rating may receive very
different final disability ratings and thus have very different claim costs as a result
of factors unrelated to the injury. Interstate differences also are revealing:
Predicted final disability ratings vary significantly across states, even after
controlling for injury severity, other demographic characteristics, and the
102
The Journal of Risk and Insurance
impairment rating.
As observed during the reports of the National Commission on State
Workmen's Compensation Laws in the early 1970s, the equitable distribution of
permanent disability benefits is one of the most complex and controversial issues
affecting workers' compensation. The high levels of disputes and litigation are
continuing signals of the problems. Even after many years of often-significant
reforms, these issues remain today.
APPENDIX
Table 8
Probit Model Probability That Claim Has Impairment
Rating and Disability Rating
(for Sample Selection Correction)
Variables
Estimated
Coefficients
-0.252*
0.238**
-0.040
0.287*
0.461**
0.567*
-0.149**
-0.467*
0.145***
0.126*
-0.105*
0.041
Yes
T-Ratio
Insurer #1
3.079
Insurer #2
2.287
Insurer #3
0.304
Insurer #4
4.204
Insurer #5
2.149
Insurer #6
3.717
Insurer #7
2.180
Insurer #8
5.732
Insurer #9
1.712
Total Medical Cost
6.249
Total Indemnity Cost
5.592
Loss of Earnings Base
0.728
State Controls
* Significant at .01 ** Significant at .05 *** Significant at .10
REFERENCES
Berkowitz, M. and J. Burton, 1987, Permanent Disability Benefits in Workers'
Compensation Kalamazoo, Mich.:. W.E. Upjohn Institute for Employment
Research.
Boden, L., 1992, Dispute Resolution in Workers' Compensation, Review of
Economics and Statistics, 74: 493-502.
Boden, L. and R. Victor, 1994, Models for Reducing Workers' Compensation
Litigation, Journal of Risk and Insurance, 61(3): 458-475.
Borba, P., and D. Appel, 1987, The Propensity of Permanently Disabled Workers
to Hire Lawyers, Industrial and Labor Relations Review, 40(3): 418-429.
Factors Affecting Permanent Partial Disability Ratings In Workers’ Compensations n
103
Durbin, D., N. Helvacian, and R. Butler, 1995, Attorney Involvement in High
Cost Workers' Compensation Cases, NCCI Working Paper, Boca Raton,
Florida.
Durbin, D., and R. Butler, 1998, Prevention of Disability from Work Related
Sources, in New Approaches to Disability in the Workplace, Terry Thomason,
John Burton Jr. and Douglas Hyatt, eds., (Madison, WI: IRRA Press).
Greene, W., 1981, Sample Selection Bias as a Specification Error: Comment,
Econometrica, 49(3): 795-798.
Halvorsen, R. and R. Palmquist, 1984, “The Interpretation of Dummy Variables
in Semilogarithmic Equations,” American Economic Review, 70(3): 474-475.
Heckman, J., 1979, Sample Selection Bias as a Specification Error, Econometrica,
47(1), 753-161.
Krueger, A. B. and J. F. Burton, 1990, The Employer's Costs of Workers'
Compensation Insurance: Magnitudes, Determinants and Public Policy, Review
of Economics and Statistics, 81: 228-240.
National Council on Compensation Insurance, 1989-1995, NCCI Annual
Statistical Bulletin (Boca Raton, Fla.: NCCI).
Sinclair, S. and J. Burton, 1994, Measuring Non-Economic Loss: Quality of Life
Values versus Impairment Ratings, Workers' Compensation Monitor.
Thomason, T., 1993a, “Permanent Partial Disability in Workers' Compensation:
Probability and Costs,” The Journal of Risk and Insurance, 60: 570-590.
Thomason, T., 1993b, The Transition from Temporary to Permanent Disability:
Evidence from New York State, in, Durbin and Borba, Eds. Workers'
Compensation Insurance: Claim Costs, Prices, and Regulation Boston:
(Kluwer Academic Publishers).
Worrall, J., D. Durbin, D. Appel, and R. Butler, 1993, The Transition from
Temporary Total to Permanent Partial Disability: A Longitudinal Analysis, in:
Durbin and Borba, eds., Workers' Compensation Insurance: Claim Costs,
Prices, and Regulation, Boston: (Kluwer Academic Publishers).