Chapter Outline
16.1
Overview Of Workers’ Compensation Laws
16.2.
Workers’ Compensation Benefits
Medical Benefits
Disability Benefits
Total Disability Benefits
Permanent Partial Disability Benefits
Survivor Benefits
16.3
Why Have Workers’ Compensation
Who Pays for Injury Costs?
Benefits and Costs of Different Arrangements
No Mandatory Benefits and No Tort Liability
No Mandatory Benefits with Tort Liability
Workers’ Compensation: Mandatory Benefits without Tort
Liability
Mandatory Benefits with Tort Liability
Chapter Outline
16.4
Workers’ Compensation Insurance and Self-insurance
Description of Insurance Coverage
Insurance Pricing, Residual Markets, and State Funds
Pricing
Residual Markets and State Funds
Self-insurance and Large Deductible Policies
Second Injury Funds
16.5
16.6
Problems and Reforms in Workers’ Compensation
Government Safety Regulation and Other Sources of
Liability
The Occupational Safety and Health Act
Americans with Disabilities Act
Other Sources of Liability
16.7
Summary
Overview of Workers’
Compensation 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’
Compensation 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’
Compensation 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
Benefits

Three main types
– _____________
– _________ Income (Disability)
– __________(Survivor)
WC 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 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 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 Benefits
– Burial costs
– Benefits to surviving spouse and dependent
children

similar to total disability
Why Have Workers’ Compensation?
(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’
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’
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?
Alternative Methods of Dealing with Workplace Injuries
Mandatory
Benefits
Costs
No
Tort
Liability
No
Low
No
High
Yes
Yes
No
Safety
Incentives
Compensation
Inadequate if employees
underestimate risk
Adequate
Inadequate
Excessive if e’er negligent
otherwise inadequate
Adequate w/ labor mkt
incentives and safety regulation About right
Moderate
Yes
Yes
Adm/Dispute
Resolution
Adequate or possibly
Excessive if
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 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 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 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 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 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 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
and 1990s
WC insurance rates did not keep up with
costs
30
29
28
26
24
24
25
22
Residual market premiums as percent of total WC premiums
20
19
20
17
16
15
13
13
12
12
10
10
10
10
8
6
6
5
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
0
1977
Percent

Problems in WC during 1980s
and 1990s
Residual market premiums
as a percent of total WC premiums by state
ID
AZ
OR
NJ
HA
MI
IL
CT
DE
DC
AK
IN
IA
NB
State
NC
SD
GA
VA
FL
MO
KS
NH
VT
SC
TN
AL
KY
AR
MS
NM
MA
LA
ME
RI
0
10
20
30
40
50
Percent
60
70
80
90
100
Reforms in WC in 1980s and
1990s
– 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 OSHA

OSHA
– Occupational Safety and Health Act (1971)




– Issues


Is it effective in improving safety?
Is it cost-effective?
American With Disabilities Act
(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
Employees

Examples of sources of liability
– wrongful _____________
– ____________harassment
– _____________discrimination

Insurance coverage
– Employment practices liability (EPL) coverage