Workers' Compensation: Recent Developments in Moral Hazard and Benefit Payments

Abstract

Studies using pre-1990 data generally found benefit and frequency elasticities for workers' compensation cash benefits that exceeded, respectively, 1.0 and 0: an increase in expected benefits apparently induced (a) an even greater increase in actual benefit payments and (b) an increase in claim frequency. Researchers previously hypothesized that incentive effects for workers dominated those for employers. The authors of this study reevaluate benefit and frequency elasticities for 1975–89, using data with some advantages over those used by previous studies, and also investigate whether the elasticities changed during the years 1990–1999, when insurance policies with large deductibles increased employers' incentives to limit benefits and many states restricted benefit eligibility. For both periods, they find benefit elasticities significantly under 1.0 and frequency elasticities of about 0. They also find that much of the substantial decline in actual benefits in the 1990s was due to changes in state compensability rules and administrative stringency.

The lack of correspondence between work‐related disability and receipt of workers' compensation benefits

“…In states passing these reforms, they accounted for 12.2-23.7% of the decline. Guo and Burton [2010] identified several factors that help explain the decline in cash benefits in many states during the 1990s. They constructed a measure for the benefit allowance stringency (the BAS variable), which looked at the proportion of injuries reported by employers to OSHA that resulted in workers' compensation claims, and found that the proportion declined between 1985 and 1999 as state workers' compensation programs became more stringent because of administrative practices, rules, or decisions by state agencies or courts.…”

The Law and Economics of Liability Insurance: A Theoretical and Empirical Review

“…Thus, the workers' compensation moral hazard story is a complicated one that involves much more than worker claiming patterns (Baker 1996). Confirming this conclusion, Guo & Burton (2010) find that "much of the substantial decline in actual benefits in the 1990s was due to changes in state compensability rules and administrative stringency," rather than to worker behavior. …”

The Effect of State Workers' Compensation Program Changes on the Use of Federal Social Security Disability Insurance

“…44 This may be because moral hazard is less of an issue for the more serious, permanent injuries, or because labor supply disincentives in WC are smaller than previously estimated (Bronchetti and McInerney (2009); Guo and Burton (2010)). This result may also arise merely because with so many regressions estimated, some relationships may be statistically significant by chance (see, e.g., Bland and Altman (1995)).…”

“…Following the WC literature, we first consider a tightening in WC parameters (see, e.g., Bronchetti and McInerney (2009);Guo and Burton (2010); Guo and Burton (under review); Guo and…”

“…However, this finding is unlikely to explain the aggregate decline in WC benefit receipt because we document only ten declines in maximum duration for the loss of an arm. This may be because workers are not responsive to benefit generosity (see, e.g., Bronchetti and McInerney (2009) or Burton and Guo (2010)), or this may arise if there is too little variation in the number of PTD claims (per 100,000 workers) within a state over time. In column (3), among PPD claims, we do see modest responsiveness to benefit generosity.…”