Chapter Outline 16.1Overview Of Workers’ Compensation Laws 16.2.Workers’ Compensation Benefits Medical Benefits Disability Benefits Total Disability Benefits Permanent Partial Disability Benefits Survivor Benefits 16.3Why 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 16.4Workers’ 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 16.5Problems and Reforms in Workers’ Compensation 16.6Government Safety Regulation and Other Sources of Liability The Occupational Safety and Health Act Americans with Disabilities Act Other Sources of Liability 16.7Summary

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 Tort Safety Adm/Dispute Benefits 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 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 Residual market premiums as percent of total WC premiums

Problems in WC during 1980s and 1990s Residual market premiums as a percent of total WC premiums by state

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