The adequacy of workers' compensation benefits

Principal Investigator: Emile Tompa

Co-investigators: Heather Scott-Marshall, Miao Fang, Cameron Mustard

Community involvement: Steve Mantis, the RAACWI community lead, has been involved in this study since its inception. Versions of the analysis have been presented at community forums and feedback has been incorporated into the analysis.

Interest to community: The study results will be of interest to injured workers and their representatives, workers' compensation boards, and ministries of labour across Canada. The study is important because the adequacy of benefits is a key concern for injured workers. The study provides workers' compensation authorities with important insights into the labour-market realities experienced by injured workers and the merits of three program options.

Project abstract: This study compares the adequacy of three different ways that have been used to formulate workers' compensation long-term disability benefits in different provinces in Canada. One formulation is based on percentage of impairment (permanent impairment program), another on an estimate of loss-of-earnings capacity (loss of earnings capacity program), and a third considers both options and pays the higher of the two (bifurcated program). Analysis is undertaken using administrative data sources, and draws on previous studies on benefits adequacy. We found that of the three programs, the bifurcated program offers the most adequate and equitable benefits.

Literature review: There is a longstanding interest in the adequacy and equity of wage loss compensation for individuals sustaining permanent impairments due to work-related accidents. Yet few studies have investigated the labour-market re-entry and earnings of individuals sustaining a permanent impairment as a result of a work-related accident. Fewer still have evaluated the earnings losses due to permanent impairment and the adequacy and equity of wage-loss benefits provided by workers' compensation. The lack of studies is a reflection of the fact that longitudinal data sources required to address these issues are not readily available.

In two reports, Weiler comments that determining the level of permanent partial work disability is one of the most difficult undertakings of workers' compensation boards (Dee, McCombie, and Newhouse 1987; Weiler 1980, 1986). Johnson and Baldwin (1993) also note the difficulty in determining partial disability, claiming that most U.S. social programs only provide benefits for total disability as a result. The difficulty lies in the fact that earnings losses can be due to more than just the impairment per se. Factors such as the level of education, amount of work experience, financial resources and individual preferences, as well as local labour-market conditions and an employer?s willingness to accommodate can all bear on labour-market re-entry and earnings. Most current models of disablement aptly describe disability as a relational phenomenon, determined by the characteristics of the individual, the health condition, and the physical and social context (Nagi 1965, 1991; World Health Organization 1980, 2001). It is precisely the interrelated nature of the factors producing disability that makes it difficult for workers' compensation programs to distinguish earnings loss due to impairment from earnings loss due to labour-market conditions and/or individual preferences for work and leisure (Hyatt 1996).

A large survey undertaken in 1988 by the Ontario workers' compensation board spawned several Canadian studies (Butler et al. 1995; Cater 2000; Cater and Smith 1999; Hyatt 1996; Johnson, Butler, and Baldwin 1995; Johnson and Baldwin 1993). These studies provide invaluable insight into the labour-market re-entry experience of permanently impaired individuals who received benefits from the Ontario program in existence prior to 1990. An important finding of this body of work is that first return to work is not an accurate predictor of labour-market re-entry success; though 85% of workers in the sample returned to work, only 50% were employed several years later (Butler et al. 1995). These studies also confirm that characteristics other than the degree of impairment bear on labour-market participation and earnings post-accident. More recently a qualitative study on a sample of pre-1990 Ontario workers' compensation claimants with permanent impairments was undertaken to review the claimants' experiences with the Ontario board and to evaluate their quality of life (Ballantyne 2001). The study found that interviewed subjects experienced chronic employment instability throughout their post-accident years. Less than half had secure employment at the time of accident, defined as employment with a large and/or unionized firm. Furthermore, most study participants felt that their pension did not adequately replace the earnings they had lost.

Most studies of earnings loss, and benefit adequacy and equity have been undertaken with data from U.S. jurisdictions (Berkowitz and Burton, Jr. 1987; Biddle 1998; Boden and Galizzi 1999; Cheit 1961; Ginnold 1979; Johnson, Cullinan, and Curington 1979; Peterson et al. 1998; Reville et al. 2001a; Reville et al. 2001b). Only two of these, Boden and Galizzi (1999) and Biddle (1998), included all individuals who experienced time loss claims. The other studies focused exclusively on those with permanent-impairment claims. Both sets of studies found that many permanently impaired individuals suffer substantial long-term earnings losses, and the latter found that the same was also true for many individuals experiencing only a short-term disability. The studies of PPD claimants confirmed that wage loss benefits provided by many programs are not adequate in terms of achieving replacement rate targets (usually 2/3rds of pre-tax or 80% of after-tax pre-accident earnings), nor are they equitable in terms of replacing the same percentage of lost wages across all impairment rating categories.

Peterson et al. (1998) found that proportional earnings losses were very similar for individuals with impairment ratings from 1-20%, 4-5 years post-accident in a sample of PPD beneficiaries injured in the early 1990s in California (California had an impairment-based system of compensation at that time). Berkowitz and Burton (1987) found considerable variability in wage-loss replacement rates across rating categories for California, Wisconsin, and Florida in data on PPD claimants injured in 1968 (at that time, California had a loss of earnings capacity system, Wisconsin an impairment-based system, and Florida a system that provided a choice between the two compensation methods). Similar variability in wage-loss replacement rates were found in studies by Ginnold (1979) and Johnson, Cullinan, and Curington (1979). Biddle (1998) went so far as to state that estimated post-accident losses bear little relationship to the size of benefit awarded (Biddle 1998, 47-48) for accident claims from 1993 and 1994 in Washington State.

It is difficult to make direct comparisons between studies because of time period, jurisdiction, and methodological differences, but the range of results provides some insights. We focus on studies that consider rates over a 10 year period post-accident. Rates identified by Peterson et al. (1998) for accidents from 1991-1994 for California were quite low, averaging 29% before tax. Mid-range values were found for Wisconsin (29% before tax and 38% after tax), Washington (41% before tax and 53% after tax), California (37% before tax and 48% after tax), Oregon (42% before tax and 55% after tax), and New Mexico (46% before tax and 60% after tax) for accidents from 1989 through 1998 (Reville et al. 2001a). Other studies have also found a similar range of values over a 10 year period (Biddle 1998; Reville et al. 2001b). Higher values were found for some strata by Boden and Galizzi (1999) with data from Wisconsin from accidents occurring between 1989 and 1990. Other studies have considered different time periods post accident, ranging from a single year (Johnson, Cullinan, and Curington 1979), and 6 years (Berkowitz and Burton 1987), to lifetime (California Workers' Compensation Institute 1984; Ginnold 1979).

Project references

Ballantyne, P. 2001. Pre-1990 Claims Unit Study: Final Report to the Workplace Safety and Insurance Board. Toronto: University of Toronto.

Berkowitz, M. and J.F. Burton, Jr. 1987. The Wage-Loss Study of California, Florida, and Wisconsin. In Permanent Disability Benefits in Workers' Compensation (pp. 317-361). Kalamazoo, Michigan: W.E. Upjohn Institute for Employment Research.

Biddle, J. 1998. Estimation and Analysis of Long Term Wage Losses and Wage Replacement Rates of Washington State Workers' Compensation Claimants. Working Paper, Washington State Workers' Compensation System.

Boden, L.J. and M. Galizzi. 1999. Economic Consequences of Workplace Injuries and Illnesses: Lost Earnings and Benefit Adequacy. American Journal of Industrial Medicine 36(5):487-503.

Boden, L.J., Reville, R.T. and J. Biddle. 2005. The Adequacy of Workers' Compensation Cash Benefits. In Workplace Injuries and Diseases: Prevention and Compensation, eds. K. Roberts, J.F. Burton, Jr. and M.M. Bodah, pp. 37-68. Kalamazoo, Michigan: W.E. Upjohn Institute for Employment Research.

Burkhauser, R.V., and M.C. Daly. 2000. Employment and economic well-being following the onset of a disability, the role for public policy. In Disability, Work and Cash Benefits, eds. J.L. Mashaw, V. Reno, R.V. Burkhauser and Berkowitz M., pp. 59-101. Kalamazoo, Michigan: W.E. Upjohn Institute for Employment Research.

Butler, R.J., Johnson, W.G. and M.L. Baldwin. 1995. Managing Work Disability: Why First Return to Work is not a Measure of Success. Industrial and Labor Relations Review 48(3):452-69.

California Workers' Compensation Institute. 1984. Economic Consequences of Job Injury. San Francisco (CA): California Workers' Compensation Institute. Cater, B.I. 2000. Employment, Wage and Accommodation Patterns of Permanently Impaired Workers. Journal of Labor Economics 18(1):74-97.

Cater, B.I. and B.J. Smith. 1999. Inferring Disability from Post-Injury Employment Duration. Applied Economics Letters 6 (11):747-51.

Cheit, E.F. 1961. Measuring Economic Loss due to Occupational Death and Disability. In Injury and Recovery in the Course of Employment, pp. 61-93. New York (NY): John Wiley and Sons.

Dee, G., McCombie, N. and G. Newhouse. 1987. Chapter 14: Permanent Disability Payments. In Workers' Compensation in Ontario, pp. 199-229. Toronto: Butterworths.

Ginnold, R. 1979. A Following Study of Permanent Disability Cases under Wisconsin Workers' Compensation. In Research report of the Interdepartmental Workers' Compensation Task Force, pp. 79-93. Eugene, OR: Education and Research Center, University of Oregon.

Horner, S.M. and F. Slesnick. 1999. The Valuation of Earning Capacity: Definition, Measurement and Evidence. Journal of Forensic Economics 12(1):13-32.

Hyatt, D.E. 1996. Work Disincentives of Workers' Compensation Permanent Partial Disability Benefits: Evidence for Canada. Canadian Journal of Economics 29(2):289-308.

Johnson, W.G. and M.L. Baldwin. 1993. Returns to Work by Ontario Workers with Permanent Partial Disabilities. Toronto (ON): Ontario Workers' Compensation Board.

Johnson, W.G., Butler, R.J. and M.L. Baldwin. 1995. First Spells of Work Absences Among Ontario Workers. In Research in Canadian Workers' Compensation, eds. Thomason T. and R.P. Chaykowski, pp. 72-84. Kingston, ON: Industrial Relations Press.

Johnson, W.G., Cullinan, P.R. and W.P. Curington. 1979. The Adequacy of Workers' Compensation Benefits. In Research report of the Interdepartmental Workers' Compensation Task Force, pp. 95-121. Syracuse, NY: The Maxwell School, Syracuse University.

Mustard, C., Dickie, C. and S. Chan. 2007. Disability Income Security Benefits for Working-Age Canadians, Institute for Work and Health Working Paper #339. Toronto, Ontario Canada.

Nagi, S.Z. 1965. Some Conceptual Issues in Disability and Rehabilitation. In Sociology and Rehabilitation, ed. M.B. Sussman, pp. 100-13. Ann Arbor: American Sociological Association.

Nagi, S.Z. 1991. Disability Concepts Revisited: Implications for Prevention. In Disability in America: Towards a National Agenda for Prevention, eds. Pope, A.M. and A.R. Tarlov, pp. 309-27. Washington, D.C.: National Academy Press.

National Academy of Social Insurance Study Panel on Benefit Adequacy. 2004. Adequacy of Earnings Replacement in Workers' Compensation Programs. Washington, DC: National Academy of Social Insurance.

Peterson, M.A., Reville, R.T., Stern, R.K. and P.S. Barth. 1998. Compensating Permanent Workplace Injuries: A Study of the California System. Santa Monica, CA: RAND.

Reville, R.T. 1999. The Impact of a Disabling Workplace Injury on Labor Force Participation and Earnings. In The Creation and Analysis of Linked Employer-Employee Data: Contributions to Economic Analysis, eds. J.C. Haltiwanger, J.I. Lane, J.R. Spletzer, J.J.M. Theeuwes and K. R. Troske, pp. 147-73. Elsevier Science, North Holland.

Reville, R.T., Boden, L.J., Biddle, J. and C. Mardesich. 2001a. An Evaluation of New Mexico Workers' Compensation Permanent Partial Disability and Return to Work. Rand Institute for Civil Justice, Santa Monica, CA.

Reville, R.T., Polich, S., Seabury, S. and E. Giddens. 2001b. Permanent Disability at Private, Self-insured Firms: A Study of Earnings Loss, Replacement, and Return to Work for Workers' Compensation Claimants. Rand Institute for Civil Justice, Santa Monica, CA

Sinclair, S.J. and J.F. Burton, Jr. 1995. Development of a Schedule for Compensation of Non-Economic Loss: Quality-Of-Life Values vs. Clinical Impairment Ratings. In Research in Canadian Workers' Compensation, eds. Thomason T. and R. Chaykowski, Kingston, Ontario: IRC Press.

Weiler, P.C. 1980. Reshaping Workers' Compensation for Ontario. Toronto: Government of Ontario.

Weiler, P.C. 1986. Permanent Partial Disability: Alternative Models for Compensation. Toronto: Queens' Printer.

World Health Organization. 1980. International Classification of Impairments, Disabilities, and Handicaps: A Manual of Classification Relating to the Consequences of Disease. Geneva: World Health Organization.

World Health Organization. 2001. International Classification of Functioning, Disability and Health. Final draft, full version. Geneva: World Health Organization.

Published works on the project

Tompa E, Scott-Marshall H, Fang M, Mustard C. Comparative Benefits Adequacy and Equity of Three Canadian Workers' Compensation Programs for Long-Term Disability. Institute for Work & Health Working Paper #350. Paper copy is available upon request.

Tompa E, Scott-Marshall H, Fang M, Mustard C. Comparative Benefits Adequacy and Equity of Three Canadian Workers' Compensation Programs for Long-Term Disability. Submitted.

Tompa E, Mustard C, Sinclair S, Trevithick S, Vidmar M. Post Accident Earnings and Benefits Adequacy and Equity of Ontario Workers Sustaining Permanent Impairments from Workplace Accidents. Institute for Work & Health Working Paper #210, 210A, 210B. Paper copy is available upon request.

Legislation policies, programs & practices

Phase 1 Projects

The adequacy of workers' compensation benefits

Extension of Workplace Safety & Insurance Board Front Line Study

Interaction between workers' compensation and other disability income and support programs

Legal and academic concepts of disability

Lived versus statutory versions of work injury and compensation

Medical evaluation and its consequences

Policy feedback and the direction of workers' compensation policy in Ontario