Earnings Losses and Benefit Adequacy in California’s Workers’ Compensation System

A Review of RAND’s Final Report

By Hon. Susan V. Hamilton, Former Assistant Secretary and Deputy Commissioner, California Workers’ Compensation Appeals Board

Ask anyone generally familiar with workers’ compensation what the intended purpose of a workers’ compensation system is and you will be told that it is responsible for providing workers injured on the job with prompt no-cost medical care and indemnity benefits to prevent income loss resulting from the injury. What you are less likely to hear, however, is an equally important responsibility of workers’ compensation systems—to promote favorable labor market outcomes after a work-related injury. Injured workers’ post-injury return to the labor market with little or no loss of income is an indication of successful recovery or rehabilitation. But injured workers’ post-injury earnings losses—the difference between what they earn following an injury and what they would have earned had they not been injured—is an indication that disability benefits may be inadequate, or that return-to-work interventions require improvement. This important policy objective requires regular monitoring of post-injury employment and earnings loss, but in California such monitoring has not routinely been done.

To improve its knowledge about injured workers’ post-injury employment and earnings, the California Department of Industrial Relations (DIR) contracted with the RAND Corporation (RAND) to monitor labor market outcomes for injured workers. The project, which began in 2017, includes an agreement between DIR and the Employment Development Department (EDD) whereby EDD provided RAND with data on employment and wages that was linked with claims data from the Division of Workers’ Compensation (DWC). These data sets enabled RAND to develop a program of on-going monitoring to examine employment and earnings outcomes for injured workers in the years following their injuries. To date the project has produced three interim reports that describe labor market outcomes for workers injured between 2013 and 2017, along with comparisons with labor market outcomes for workers injured during the earlier period 2005 to 2012. The three interim reports demonstrate that employment, earnings, and return to work at the employer where the injury occurred have improved slowly for those injured between 2013 and 2017 but have not returned to the levels observed before the “Great Recession” of 2008-2009. RAND has now released its fourth and final report, Earnings Losses and Benefit Adequacy in California’s Workers’ Compensation System (Estimates for 2005-2017 Injury Dates) (Final Report) by Dworksky, Rennane and Broten (https://www.rand.org/pubs/research_reports/RRA964-1.html). At the outset it is necessary to include an important caveat: the study does not include data and analysis on how the COVID-19 pandemic has impacted injured workers’ post-injury earnings. No doubt, that important question will be the topic of future studies.

RAND’s 156-page Final Report answers four main research questions. First, for workers injured between the years 2005 and 2017, how did earnings losses evolve over time? Second, what is the explanation for earnings loss trends and the slow recovery after the Great Recession? Third, one of the interim reports identified regional differences (Southern California versus the rest of California) in labor market outcomes for workers with cumulative trauma injuries. How can these regional differences be explained? Fourth, for workers injured between 2005 and 2017, how do benefits paid compare with earnings losses and how has the adequacy of benefits changed over time? The following is a summary of the key findings.

Finding One: Overall RAND found that post-injury wage losses of injured workers remain larger than they were before the Great Recession. For workers injured between 2005-2007, earnings in the second-year post-injury were 85% of pre-injury earnings. Workers injured during the Great Recession (2008-2009 ) had second-year post-injury earnings at 80% of pre-injury earnings. For workers injured between 2010-2012, second-year post-injury earnings dropped to 79% of pre-injury earnings. For injuries sustained between 2013-2017, however, there is evidence of slight improvement. Second-year post-injury earnings were 83% of pre-injury earnings. RAND attributes at least part of this recovery to improvements in the economy which allowed for an increase in labor force participation among injured workers. Unemployment rates also fell during this period. However, the findings also show that injured workers were more likely to find new employment opportunities in recent years and less likely to have sustained return-to-work at the at-injury employer.

Finding Two: RAND observes that post-injury earnings losses are not the same for all groups of injured workers. As might be expected, workers with “medical only” claims experienced smaller reductions in their earnings than those who sustained a permanent disability (PD). As of 2016-2017, the employment rate for injured workers with medical-only claims fully recovered to levels seen prior to the Great Recession, albeit at lower rates of at-injury employment and with lower wages. This means that while these workers were highly successful in finding new employment opportunities post-injury, their earnings in those jobs did not recover to pre-injury levels seen prior to the Great Recession.

Injured workers who sustained PD had worse outcomes than those workers with medical-only claims. Workers whose injuries resulted in PD had second-year post-injury earning at 79% of pre-injury earnings for those injured during the years 2005-2007. For workers injured during the 2008-2009 Great Recession, second-year post-injury earnings dropped to 73% of pre-injury earnings, decreasing further for injuries in the period 2010 -2012 to 72% of pre-injury earnings. Workers injured in the period 2016-2017 had second-year post-injury earnings at 73% of pre-injury earnings.

RAND explored a variety of factors to explain these trends, particularly the slower than expected recovery in post-injury earnings following the Great Recession. While much of the initial decline in earnings was associated with economic conditions during the Great Recession, RAND found that even as unemployment rates fell greatly in the general population, the recovery for injured workers remained incomplete. How can this be explained? RAND speculates that the incomplete recovery between pre-and post-injury earnings may reflect broader and more permanent demographic and economic changes, such as an aging workforce and a decline in demand for lower-skilled workers. Although geographic distribution of workers has remained quite constant in California, the industry mix of injured workers has changed significantly. For example, the manufacturing sector has seen a steady decline in its share of workers and the same is true for the share of workers in public sector and education fields. These trends are significant because post-injury earnings in these sectors are generally much higher than in other sectors.

Finding Three: More severe earnings losses were observed for workers with cumulative trauma (CT) injuries, especially those workers located in the Southern California counties of Los Angeles, Orange, Riverside, San Bernardino and Imperial (Southern California). RAND compared CT claims filed in Southern California with CT claims filed in other regions of the state and identified several important differences in the characteristics of the claims. Southern California CT claims were more likely to involve multiple body parts, have legal representation, and have a lien or lien claims associated when compared to CT claims originating in other regions of California. Additionally, Southern California CT claims were more likely to be filed after the worker had separated from employment and to involve workers in hospitality, retail and manufacturing sectors. RAND also discovered that workers with CT claims in Southern California had lower pre-injury earnings, were less likely to work for a self-insured employer, and were more likely to have received PD benefits. For these Southern California workers, post-injury earnings were 70% of pre-injury levels for those injured in the period 2005-2007. Workers with CT injuries immediately after the Great Recession (2010-2012) had post-injury earnings at 56% of pre-injury levels. Workers injured during the period 2016-2017 had post-injury earnings at 67% of their pre-injury earnings. RAND reports that the timing of the 2016-2017 era increase in earnings coincides with legislative anti-fraud activities especially directed at lien claims and medical providers. It recommends further research to verify whether removing fraudulent medical providers from California’s workers’ compensation system directly contributed to improved economic outcomes for these workers.

Post-injury earnings losses for workers with CT injuries in other parts of California were significantly less than the losses of their Southern California counterparts. In large part, their CT injury claims did not replicate the same characteristics of a Southern California CT claim. That is, these CT claims were less likely to involve multiple body parts, have legal representation, involve lien claims and be filed after separation from employment. Workers injured during the period 2005-2007 had post-injury earnings at 76% of pre-injury level. Workers injured during the Great Recession (2008-2009) had post-injury earnings at 72% of pre-injury levels. Workers injured during 2016-2017 had post-injury earnings at 74% of pre-injury levels.

RAND concludes its discussion of Finding Three with an observation and a recommendation. Because its analysis indicates that workers with CT injuries in Southern California appear to be particularly vulnerable to economic downturns, RAND cautions that it is even more important to closely monitor outcomes for these workers during and after the end of the COVID-19 pandemic.

Finding Four: RAND examined benefits paid over five years post-injury and compared the amounts of benefits paid with earnings losses over the same time period. Not unexpectedly, RAND found that benefit adequacy declined during the Great Recession, especially for workers with PD. However, even after the increase in benefit payments under Senate Bill 863 took effect, wage replacement rates did not improve as much as expected. This finding was surprising to RAND since a major objective of Senate Bill 863 was to improve benefit adequacy for permanently disabled workers. Earlier studies, including RAND’s 2016 study anticipated that implementation of Senate Bill 863 would result in an increase in the after-tax wage replacement rate by 21.4%, driven primarily by the higher maximum weekly benefit amount. The Workers’ Compensation Insurance Rating Bureau (WCIRB) similarly projected large increases in PD benefits following implementation of Senate Bill 863.

To validate this unexpected finding, RAND carefully explored factors that might have impacted the result. For example, if claims administrators failed to pay the statutory benefit increases enacted under Senate Bill 863, benefit payments would be less than expected. However, paid PD benefits data from DWC and the WCIRB confirm that the statutory benefit increases were included in PD payments during the study period. Next, RAND examined whether PD ratings increased in line with the statutory changes enacted by Senate Bill 863. Data from DWC’s Disability Evaluation Unit confirms increases in PD ratings after implementation of Senate Bill 863. RAND also considered whether higher PD ratings could have resulted in PD benefit payments that extended more than five years post-injury. Since this study measured wage replacement rates over the first five years post-injury, the payment of PD benefits more than five years post-injury might underestimate the overall impact of Senate Bill 863 on benefit adequacy. RAND was able to confirm, however, that for the majority of workers with PD in their analysis, increases in paid PD benefits resulting from Senate Bill 863 are likely to be fully observed by five years post-injury.

While RAND did identify an increase in benefits overtime following the Great Recession, the majority of the increase in benefits came from settlements, especially medical settlements, rather than increases in PD benefits.

RAND admits that there is a plausible explanation for why PD benefits did not increase as much as anticipated by the enactment of Senate Bill 863, and that is apportionment. This study, however, did not examine the impact of apportionment of disability to non-industrial cause on benefit adequacy. Nonetheless, RAND acknowledges that increases in statutory benefits create strong incentives for claims administrators and defense attorneys to encourage evaluating physicians to apply apportionment when possible. Since apportionment can have a substantial impact on final ratings and PD benefits, RAND recommends future study of this topic.

Finally, RAND found that wage replacement rates would have been even lower without payments from special funds administered by DIR, including the Subsequent Injury Benefit Trust Fund and the Return-to-Work Supplement Program.

Policy Implications and RAND’s Final Recommendations

RAND concludes the Final Study with a brief discussion of policy implications and a recommendation. RAND identifies the adequacy of workers’ compensation benefits as the overarching policy concern to be addressed. California’s recent efforts to improve benefit adequacy (Senate Bill 863) have not fully accomplished the goal, but there are several options that policymakers may want to consider. The first option is to increase benefits. The second option is to reduce post-injury earnings loss through increased earnings and employment for disabled workers. The second option provides an opportunity for policymakers to incentivize and increase sustainable employment through such mechanisms as wage subsidies and other reimbursements for employers who provide work opportunities for injured workers. A third option is the increased use of special funds, which are designed to assist workers with the most severe disabilities or poor return-to-work outcomes.

RAND strongly recommends that ongoing monitoring of labor market outcomes continue as a key component of California’s workers’ compensation system. It bolsters this recommendation with the observation that following the Great Recession the overall economy improved and it would have been reasonable to assume that injured workers’ employment and earnings outcomes would reflect the same improvement. However, the Final Study revealed that improvements in outcomes for injured workers were slower than the overall economy. Ongoing monitoring will provide valuable information to assist policymakers in achieving its goal to help injured workers recover and thrive.

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