Chapter 7. Workers’ Compensation. Major Topics. Overview of Workers Compensation Workers Compensation Legislation Workers Compensation Insurance Injuries and Workers Compensation Disabilities and Workers Compensation Cost Reduction Strategies. Rationale for Workers’ Compensation.
Chapter 7 Workers’ Compensation
Major Topics • Overview of Workers Compensation • Workers Compensation Legislation • Workers Compensation Insurance • Injuries and Workers Compensation • Disabilities and Workers Compensation • Cost Reduction Strategies
Rationale for Workers’ Compensation • Allows injured employees to be compensated appropriately without having to take their employer to court. • Rationale: • 1. Fairness to injured employees, especially those without the resource to undertake legal actions that are often long, drawn out and expensive. • 2. Reduction of costs to employers associated with workplace injuries (legal, image, and morale costs). • No fault approach to resolving workplace accidents.
Objectives of Workers Compensation • Replacement of income (2/3 of income without taxes in most states) • Rehabilitation of injured employee (provide needed medical care at no cost to worker until fit to return to work, vocational training or retraining – motivate employee to return to work) • Prevention of accidents (employer will investigate accident prevention programs to hold down compensation costs – fewer accidents – lower insurance premium) • Cost allocation (high risk industries pay higher workers’ compensation insurance premiums than low risk industries).
Employees who may not be covered by Workers’ Compensation (coverage varies from state to state) • Agricultural employees • Domestic employees • Casual employees • Hazardous work employees • Charitable or religious employees • Employees of small organizations • Railroad and maritime employees • Contractors and subcontractors • Minors • Extraterritorial employees
Contributory Negligence • Means that the injured worker’s own negligence contributed to the accident. Even if the employee’s negligence was a very minor factor, it was usually enough to deny compensation in the days before workers’ compensation.
Assumption of Risk • If an employee knew that the job involved risk, he or she could not expect to be compensated when the risks resulted in accidents and injuries.
Reason for Unprecedented Increase in Medical Costs in the United States • 1. Technological developments that have resulted in extraordinary but costly advances in medical care – X-ray machine that costs thousands of dollars has been replaced by magnetic resonance imaging (MRI) machine that costs millions. • 2. Proliferation of litigation that has driven the cost of malpractice insurance steadily up – multimillion dollar settlements. • Expensive malpractice suits force medical practitioners to be increasingly cautious and order even more tests than a patient’s symptoms may suggest. Tests involve expensive new technologies adding to the cost of medical care.
Three Types of Workers’ Compensation Insurance • 1. State Funds (in some states – see fig 7.1, page 145) • 2. Private Insurance • 3. Self Insurance • Rates are affected by several different factors: • Number of employees • Types of work performed (risk involved) • Accident experience of the employer • Potential future losses.
Insurance Companies Methods in determining premium rates of employers • 1. Schedule rating: evaluate employer’s condition against baseline – credit for being better, debit for conditions that are worse – insurance rates are adjusted accordingly. • 2. Manual rating: rates for various occupations. Overall rate for employer is combination of individual rates. • 3. Experience rating: premium rates are based on predictions of average losses for a given type of employer and experience over the past three years.
Determination of Serious Injury • A harmful environment does not have to be limited to its physical components. Psychological factors (such as stress) can also be considered. The highest rate of growth in workers’ compensation claims over the past two decades has been in the area of stress related injuries. • Over 30 percent of all disabling work injuries are the result of overexertion, when all industry categories are viewed as a composite. • The next most frequent cause of injuries is struck by/struck against objects at 24 percent. • Falls account for just over 17 percent. • The remainder is fairly evenly distributed among other accident types.
AOE and COE Injuries • Workers’ compensation benefits are owed only when the injuries arise out of employment (AOE) or occur in the course of employment (COE). • When employees are injured undertaking work prescribed in their job description, work assigned by a supervisor, or work normally expected of employees, they fall in the AOE category. • If a technician brings a damaged printed circuit board from her home stereo to work and burns her hand while trying to repair it, the injury would not be covered because the accident did not arise from her employment.
Distinguish between Employee and Independent Contractor • A person who is on a company’s payroll, receives benefits, and has a supervisor is an employee. • A person who accepts a service contract to perform a specific task or set of tasks and is not directly supervised by the company is not considered an employee. Employers who use independent contractors sometimes require the contractors to show proof of having their own workers’ compensation insurance.
Temporary Disability and Permanent Disability • Temporary disability is the state that exists when it is probable that an injured worker who is currently unable to work will be able to resume gainful employment with no or only partial disability. • Permanent disability is the condition that exists when an injured employee is not expected to recover fully.
Permanent Partial Disability: Whole person, wage loss, and loss of wage earning capacity • Whole person theory: What a person can do after recuperating from an injury is determined and subtracted from what he or she could do before the accident. Factors such as age, education, and occupation are not considered. • Wage loss theory: The employee is awarded a percentage of the difference between the wages actually being earned and what could have been earned had the injury not occurred. No consideration is given to the extent or degree of disability . • Loss of Wage-Earning Capacity Theory: Factors considered include past job performance, education, age, gender, and advancement potential at the time of the accident. Once future earning capacity has been determined, the extent to which it has been impaired is estimated, and the employee is awarded a percentage of the difference .
Medical and Vocational Rehabilitation • Whether the rehabilitation services are medical or vocational in nature or both the goal is to restore the injured worker’s capabilities to the level that existed before the accident. Both are available to injured workers. • Medical Rehabilitation: consists of providing whatever treatment is required to restore to the extent possible any lost ability to function normally. This may include such services as physical therapy or the provision of prosthetic device. • Vocational Rehabilitation: involves providing the education and training needed to prepare the worker for a new occupation.
Medical Management of Workplace Injuries • Out of control workers’ compensation claims have led states to merge the concept of worker’s compensation and managed care through the creation of Health Partnership Programs (HPPs). HPPs are partnerships between employers and their state’s Bureau of Worker’s Compensation (BWC). A managed care organization (MCO) provides medical management of workplace injuries. • When a workplace injury occurs or an illness manifests itself the employee reports it to the employer and seeks initial medical treatment. The employer informs the MCO. The MCO works with employers, injured workers, health care providers and BWC.
Three approaches for settling workers compensation claims • 1. Direct Settlement: The employer or its insurance company begins making what it thinks are the prescribed payments. The insurer sets the period over which payments will be made. Both factors are subject to review by the designated state agency. • 2. Agreement Settlement: The injured employee and the employer or its insurance company work out an agreement on how much compensation will be paid and for how long. Typically the agreement is reviewed by the designated state agency. • 3. Public Hearing: An injured worker can request a hearing. The hearing commission reviews the facts surrounding the injured worker’s case and renders a judgment concerning the amount and duration of compensation. Should the employee disagree with the decision rendered, civil action through the courts is an option.
Theory of Cost Allocation • Cost allocation is the process of spreading the cost of workers’ compensation across an industry so that no individual company is overly burdened. The cost of workers’ compensation includes the costs of premiums, benefits, and administration. • Cost allocation is based on the experience rating of an industry. Cost of workers compensation for a bank is less than ½% of gross payroll. For a ceramics manufacturer the percentage may be as high as 3 or 4 %.
Problems with Workers Compensation • On one hand there is evidence of abuse of the system. • On the other hand many injured workers who are legitimately collecting benefits suffer a substantial loss of income. • Even though the benefits awarded for stress claims are less than those awarded for physical injuries the cost is higher because of the litigation. • The amount of wages paid to workers in most states is 66 percent. • California saw a caseload increase by 40,000 in one year.
Workers Compensation Reform • Key to reforming workers compensation is finding a way to allocate more of the cost to benefits and medical treatment and less to administration and litigation. • Stabilizing workers compensation costs over the long term. • Streamlining administration of the system. • Reducing the cost associated with the resolution of medical issues. • Limiting stress related claims. • Increasing the benefits paid for temporary and permanent disabilities.
Workers’ Compensation Cost Reduction Strategies • The best way is to maintain a safe and healthy workplace, thereby preventing injuries that drive up the costs. • Stay in touch with the injured employee, answer all their questions, and try to maintain their loyalty to the organization. • Have a return to work program and use it. The sooner an injured employee returns to work, even with a reduced workload, the lower the workers’ compensation cost will be. • Determine the cause of the accident. The key to preventing future accidents is to determine the cause of the accident, and eliminating it.
Summary • Workers compensation was developed to allow injured employees to be compensated without the need for litigation. • There are 3 types of workers compensation insurance: state funds, private insurers, and self insurance. • Workers compensation applies when an injury can be classified as arising out of employment (AOE). • Employees are provided direction (supervision) by the employer and contractors are not. • Injuries fall in one of 4 categories: temporary partial disability, temporary total disability, permanent partial disability, and permanent total disability. • For workers who are fatally injured, spouses receive benefits for life or until remarriage. Dependents receive benefits until legal age of maturity. • Cost reduction strategies include staying in touch with the injured employees and determining the causes of accidents.
Home Work • Answer questions 1, 3, 6, 8, 13, 15, and 20 on page 163. • 1. Explain the underlying rationale of worker’s compensation as a concept. • 3. List the 5 types of employees who may not be covered by worker’s compensation. • 6. Explain the reasons for the unprecedented increase in medical costs in the United States. • 8. Insurance companies use one of 6 methods for determining the premium rates of employers. Select 3 and explain them. • 13. Explain the following theories of handling permanent partial disability cases: whole person, wage loss, and loss of wage earning capacity. • 15. What are the 3 approaches for settling workers’ compensation claims? • 20. Explain the most common workers’ compensation cost-reduction strategies.