Permanent Partial Disability Awards and Wage Loss

Physicians handling workers compensation cases serve in a dual capacity not required of physicians treating non-workers compensation cases. Not only are they are asked to treat the workers’ injuries and disability symptoms, but they are also frequently asked to evaluate the extent of economic damage done to a worker via the assignment of an impairment rating to certain types of injuries. Although physicians are trained to treat traumatic injuries as well as the symptoms of cumulative trauma processes, they generally receive no training in disability evaluation. The authors examine physicians’ ability to carry out their latter, “lost earnings capacity” assessment, role. Their multivariate regressions indicate that physicians’ impairment ratings are poor guides to subsequent wage loss; impairment ratings explain no more than one-half of 1 percent of subsequent wage loss. PERMANENT PARTIAL INJURIES IN MINNESOTA Workers’ compensation insurance pays both healthcare benefits and disability benefits to workers injured on the job. Physicians handling workers’ compensation cases serve in a dual capacity not required of physicians treating non-workers’ compensation cases. Not only are they asked to treat the workers’ injuries and disability symptoms, but they are also frequently asked to evaluate the extent of economic damage done to a worker via the assignment of an impairment rating to certain types of injuries. Although physicians are trained to treat traumatic injuries as well as the symptoms of cumulative trauma processes, they generally receive no training in disability evaluation. In many states, such as Minnesota, physicians use guidelines to determine an impairment rating that is frequently taken as a proxy for potential wage loss. Richard J. Butler is professor of economics at Brigham Young University in Provo, Utah. Yong-Seung Park is assistant professor of business administration at Kyung Hee University, Korea. The authors are grateful for computing support and comments on earlier drafts of this article by the Minnesota Department of Labor and Industry, especially those of Kate Kimpan. Anonymous referees also made excellent suggestions on earlier drafts of the article. 332 THE JOURNAL OF RISK AND INSURANCE Generally the doctor giving the worker a rating is necessarily going beyond his medical training—i.e., the doctor is “out of school”—when making the assessment of damage sustained by the “out-of-work” injured employee. This article addresses whether impairment ratings assessed by physicians are a good guide of lost wages; namely, is a doctor’s medical training helpful in assessing economic damage sustained by a claimant? Following an injury on the job, all workers with lost-time claims (including the most severely injured) initially receive temporary total disability pay to partially compensate for lost wages after a short waiting period. These benefits generally continue until they return to work or, for the severely injured, until the worker’s medical condition has stabilized at what is known as the point of maximal medical improvement (MMI). At the point of MMI, workers with residual medical impairments are divided into two groups: those whose injuries preclude any gainful employment are classified as permanent total claims, while those whose injuries allow them to return to work are classified as permanent partial disability claims.1 Permanent total disabilities are relatively rare, accounting for only about .3 percent of all national worker compensation claims receiving some type of disability pay, but because of their severity, permanent total disabilities account for about 6 percent of total system costs. Permanent partial disabilities, on the other hand, account for 23 percent of national disability claims and 63 percent of total claim costs (Appel and Borba, 1988, p. 4). Nineteen states, including Minnesota, from which the authors’ sample was drawn, use an impairment rating approach to help determine benefits.2 The impairment rating approach to compensating permanent partial injuries is based on the physical or mental impairment of the claimant at the point of maximum medical improvement. The impairment assessment is generally expressed as a percentage that indicates the extent to which the injury limits motion, sensory perceptions, or physiological function. The assessment is made without regard to the claimant’s vocation, age, or skill level. Hence a concert pianist would receive the same workers compensation benefits as the college professor for loss of the left hand, even though the latter’s earning capacity was not affected as much by the injury. This is because the award is made prospectively, before actual wage losses are observed. The data used in this study come from workers compensation claimants in Minnesota, where physicians’ assessments are based on the Minnesota Permanency Schedule. This schedule was intended to make more objective the evaluation of whole-body disability associated with particular medical conditions in order to decrease litigation and other friction costs associated with disagreement about disability ratings among the system participants. Under the 1984 Minnesota Permanency Schedule, any condition without a specified rating was rated like the most similarly rated condition (the process in effect during the authors’ 1989 sample period). One complicating aspect of Minnesota permanent partial disability (PPD) benefits was a two-tier reimbursement system in effect during the authors’ sample period. The 1983 1 Those claimants whose injuries are classified as permanent partial do not all return to work. Some of the permanent partial claimants collect Social Security Disability Insurance benefits. 2 For more information on how permanent partial injuries are compensated, including alternatives to the impairment rating system, see Burton (1997), Welsh (1994), and WCRI (1999). PERMANENT PARTIAL DISABILITY AWARDS AND WAGE LOSS 333 workers compensation legislation included a two-tier reimbursement formula to determine for PPD benefit amounts. This system stayed in effect until October 1995. Under this system, there are two types of reimbursement: impairment compensation (IC) and economic recovery compensation (ERC). ERC is used when an employer has not offered an injured employee a suitable job within 90 days of that employee having reached MMI. IC benefits are lower than ERC benefits to encourage employers to find suitable employment for their injured workers. This statute led to much dispute about the definition of the suitability of the job offered, both in terms of the work and the wages. If an employee with a permanency rating was offered a suitable job within 90 days of MMI, the compensation for his or her permanency was determined by the schedule in Table 1, below. The amount was determined by multiplying the number of PPD points by the appropriate dollar amount on the IC table. The money was paid to the employee in a lump sum after 30 days of work were completed successfully. If the employer offered a suitable job, and the employee refused it, the IC amount was awarded for the permanency as determined by Table 1 but given to the worker at the same rate as his or her temporary total disability (TTD) benefits and not in a lump sum. TABLE 1 Impairment Compensation (IC) Schedule Percentage of Disability $ Amount per Point