Why is work comp wage replacement capped, part 2

There are some differing opinions on this issue; I heard from several colleagues with different views on wage replacement caps; two somewhat different perspectives are provided below. [original post and reader comments are here]

From Bruce Wood – former Vice President and Associate General Counsel at AIA; retired after 27 years, currently consulting (AIA is a client):

The amount of the maximum weekly benefit amount (WBA) is a major cost element in workers’ compensation. Industry (surely, AIA) policy has always deferred to business and labor on the amount of the maximum WBA, lest the insurance industry be accused of seeking to inflate insurance premiums by supporting more generous benefits. It would be interesting to see if many others in the business community go along with increasing the maximum, much less completely eliminating it even for workers with annual incomes of hundreds of thousands of dollars, who typically have alternative sources of income support.   I would expect policyholders to be reluctant to accept this increased expense.  

All states have a maximum WBA, in nearly all instances indexed to a percentage of the statewide average weekly wage (SAWW). Most – 36 — today cap benefits at 100 percent of SAWW.  Sixteen states exceed 100 percent, with one at 200 percent.  Eleven states fall below 100 percent; and the maximum temporary total disability benefit in two states is a fixed dollar amount that can be changed only by the legislature.  In the early 1970s, when the National Commission issued its report, many states did not use a maximum WBA equal to even two-thirds of SAWW.  The Commission recommended an immediate step-up to two-thirds, with a phased increase thereafter, to 100 percent (by 1975), 133 1/3 percent (by 1977), 166 2/3 percent (by 1979), and 200 percent (1981); and it further recommended the maximum be indexed annually (for new injuries) to the state’s current average weekly wage.  After the Commission report, the states all raised their maximums, but as noted few were willing to go above 100% because a higher maximum is very costly. Nowhere in the Commission’s narrative is there consideration for eliminating any cap.  Thus, the Commission seems to have accepted the premise that some cap on benefit levels was essential in balancing overall system costs and in lending greater actuarial predictability to those costs. Public policymakers need to obtain actuarially credible pricing estimates before reaching any conclusions about raising, let alone eliminating, any cap.

It should be noted that any serious consideration to significantly increasing benefit caps should necessarily include examination of the wage replacement rate (typically 2/3 of gross pay) as well as using net pay rather than gross pay as the wage base. The National Commission recommended that states adopt a net pay basis for benefits, at 80 percent of “spendable income.” The Commission’s recommendation took cognizance that workers’ compensation indemnity benefits are not subject to income and payroll taxes, and thus a more generous WBA for higher income individuals may reduce return to work incentives by replacing a higher percentage of pre-injury net pay, or in some cases, exceeding it. Replacing a percentage of net pay would better-preserve return-to-work incentives and more equitably pay benefits to workers in different income tax brackets.     

As with everything in comp, it is all more complex than might appear.

From a current C-suite Executive and former Chief Claims Officer:

I’ve been asking this question [why is there a limit pegged to AWW] since I was a 22 year old claim trainee and have pissed off a number of insurance executives and mid-level managers in the process of simply being honestly curious.   The pricing argument is a red herring – with loss data and payroll data available to the level of detail it is, I don’t buy it.   I’ll take the question a step further…why do some states limit the number of weeks of indemnity for someone who remains off work and is legitimately disabled?  Seems to be against the concept of equity and the ‘grand bargain’ that was originally intended.

Wonder why we as an industry have the reputation we do????

What does this mean for you?

It’s always helpful to hear different opinions from folks with deep, relevant experience.

7 thoughts on “Why is work comp wage replacement capped, part 2

  1. I assure your readers the wacky liberal IL WC system lost the “caps” referred to in this article via our reviewing courts and our Rate Adjustment Fund. By that I mean, a worker in IL has been awarded both wage loss differential benefits and lifetime total and permanent disability benefits. The RAF or rate adjustment fund will also provide cost-of-living payments from a separate fund/levy on IL business and government.

    Another worker also received total and permanent disability benefits and amputation loss arising from the same injury. The same worker will receive RAF monies also.

    For years, most IL WC participants felt the most any worker could get was T&P benefits because the employer or insurance carrier would owe them for life. Our courts were not so constrained, causing lots of confusion and consternation.

  2. I’ve looked at the weekly cap issue with the help of Terry Bogyo. The cap design (% of AWW in the state) is methodologically out of date for about 30 years. If there is a cap, it should be a “percentile” figures, such as the 90% percentile. The caps were first introduced 100 years ago to assure legislators that WC benefits were to be focused on regular workers, not bosses. That makes sense. Today, one might say that WC is not designed for a hedge fund manager who trips entering the Harvard Club in New York City. The argument that caps avoid high costs could be used to argue, say, that back injuries should be removed from WC coverage because they entail high costs. The WCRI did a study of caps the other years which ignored the impact on workers; it was entirely focused on the financial impact on payers.

  3. Thanks Joe, this topic offers a great opportunity for a philosophical discussion as there is a wide disparity in benefits across states and in the opinions of those involved.

    I’m more of a tenth amendment, states rights kind of guy. Let the state legislatures decide the level of benefits (continue to let the pundits, industry researchers, unions and employers contribute to the discussions). Depending on your point of view some states will get it more right than others. As we’ve seen in many many instances, the courts have a way of keeping things in check.

    I don’t buy the argument that capping AWB or limiting the number of weeks of benefits somehow violates the concept of the “grand bargain”. I’ve never read anything about the rise of the workers compensation system that would suggest this “bargain” would or should guaranty life-time uncapped benefits.

    The “grand bargain” simply means that both workers and employers MAKE CONCESSIONS in order to avoid the less favorable civil litigation approach.

    If workers are guaranteed life-time uncapped benefits, for injuries that in some cases occurred through no ones fault but their own, where’s the bargain for employers in that?

  4. There is also the incentive argument in workers compensation systems. Caps are caps – they are arbitrarily selected to balance costs and benefits. Are they fair ? I’ve learned “fairness” is in the eye of the beholder – it all depends on which side you sit.

    More important, caps serve to provide an incentive to healing and returning to work (really full life capacity, not just “work”). Our workers compensation systems were never designed to make someone whole – they are designed to eliminate questions of liability, provide immediate and reasonable medical care and to provide assistance to get back to where you were.

  5. For most every other line of coverage, we can choose the limits of coverage. For example, there is a state minimum for auto liability, but individuals and employers can buy more if they want. Why can’t we do the same thing for workers’ comp?

  6. Many employers (large employers anyway) have a top up plan that salaried employees are eligible for to bring them up to full or close to full wages for a period of time just because of this problem. Wonder just what the prevalence really is.

  7. Here’s a piece of news that no one seems to know. In NCCI rating states and maybe in others, employer premiums are paid on every dollar of gross payroll. So if an individual worker earns more than enough to exceed the max comp rate, the employer is paying for a higher amount but the insurer is not paying a higher amount. At least in NCCI states, eliminating the Max comp rate wouldn’t cost employers but it might cut into excess profits of carriers. And by the way, in 2013 Florida exempted WC carriers and only WC carriers from having to return excess profits.

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