Why is work comp wage replacement capped?

That’s a question that’s been bouncing around between my neurons for some years.

These neurons finally fired intelligently when I got an email from good friend Todd Brown. Todd is Medata’s Compliance and Regulatory Affairs Practice Leader and he tracks pretty much everything and anything going on in work comp regulatory and legislative affairs around the country.

Todd’s latest summary included news that several states just re-set the maximum wage replacement payout for workers comp patients who are not working.

I don’t understand, or more accurately, don’t “get” why workers who make more than a certain arbitrarily set amount don’t get adequate wage replacement when injured and out of work. If you make more than the “AWW” (average weekly wage) you likely have expenses higher than folks who make less than the AWW, expenses that won’t be covered by even the maximum payout in most states.

So, Todd being way smarter than me on this, I asked him for his take.  Here’s what he said:

In fact in my 30 years in this business I have never seen serious discussion regarding the capping issue except for the number of weeks for certain benefit types.  As far back as I can research I have not come across the reasoning behind it.  My supposition is that it makes the pricing of policies easier for actuaries.  But that is just a guess.  Years ago it wasn’t much of an issue as the gap between the high wage earners (excluding corporate officers) and low wage earners was not what it is today. 

In 1970 a senior level professional made 3.6 times what the entry level person made.  Today the senior level professional makes 6.6 times

In 1970 mid level professional made 1.9 time what entry level person made.  Today the mid level makes 4.3 times

As the wage gap continues to widen between professionals and unskilled the situation will continue.  For those at the bottom rung the statewide cap based on AWW will not affect them but for those midway and up the statewide cap based on AWW will be adversely affected.  

Unless I’m missing something this seems eminently unfair.

6 thoughts on “Why is work comp wage replacement capped?

  1. Hi Joe,

    This is just a guess, but it may have been put in place as an incentive for injured workers to want to return to work. How quickly would injured workers want to return to work, if they were receiving full pay to remain at home? Also, another possible factor is that IRS does not consider WC benefits to be taxable income. Therefore, if an employee were paid their entire wage, by the WC carrier, they would in fact be receiving a greater benefit than they should be entitled to receive.

    • Hi Steve- thanks for the note. I don’t think this is about full wage replacement, but rather giving the same percentage for workers who make above the current limit. Thus, someone making twice as much as the average worker would still get only 66% (or whatever %) of their weekly wage.

  2. Joe
    I brought this up in an article I wrote back in April on how WC needs to evolve. It doesn’t make sense to me either.

    http://insurancethoughtleadership.com/how-should-workers-compensation-evolve/

    Because of those caps, if a worker earning higher wages suffers a WC injury the results could be financially devastating. This is not just a white-collar issue either. Skilled laborers like carpenters, electricians, plumbers, ironworkers, etc often can earn above the benefit cap. Same for truckers and a number of other occupations. The benefit cap is under $1000 in almost every state, meaning that anyone earning over $78,000 a year hits the cap (assuming benefits are 2/3 of wages).

    When Peter Rousmaniere did his study on the financial impact of WC claims last year he focused on the impact for people below the benefit cap. But the impact is much more for those earning above the cap.

    With increased talk about benefit adequacy in workers’ compensation I am surprised this is not getting mentioned more.

  3. There are clear moral hazard issues to the size of benefits. The cap is likely one of the reasons that we see fewer claimants on time-loss who are high earners. It is generally accepted that SSI and to a degree workers’ compensation have in some locales become a de facto wage replacement driven by economic rather than actual disability issues. See:

    http://www.cbpp.org/research/geographic-pattern-of-disability-receipt-largely-reflects-economic-and-demographic-factors

    Having over the years been involved in some private disability cases of high earners, they are challenging to say the least. Raising the percentage of wage replacement and the ceiling is a political act that will impact behaviors and the system at large, regardless of one’s personal beliefs on the matter.

  4. Well….all intetesting…if a state, such as Virginia, puts a cap on wage replacement if unemployed due to lay off/ reduction in force by their employer and one made way over in salary prior to their layoff …and is fortunate enough to be approved and accepted to receive unemployment benefits lower than their salary they had due to the cap…what does that do motivationally or better yet intrinsically to the person whether it be unemployment benefits paying them…or in theory if cap on workers’ comp for lost wages if that is capped ? Bottom line…it is all dependent on if one has the reserves and knowledge to float and make it with the cap instilled…or they need to evaluate their injury and goal to return to their life with the salary they have accomplished to keep/maintain their life style or….this is called intrinsic motivation for a person to choose…or end up with no job to come back to which will end them up once MMI is done and/or employer accepts their perm mod duty restrictions with RTW….and then lays them off due to business needs and thus said …they then typically qualify for unemployment…which is more cost effective for an employer than workers’ comp payouts….

  5. Joe,

    I have been an actuary for over 40 years. Higher maximum weekly benefits would not make my job much harder in setting rates or reserves. The higher amounts would increase the average loss, the variance of the loss data, and impact the loss development patterns as a new group of claimants would see higher wage replacements. In my experience, it is often business that argues to keep the max at 100% of the AWW rather than 150% or 200%. They are concerned with the overall cost of workers’ compensation, which would be adversely impacted by a higher maximum. They are not concerned with who would be positively impacted. I know that I cannot afford to stay out on WC in my high benefit state of CT.
    I believe that the origin of this issue may go back to the design of WC back in 1913 or so. Benefits were very low through the early 1970’s when actuaries used to think 5 years of loss development was at ultimate. That changed in 1972 with the WC Commission that was chaired by Senator Jacob Javits. The Commission talked of very inadequate benefits to claimants, which prompted the legislatures in almost all states to significantly increase benefits. Benefits were further liberalized through the 1980’s when premiums rose significantly.

Leave a Reply

Your email address will not be published. Required fields are marked *