Do High Claim-Denial Rates Discourage Claiming? Evidence from Workers Compensation Insurance

Abstract

If individuals decide whether to file an insurance claim based in part on the expected value of the benefits they will receive, then changes in the probability that a claim will be denied by the insurer will influence the probability that a claim is filed. Increasing claim-denial rates to reduce claim rates and cut costs would be a questionable strategy for an insurance company that marketed policies to the individuals who will file claims. But in the workers compensation insurance market, insurers sell policies to employers, while it is workers who file claims that may be denied. This article examines evidence from a period in the state of Oregon during which workers whose employers were covered by different workers compensation carriers faced different claim-denial rates at the same point in time, and during which the state's largest carrier changed its claim-denial rate dramatically over time. Using this evidence, the author finds that higher denial rates were associated with lower rates of claim filing. F urthermore, this relationship was strong and significant for claims arising from back injuries but insignificant for claims arising from traumatic injuries. Possible reasons for this latter finding are explored. INTRODUCTION Insurance carriers do not accept all the claims made by those they insure. Some claims are denied, whether because the insurer believes that the insured party misunderstood the terms of the coverage, or because the insurer suspects exaggeration of losses or some other intentional fraud on the part of the insured. Standard economic reasoning suggests that in deciding whether to file a claim, the insured individual takes into account this possibility of denial, along with any costs in terms of time and trouble imposed on him or her by the screening process through which the insurer makes the denial decision. Thus, an increase in the probability that all or part of a claim will be denied, or in the delays and requirements imposed on the claimant while that decision is reached, lowers the number of claims filed, Of course, an insurance company competing in a private market would likely be wary of a strategy designed to reduce the number of claims filed by increasing denial rates and/or the rigorousness of claims- screening procedures, as such behavior would potentially lead to a loss of customers to other carriers. Designers and administrators of social insurance programs such as Unemployment Insurance or Social Security Disability Insurance are in a different position, as they do not need to solicit customers for their insurance in a competitive marketplace. When faced with rising costs or concerns with moral hazard on the part of potential recipients, they can raise denial rates by tightening eligibility requirements or enforcing eligibility requirements more stringently, subject only to political pressures from potential recipients and those who represent them. Such increases lower program costs directly by lowering the number of filed claims that are paid. But, as Parsons (1991) has pointed out, an increase in claim-denial rates also acts as a self-screening mechanism, discouraging some potential recipients from even attempting to file a claim. Parsons offers empirical evidence of the claim discouraging effect of rising denial rates in the Social Security Disability Insurance program, as do Helpern and Hausman (1986 ) and Gruber and Kubik (1997). Likewise, Blank and Card (1991) show that the proportion of eligible unemployed workers filing for Unemployment Insurance benefits is lower, other things equal, in states that disqualify a greater percentage of those who actually do file claims. This study looks at another social insurance program, workers compensation insurance, for evidence that claiming is discouraged by higher claim-denial rates. The author examines data on workers compensation claims from the state of Oregon, covering a period during which, because of changes in state law and policy changes by the state's largest workers compensation insurer, there was considerable variation in claim-denial rates experienced by claimants over time, and by different groups of claimants at the same point in time. …