Predicting Disputes in Workers' Compensation

Abstract

The author uses claims data from the Michigan Bureau of Workers' Disability Compensation to examine what type of workers' compensation cases are most likely to be contested. Logit regression results indicate that how a claim is handled is the most important factor. Uncertainty about recovery increases the likelihood of dispute but can be mitigated by claims handling. Claimant labor market alternatives and strength of the employment relation affect the likelihood of disputes. But, claims handling appears to vary with employment relation and may be the more decisive factor. While most work-related disabilities are of short duration and involve straightforward claims on the workers' compensation system, a significant percent are disputed. For example, in the State of Michigan, an estimated 12% involve some type of dispute. These disputes dramatically increase the social, monetary and personal costs of disability. Despite much discussion of their prevalence, little is known about what type of cases are most likely to involve disputes. More attention has been devoted to the relationship between benefit levels and the return to work decision, and the effect on employer costs (Chelius and Kavanaugh, 1988; Hunt, 1982; Viscusi, 1980; Worrall and Appel, 1982; Worrall and Butler, 1985), as well as how to reduce employers' costs (Miron, 1989). This paper examines what type of claims are likely to be contested, using data from the claims files of the Bureau of Workers' Disability Compensation for the State of Michigan (BWDC). Disputes in Workers' Compensation The primary objective of the workers' compensation system is to provide income during a period of disability to workers injured on the job or who develop work-related illnesses. Although it was expected that some disputes would be inevitable, this insurance system was designed to minimize the need for litigation over liability for work-related injuries and illnesses while providing basic income security to disabled workers. The Michigan workers' compensation claims process begins on the date of injury or disablement with the worker filing a claim against the firm's insurer. If there is no dispute, the insurer begins paying wage replacement benefits after the statutory waiting period plus medical costs. The employer may, however, dispute a claim by filing a Notice of Dispute. The Notice of Dispute may just challenge a detail of the case or assert that the firm has no liability, an effective denial of the claim. By law, this is the employer's decision; however, many employers rely on their insurers and insurer practices for guidance. If the dispute is substantive, the claimant can request a hearing before a workers' compensation magistrate to start or restart benefits. At this point, the claim is termed a case. A case may be settled or dropped before it is heard. It may be settled at a hearing, or the final step may be the submission of the claim to the Appeal Board. Typical reasons for conflict include: whether or not the injury is work-related; whether or not recovery has occurred; and, less frequently, whether or not the worker refused a legitimate offer of employment. Michigan is primarily a wage-loss state, where disability is defined in terms of limitation on earning capacity and benefits are paid on the basis of lost wages. Thus, the degree of impairment is rarely an issue, in contrast to most states which use impairment rating schemes. However, in contested cases that are settled in the form of a single lump-sum payment, the severity of injury is an implicit factor in settlement size. These sources of conflict are the outward manifestations of a fundamental source of conflict in workers' compensation; that is, the availability of disability income converts a medically-based problem into a labor supply decision that is vulnerable to the problem of moral hazard. Employers are often suspicious of the legitimacy of the disability, whether or not recovery has occurred, and/or whether workers are actually healthy but using workers' compensation as paid vacation or retirement benefits (Parsons, 1984). …