The Impact of Workers’ Compensation Experience-Rating on Discriminatory Hiring Practices

Abstract

The widespread adoption of experience-rating has been a major trend in workers’ compensation systems for over a decade (O’Grady 1999). Under this approach, a firm’s insurance premium rate for its industry or class is adjusted upwards or downwards to reflect the costs of the insuranc e claims made by that firm’s workers. Firms that have higher-than-normal claims levels are punished with a penalty, paid on top of their base premium. In contrast, firms that have lower-than-normal claims levels are rewarded with a partial rebate (discount) of their base premium. Many workers’ compensation authorities across the United States, Canada, Australia, and New Zealand adopted experience-rating as a pricing mechanism to encourage employer investment in hazard prevention measures. Although earlier research (e.g., Chelius and Smith 1983) indicated that experience-rating was not associated with improved health and safety performance in the United States, the evidence from more recent studies suggests that experience-rating reduces fatalities in Canada (Bruce and Atkins 1993), lowers the reported accident rate in Canada (Thomason and Pozzebon 2002) and the United States (Worrall and Butler 1988), shortens claim duration in the United States (Krueger 1990), and encourages better safety practices in Canada (Kralj 1994). However, most researchers have been cautious about crediting experience-rating for lowering overall actual injury rates, because experience-rating provides incentives for injury under-reporting (McClintock 1994; Samaras 2001) and undesirable employer activities, such as the contracting out of hazardous activities and excessive claims management (Kralj 1994). Before experience-rating becomes further entrenched in the workers’ compensation system, understanding any other unintended, negative side effects remains important.