Freeman Spogli Institute for International Studies Program on Energy and Sustainable Development Stanford University


Evaluating permanent disability ratings using empirical data on earnings losses

Journal Article

Jay Bhattacharya - Stanford University
Neuhauser, F.
Reville, R. T.
Seabury, S. A.

Published by
Journal of Risk and Insurance, Vol. 77 no. 1, page(s) 231-260

Workers' compensation systems are typically designed to assign higher permanent disability benefits to workers with more severe disabilities. However, little or no scientific work exists to guide the design of ratings systems to properly account for the amount of earnings power lost due to disability. In this article, we examine the effectiveness of disability ratings using matched administrative data on ratings and earnings for a large, representative sample of permanent disability claimants in California. We find that while workers with higher ratings do experience larger earnings losses on average, there are large and persistent differences in average earnings losses for similarly rated impairments in different parts of the body. We then explore how adjusting permanent disability ratings to reflect cross-impairment differences in earnings losses can affect the equity of permanent disability benefits. Adjusting disability ratings to account for typical earnings losses reduces cross-impairment differences substantially. The adjusted ratings result in a more equitable distribution of disability benefits across workers with different impairments.