Academic journal article Journal of Risk and Insurance

Compensation Alternatives for Occupational Disease and Disability

Academic journal article Journal of Risk and Insurance

Compensation Alternatives for Occupational Disease and Disability

Article excerpt

Compensation Alternatives for Occupational Disease and Disability

ABSTRACT

Occupational disease and disability compensation programs differ in four basic dimensions: (1) the standard of proof required to document a claim; (2) criteria for eligibility under the program; (3) the source of program funding; and (4) the size of the award to a successful claimant. In this paper the authors examine how changes in these four dimensions establish incentives that influence: (1) the level of administrative costs; (2) investments in safety; (3) level of disease incidence; (4) Type I errors; and (5) Type II errors. This analysis suggests it is unlikely any single program will be optimal for all occupational diseases. The political constituencies which have incentives to lobby for programs and program changes with particular characteristics are then examined.

Introduction

In a recent issue of this journal, Danzon (1987) compares alternative occupational disease compensation systems and argues for reliance on a modified form of workers' compensation as the sole remedy. Barth (1984) proposes a no-fault fund for cancer death compensation financed by a payroll tax on industry. Several authors favor reliance on the tort system but do not agree on the forms or changes in liability statutes. No concensus has been reached in designing an ideal occupational disease compensation system.

Diverse programs have evolved to compensate victims of occupationally related disability and disease. Some are private (such as employee group health insurance) while others are public (such as workers' compensation); some treat general disabilities or diseases (such as Social Security disability benefits); some are occupation specific (such as Longshoremen's and Harbor Workers' Compensation); and some are disease specific (such as the Black Lung Program). Nevertheless, the rate at which new legislation is being introduced suggests significant dissatisfaction with the current package of programs remains.

In this paper, the authors seek a coherent framework for assessing policy choices in structuring compensation programs. Alternate specifications change incentives with respect to practices and conditions in the work place. Making intelligent choices requires that policymakers understand how these private incentives differ across program provisions.

Setting parameters of occupational disease compensation programs occur both in the private marketplace and in the political arena. Given that implementation of government programs is dependent on the forces in the political market, it would be difficult to defend the proposition that the decisions reached in the political arena represent maximization of a social objective function. Therefore, in order to evaluate programs in terms of their political acceptability, it is useful to consider the nature of the wealth transfers that are (or appear to be) implicit in alternative compensation programs. Hence, while the focus in the initial analysis will be on efficiency measures, the political appeal of program features is addressed subsequently, followed by brief concluding comments.

Criteria for Program Evaluation

Although existing and proposed compensation programs differ in operational details, their principal parameters can be characterized in four dimensions: (1) the standard of proof required to document a claim; (2) criteria for program eligibility; (3) the source of funding of the program; and (4) the size of the award to a successful claimant. For example, superfund programs (such as the black Lung Program in the coal industry and most proposed superfunds for asbestos claims) are open to industry employees, specify a no-fault standard of proof, are funded by an output tax on the industry (and thus are not experience-rated for the firm), and award damages fixed by class of disability. The Social Security Disability Insurance program is open to all covered workers, employs a no-fault standard of proof, is funded from Social Security taxes (a very broad-based non-experience-rated tax) and the level of compensation is fixed by the nature of the disability and previous earnings. …

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