Academic journal article Journal of Risk and Insurance

Does Workers' Compensation Encourage Hard to Diagnose Injuries?

Academic journal article Journal of Risk and Insurance

Does Workers' Compensation Encourage Hard to Diagnose Injuries?

Article excerpt


Worker-generated claims-reporting moral hazard is said to occur when, in order to collect workers' compensation benefits, workers report on-the-job injuries that never occurred or that occurred off the job. Using newly available injury micro data from the Bureau of Labor Statistics on all cases with days away from work, this article assesses the hypothesis that claims-reporting moral hazard is more likely to occur for hard-to-diagnose injuries than for easy-to-diagnose cuts and fractures. Consistent with the hypothesis, multinomial logits indicate that an increase in the wage-replacement rate and a decrease in the benefit-waiting period increase the fraction of carpal tunnel syndrome cases relative to cuts and fractures, while a decrease in the waiting period increases back sprains relative to fractures. Contrary to the hypothesis that claims-reporting moral hazard differentially affects the timing of reported injuries, binomial logit estimates indicate that workers' compensation does not increase the probability of a Monday back sprain relative to a Monday cut or fracture. Rather, an increase in the wage-replacement rate and, possibly, worker choice of doctor increase the probability that an injury of any type is reported on Monday (or the day after a long weekend) relative to other regular workdays.


Workers' compensation insurance provides coverage for medical treatment and partial replacement of lost wages in the event a worker is injured on the job. Employers are strictly liable for these benefits, covering their potential liabilities with insurance purchased from private or state insurers or, in some cases, by selfinsuring. State laws determine the generosity of benefits, including the proportion of wages replaced and the waiting period prior to benefit payments. The laws also mandate how an injured worker can choose a treating physician. The existence of the workers' compensation system may affect the behavior of a variety of actors, i.e., workers, employers, insurers, and health care providers, in ways that alter injury frequencies, duration, and costs. Collectively, the impact of insurance on injury outcomes is termed moral hazard.

Workers' compensation can affect both true safety incentives and incentives to report injuries. More generous benefits may weaken workers' incentives to selfprotect but may, depending on the extent to which premiums are tied to a firm's own loss experience, increase incentives for firms to invest in safety. These offsetting effects change the true level of safety. Workers' compensation may also alter incentives for reporting injuries without changing the true level of safety. Specifically, more generous benefits may increase workers' incentives to report offthe-job injuries as occurring on-the-job, to report injuries that don't exist, and to exaggerate the severity of their injuries. Conversely, more generous benefits may lead firms to resist filing claims for injuries that have occurred and to place injured workers on light duty rather than having them file claims for days away from work. Butler and Worrall (1991) term the reporting effects "claims-reporting moral hazard."

A number of empirical studies, many of which are reviewed in Smith, (1992), have measured the effect of workers' compensation on the frequency and severity of occupational injuries and claims. A subset of this literature studies the impact of workers' compensation on the relative frequencies of specific types of injuries.' These latter studies generally start from the hypothesis that worker generated claims-reporting moral hazard is more likely to occur for injuries that are hard to diagnose or whose work-relatedness is hard to establish. The implication is that more generous benefits increase the frequency of hard-to-diagnose injuries, such as back sprains, relative to easier-to-diagnose injuries like fractures and cuts. An implicit assumption needed to generate such a result empirically is that the effects of workers' compensation on true safety incentives and on firm-generated claimsreporting moral hazard are the same for all types of injuries. …

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