Washington Pension System Review

Washington Pension System Review Upjohn Institute Technical Report No. 08-025

Submitted by: W.E. Upjohn Institute for Employment Research 300 S. Westnedge Avenue Kalamazoo, MI 49007-4686

Authors: Professor Peter Barth, Emeritus, The University of Connecticut; Professor Heather Grob, Saint Martin’s University; Professor Henry Harder, University of Northern British Columbia; Dr. Allan Hunt, W.E. Upjohn Institute for Employment Research; and Dr. Michael Silverstein, The University of Washington

A Deliverable under L&I Contract No. K1018

Submitted to: State of Washington Department of Labor & Industries P.O. Box 44100 Olympia, WA 98504-4100 November 12, 2008

Contents Acknowledgments………………………………………………………………..………….….ix Executive Summary………………………………………………………………………….….x 1 Overview of Report INTRODUCTION ....................................................................................................................... 1-1 The Issue .................................................................................................................................. 1-1 The Research Team.................................................................................................................. 1-1 THE RESEARCH PLAN AND ITS IMPLEMENTATION ....................................................... 1-2 1. A Program Assessment ....................................................................................................... 1-2 2. A Comparative Analysis ..................................................................................................... 1-3 3. Claim File Review .............................................................................................................. 1-4 4. Predictive Model................................................................................................................. 1-5 THE STRUCTURE OF THIS REPORT ..................................................................................... 1-6 2 Program Assessment INTRODUCTION ....................................................................................................................... 2-1 A Summary of the Claims Flow Process ................................................................................. 2-1 State fund claims.................................................................................................................. 2-1 Claims Consultants (CCs)................................................................................................ 2-2 Pension Adjudication ....................................................................................................... 2-2 Claim Closure .................................................................................................................. 2-3 Self-insured claims............................................................................................................... 2-7 Claim Managers and Pension Adjudicators Activity....................................................... 2-7 Appeals of claims–The Board of Industrial Insurance Appeals and the Courts ................ 2-11 PROVIDING VOCATIONAL REHABILITATION SERVICES............................................ 2-12 The Process of VR within the Agency................................................................................... 2-14 Mandatory to discretionary vocational rehabilitation ........................................................ 2-15 The role of private vs. public counselors ........................................................................... 2-27 Total claims management (TCM)...................................................................................... 2-28 The role played by complexity–adjusted cost outcome (CACO) ...................................... 2-29 Disability Management at L&I .............................................................................................. 2-30 Early intervention program ................................................................................................ 2-31 Early return-to-work program (ERTW)............................................................................. 2-32 Preferred Worker Program ................................................................................................ 2-32 THE INCIDENCE OF PENSIONS FOR PERMANENT TOTAL DISABILITY ................... 2-33 How Much of an Increase Has There Been? ......................................................................... 2-34 What Were the Primary Factors Responsible for the Increasing Numbers of Pensions?...... 2-38 The processing of claims–long-duration cases .................................................................. 2-38 Duration ............................................................................................................................. 2-38 The Frequency of Long-Duration Claims.............................................................................. 2-41 A Note on Claims of Shorter Duration .................................................................................. 2-47 Efforts to Reduce Time-Loss Duration.................................................................................. 2-48

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Conclusion ............................................................................................................................. 2-51 DEVELOPMENTS IN THE LABOR MARKET CONTRIBUTED TO THE GROWTH IN PENSIONS .............................................................................................................. 2-52 Strong or Weak Labor Market Conditions............................................................................. 2-52 Employment Growth and Unemployment ............................................................................. 2-54 Disadvantaged Workers and Work Injuries and Illnesses ..................................................... 2-60 Conclusion ............................................................................................................................. 2-64 THE SECOND-INJURY FUND WAS IMPORTANT IN THE GROWTH OF PENSIONS FOR THE SELF-INSURED ............................................................................................ 2-64 Conclusion ............................................................................................................................. 2-69 OTHER SUGGESTED CAUSES OF THE INCREASE IN PENSIONS................................. 2-70 The Role of Appeals in the Growth of Pensions.................................................................... 2-70 Self-Insured Appeals.............................................................................................................. 2-73 Trends .................................................................................................................................... 2-75 Conclusion ............................................................................................................................. 2-77 CHANGES IN THE NUMBERS OF ACCIDENTS, INJURIES, ILLNESSES, AND IMPAIRMENTS ..................................................................................................... 2-77 Injury Incidence ..................................................................................................................... 2-77 Level of Impairment .............................................................................................................. 2-79 Conclusion ............................................................................................................................. 2-82 DEMOGRAPHIC CHANGES MAY HAVE PLAYED SOME ROLE IN THE INCREASE IN PENSIONS .............................................................................................................. 2-82 Aging and Work Disability.................................................................................................... 2-82 The Aging of Washington’s Population ................................................................................ 2-83 Conclusion ............................................................................................................................. 2-87 CHANGES IN THE TYPES OF CLAIMS AND CERTAIN TREATMENTS DO NOT SEEM TO BE A LIKELY CAUSE OF RISING PENSION LEVELS .............................. 2-88 Back or Spinal Injuries........................................................................................................... 2-89 Conclusion ......................................................................................................................... 2-91 Psychological or Psychiatric Claims...................................................................................... 2-91 Conclusion ......................................................................................................................... 2-93 Opioid Utilization .................................................................................................................. 2-93 Conclusion ......................................................................................................................... 2-96 THE ROLE OF LEGAL DECISIONS AND LEGISLATIVE DIRECTIONS ......................... 2-96 Significant Decisions ............................................................................................................. 2-98 Impact on L&I...................................................................................................................... 2-102 Conclusion ........................................................................................................................... 2-104 3 Jurisdictional Comparisons TOTAL PERMANENT DISABILITY BENEFITS.................................................................... 3-1 Compensating for Permanent Partial Disability in U.S. Workers’ Compensation Systems.... 3-2 Scheduled or Specific Benefits ................................................................................................ 3-2 Unscheduled Benefits .............................................................................................................. 3-3 Impairment only................................................................................................................... 3-3 Loss of wage earning capacity............................................................................................. 3-4 Wage loss ............................................................................................................................. 3-4

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Bifurcation ........................................................................................................................... 3-4 Direct Linkages between Permanent Partial Disability and Total Permanent Disability ........ 3-5 Compensating for Total Permanent Disability in the U.S. ...................................................... 3-6 Statutory total permanent disability ..................................................................................... 3-6 Non-statutory total permanent disability ............................................................................. 3-9 Attempts to restrict TPD .................................................................................................... 3-11 Compromise and release agreements................................................................................. 3-18 A COMPARATIVE ANALYSIS OF WASHINGTON AND NCCI STATES........................ 3-21 NCCI Data ............................................................................................................................. 3-22 Incidence of Total Permanent Disability ............................................................................... 3-28 COMPARING WASHINGTON TO BRITISH COLUMBIA .................................................. 3-37 Direct Comparison of B.C. and Washington ......................................................................... 3-44 Time-Loss Duration of Claims .............................................................................................. 3-50 Conclusion ............................................................................................................................. 3-52 4 Claim Review Findings INTRODUCTION ....................................................................................................................... 4-1 Necessity and Requirements of the Claim Review.................................................................. 4-1 METHODS .................................................................................................................................. 4-3 Choice of Study and Comparison Groups ............................................................................... 4-3 Choice of Abstract Elements ................................................................................................... 4-6 Sample Weighting.................................................................................................................... 4-7 DESCRIPTIVE STATISTICS OF CLAIMS............................................................................... 4-8 Injury Characteristics ............................................................................................................. 4-11 Worker Characteristics........................................................................................................... 4-15 Medical Treatment and Psychological Impairment ............................................................... 4-22 Claims Management .............................................................................................................. 4-25 Vocational Rehabilitation ...................................................................................................... 4-31 Return-to-Work Experience................................................................................................... 4-35 Disputation in the L&I System .............................................................................................. 4-37 REVIEWER OBSERVATIONS OF CLAIMS ......................................................................... 4-39 Observations across Pension Years ....................................................................................... 4-40 Other Observations of Factors Affecting Pensioning ............................................................ 4-41 Observations Regarding Information Available to Conduct Claim Reviews........................ 4-42 Conclusion ............................................................................................................................. 4-44 MULTIVARIATE ANALYSIS OF CLAIM REVIEW DATA................................................ 4-44 Analysis of 1997 Claim Review Sample ............................................................................... 4-46 Analysis of 2002 Claim Review Sample ............................................................................... 4-53 Comparisons between 1997 and 2002 ................................................................................... 4-57 5 Pension Predictive Model INTRODUCTION ....................................................................................................................... 5-1 MODEL SPECIFICATION AND ESTIMATION...................................................................... 5-2 MODEL’S PREDICTIVE ABILITY .......................................................................................... 5-6 SUMMARY, CAVEATS, AND EXTENSIONS ...................................................................... 5-11

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6 Summary and Findings INTRODUCTION ....................................................................................................................... 6-1 ARE PENSIONS OR PENSION RATES HIGH IN WASHINGTON STATE?........................ 6-2 NCCI State Comparisons......................................................................................................... 6-2 Comparing Washington and British Columbia........................................................................ 6-4 Conclusion ............................................................................................................................... 6-6 WHAT FACTORS ARE ASSOCIATED WITH CLAIMS THAT RESULT IN PENSIONS? . 6-7 A Structural Source of the High Incidence of Pensions in Washington .................................. 6-7 Characteristics of Pension Claims: Claim File Review ........................................................... 6-9 Multivariate comparisons between 1997 and 2002 ........................................................... 6-15 HAS THERE BEEN SUBSTANTIAL GROWTH IN PENSIONS AWARDED?................... 6-16 WHAT CAUSED THE GROWTH IN PENSIONS? ................................................................ 6-18 The Claims Flow Process....................................................................................................... 6-18 Major Causes of the Increases in Pensions: Claims Management Practices ......................... 6-20 Major Causes of the Increases in Pensions: Poor Labor Market Conditions......................... 6-22 Other Possible Causes of the Increases in Pensions: Changing Demographics .................... 6-22 Other Possible Causes of the Increase in Pensions: Changing Types of Injuries and Illnesses and Their Treatment............................................................................................................... 6-23 Other Possible Causes of the Increases in Pensions: Injuries and Illnesses, Frequency and Sseverity................................................................................................................................. 6-24 Possible Causes of the Increase in Pensions: The Changing Legal Environment ................. 6-25 Possible Causes of the Increase in Pensions: The Second-Injury Fund................................. 6-26 Possible Causes of the Increase in Pensions: The Vocational Rehabilitation Program......... 6-26 Possible Causes of the Increase in Pensions: Appeals by Workers ....................................... 6-26 PREDICTING THE NUMBER OF FUTURE PENSIONS ...................................................... 6-27 References………………………………………………………………………………………R-1

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Tables Table 2.1 Breakdown of VR Referrals ..................................................................................... 2-14 Table 2.2 Time-Loss Claim Outcomes 5 to 10 Years after Date of Injury–Plan...................... 2-21 Development or Implementation Referrals 5-Plus Years after Accident Table 2.3 Time-Loss Claim Outcomes 5 to 10 Years after Date of Injury–Plan Development Referrals 5-Plus Years after Accident ..................................................................... 2-23 Table 2.4 Time-Loss Claim Outcomes 5 to 10 Years after Date of Injury–Plan...................... 2-25 Implementation Referrals 5-Plus Years after Accident Table 2.5 Total and Permanent Disability Awards by Year .................................................... 2-33 Table 2.6 TPD Awards as a Percentage of New claims, Six Years Earlier, ............................ 2-37 State Fund Only Table 2.7 Duration and Accident Year—The Probability of Receiving a Pension .................. 2-40 Table 2.8 The Number of Ultimate claims Actively Receiving Time-Loss Benefits............... 2-42 (within last 90 days) at Year End Table 2.9 Percentage of Ultimate claims Actively Receiving Time-Loss Benefits ................. 2-43 (within last 90 days) at Year End Table 2.10 The Number of State Fund Active Time-Loss Claims at the End of Each............. 2-44 Year that had been Open for Six or More Years Table 2.11 The Number of State Fund Claims Pensioned (TPD) in a Year that had been....... 2-45 Open for =10 years

Total

563 639 664 688 796 702 708 576 559 613 618 697 808 900 838

428 484 520 559 562 638 571 477 451 464 472 515 572 687 651

372 360 433 454 484 493 522 462 402 370 351 401 425 509 530

334 309 274 329 375 423 400 376 339 322 284 299 323 371 390

1,262 1,315 1,387 1,401 1,523 1,647 1,737 1,546 1,457 1,451 1,325 1,280 1,309 1,385 1,301

27,608 28,077 26,570 26,179 26,990 26,921 26,906 25,360 24,826 26,119 26,884 26,410 26,934 27,665 27,379

The data shown in Table 2.9 simply show the percentages derived from Table 2.8, such that we calculate the proportion of active cases of different vintage for each year. As an example, in 2007, 3.4 percent of the active time-loss claims had been open for 10 or more years. Notice that in the critical time period 1997 to 1999, the proportion of active cases that were 10 years old or older were at their highest rates, from 4.2 percent to 4.5 percent. Thus, despite the drop-off in new time-loss claims, the Department was not experiencing a decline in the numbers of active claims. In fact, both the number and percentage of claims 10 or more years of age peaked in 1999.

2-42

Table 2.9 Percentage of Ultimate Claims Actively Receiving Time-Loss Benefits (within last 90 days) at Year End Claim Maturity Payment >=10 Year