CONTENTS

3 3 4 5 6 7 9 14 18 25 Online resource: Research Reporter New work comp directors named CompFacts: Non-Minnesotan claims; child labor in the 1800s; medical fee schedule Under construction: Administrative changes New additions to www.doli.state.mn.us Research highlights: Minnesota Safety Report Will the recession affect work comp costs? Return-to-work policies and average claim duration Explaining claim denials Case update: Certification of medical disputes under Jorgenson v. Novak-Fleck, Inc., 638 N.W.2d, 760 (Minn. 2002) Free publications available online

TABLES
4 7 8 Estimated fee schedule coverage of work comp medical payments Injury and illness case incidence rates, Minnesota, 1985-2000 Industry groups and detailed industries with the highest total case rates, Minnesota, 1998-2000

11 Short-term effect of change in hours on work comp costs per hour 12 Changes in hours worked and predicted changes in annual work comp costs 15 Average claim duration for establishments by employee size, 19952000 15 Average claim duration for establishments by insurance type, 1995-2000 16 Distribution of average claim duration for manufacturers with more than 250 employees, 1995-2000 17 Distribution of average claim duration in weeks 20 Estimated effects of different factors on the denial rate

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FORMS
27 Level 1 Adjuster Training

New online: Research Reporter

Under construction: Administrative changes

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Will the recession affect workers’ compensation costs?
By David Anderson, Research Analyst Research and Statistics

The U.S. economy appears to have entered a recession in March 2001. Employment data shows Minnesota’s economy also slowed in 2001. The statewide unemployment rate was 1 percent higher in the first two months of 2002, than it was in the first two months of 2000, and hours worked declined by more than 3 percent during the same period. How will the current downturn affect the costs of workers’ compensation in Minnesota? Previous studies suggest the costs of workers’ compensation will rise during a recession. A recession could affect the costs of workers’ compensation in a number of ways. Claim filing behavior might change. The claim denial rate could change. The cost per claim could increase if duration increases or if workers get higher disability ratings. Injury rates might decline as the pace of production slows.

costs in that industry. That is, a 1 percent decline in hours worked will lead to an approximately 1 percent increase in the per hour cost of workers’ compensation. This is only a temporary, onemonth increase, however, so the resulting annual cost increase would be only one-twelfth as large. This result suggests, for example, that because hours worked in durable goods manufacturing declined by almost 10 percent during the last

described above are based, not on recessions, but on fluctuations in employment within eight major industries from 1992 to 2000. During this period, no effects on costs from fluctuations in the statewide unemployment rate could be discerned. This does not mean such effects do not exist, however. The downturn in Minnesota during the early 1990s, may have affected system costs, but these effects may not be apparent because there have been significant changes to the state workers’ compensation system since then. Projections of modest cost increases may be outweighed by a drop in the number of claims filed in 2001. Early indications are that the number of paid indemnity claims filed in 2001 will fall. Some of this drop can be explained by the decline in employment and some by the general downward trend in the number of claims filed, but the drop still appears larger than expected. Why? It is still too early to know – it could be due to the preliminary nature of the estimate, it could be an effect of the recession or it could be due to other factors. Increases in system costs that might follow from a decline in employment do not necessarily mean there is a problem with the workers’ compensation system. The duration of claims may increase when
Recession, to page 10
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year, hourly workers’compensation It is still too early to know how the costs in that industry might increase current downturn is affecting by 1 percent. workers’ compensation costs in Minnesota, but during the past nine It should be emphasized it is still years, declines in employment too early to determine what appear to have caused modest, has happened to workers’ temporary increases in workers’ compensation costs during the compensation payments. The data recent downturn. It will be at least suggests a decline in hours worked a few more months before there in an industry will lead to a nearly will be enough claim data from proportionate increase in the next 2001, to have a good idea of how month’s workers’ compensation costs have changed. The results

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Recession, from page 9

employment drops, as a natural result of the extra time it takes workers to find a job in a sluggish economy. Additional claim filing following a layoff may be due to cost-shifting from workers’ health insurance. Claims could be filed for preexisting, work-related conditions that had previously been paid for through workers’ health insurance.
Alternative views on the effects of recessions

An important qualification to the statement that recessions increase the costs of workers’ compensation is that rapid economic growth also has been found to increase costs. One study found that industries that grew or declined the fastest had the fastest growth in workers’ compensation costs.3 Costs per hour of work grew the most slowly in industries where there was the least change in employment. There is debate about how recessions affect claim rates and injury rates. Researcher John Burton says prior to the 1990s, injury rates usually declined during recessions, but during the recession of the early 1990s, injury rates increased. 4 In On Workers’ Compensation, Editor Ed Welch said: “There is a widespread assumption that workers file more claims during times of layoff. ...The fact is that this may simply be a myth. There is really no evidence that more claims are filed during times of high unemployment.”5 There is anecdotal evidence that “flurries” of claims are associated with layoffs, but some studies find the number of claims filed during recessions declines.6 Overall, the evidence is mixed, but it is possible the overall claim rate could decline during recessions even if there are flurries of claims associated with layoffs. To understand why this can be, one needs to distinguish between the claim rates for two groups of people – workers who are laid off during the recession and workers who are not laid off. Claim rates

There is consensus that the cost of workers’ compensation per hour worked increases during recessions, but this consensus is not based on a large number of studies.1 Among the studies examined, there was agreement that recessions increased costs per hour worked. Other research examined was narrower in scope and focused on particular types of workers’ compensation costs or the number of claims filed. No studies found, stated recessions reduced costs. There was also consensus that cost per claim increases during recessions. One study summed up the main reasons: “Workers spend more time on disability, medical costs rise, workers get higher permanent partial disability ratings and workers file more claims for occupational disease or cumulative injury.”2

may be quite high for the laid-off workers, but lower than average for the workers in the other group. Three factors might push down the number of claims for workers who are not laid off. During recessions, there are fewer younger, less-experienced workers. The pace of production may slow. And, workers may fear they will be more likely to be laid off if they file a claim during a recession. Overall, claim rates could go up or down, depending on whether effects on laid-off workers are larger than the effects on workers who remain employed.
The link between employment and system costs

Recessions are defined in terms of declines in output. This article focuses on the effects of changes in employment, however, because changes in employment probably affect workers’ compensation costs more than changes in output. There is industry-level employment data; in contrast, there is little recent data about the effects of recessions on workers’ compensation in Minnesota. Minnesota experienced a recession in 1984, but the slowdown in 1991 does not appear to have been severe enough to be labeled a recession. The current slowdown may not be severe enough either. Additionally problematic, most of the cost data from the recent slowdown is not mature. A simple model was developed to relate changes in workers’ compensation costs to changes in employment for eight industries. Changes in cost per hour worked were compared to changes in hours worked within each industry

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and to changes in the overall Figure 1: The short-term effect of a change in statewide unemployment rate. In hours on w orkers' com pensation costs per hour addition, time variables accounted 5.0% for overall changes in cost trends. 4.0% The industries examined were: 3.0% construction; durable goods 2.0% manufacturing; nondurable goods 1.0% manufacturing; transportation and 0.0% public utilities; wholesale and retail -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% trade; finance, insurance and real Change in hours w orked estate; services; and state and local government. explaining how industry costs not affect costs. The unemployment change. The relationship holds only rate did not fluctuate much during Data was examined for each month, in the short term, however. Drops the period examined. The rate from January 1992 through in employment in one month only declined somewhat at the beginning December 2000. January 1992 appeared to have significant effects of the period and then rose is when seasonally adjusted on costs in the next month – if somewhat at the end. There is not employment data is first available. employment is stable in the much information about the effect After December 2000, the claim following month, the cost per hour of the increase at the end of the cost data is not mature enough. worked went back to its previous period, however, because the most level. The statewide unemployment recent cost data was not mature The relative cost of all claims filed rate did not appear to have a enough to use. In addition, changes in each month was calculated. The significant effect on costs. in the Minnesota workers’ relative cost in an industry is the cost compensation system may have per hour of work in one month, These results provide some affected system costs so much that divided by the average cost per hour evidence that workers who are laid- it is not possible to determine any of work – in this case, from January off file more claims. Overall, the of the effects of the early 1990s 1992 through December 2000 – for effect on costs is not large, because downturn. that industry. the number of workers involved in layoffs is usually small compared to The results are somewhat difficult Figure 1 (above) shows the results the size of the work force and to interpret; other things being of a statistical analysis. The because the effects are temporary. equal, declines in employment will horizontal axis shows the percent Still, the results are noticeable and lead to increases in the per hour change in hours worked; the statistically significant. These costs of workers’ compensation. vertical axis shows the percent changes would probably be larger This increase is only temporary, change in cost per hour worked. if individual firms could be however. Overall, a recession will Overall, a 1 percent decline in examined, because some of the raise costs only slightly. For employment within one industry effects of layoffs may get masked example, a six-month recession in leads to a temporary increase in by other factors. which hours worked declined by costs of approximately 1 percent in 1 percent each month, would that industry. No evidence was found of an effect increase the annual costs per hour of high statewide unemployment on worked by only one-half of one Larger declines in employment relative workers’ compensation percent. The reason for the smaller lead to somewhat larger relative costs. This is not surprising, because decline is each drop in employment increases in costs. The analysis of limitations in the data, and should only affected costs for six months indicates changes in industry not be taken as strong evidence that and not for the whole year. employment are very important in statewide shifts in employment do Recession, to page 12
Change in cost per hour worked
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Figure 2: Changes in hours worked and predicted changes in annual workers' compensation costs (Changes are from annual changes from Jan. 2000 to Jan. 2001. All changes are shown in percent terms.) Change in hours Industry Construction Durable goods manufacturing Nondurable goods manufacturing Transportation and public utilities Wholesale and retail trade Finance, insurance and real estate Services Government 0.3 -9.5 -6.6 -10.7 -3.2 0 -1.1 2.1 Predicted change in cost per hour 0 1 0.6 1.2 0.2 0 0.1 -0.1

A 1 percent decline in employment leads to a 0.3 percent increase in the duration of temporary total disability benefits. Other things equal, this would lead to an increase in total system costs of slightly more than 0.1 percent, because temporary total disability claims account for approximately 40 percent of system costs.

Recession, from page 11

Conclusions

This provides additional evidence Figure 2 (above) shows the that layoffs affect claiming predicted effects of changes in propensity. employment for eight Minnesota industries. During the past year, The finding that the claim rate rises hours worked dropped by when employment declines is approximately 10 percent in the somewhat at odds with preliminary durable goods manufacturing sector projections that the claim rate fell and the transportation and public in 2001. Early indications are that utilities sector. This is expected to the number of claims in 2001 will lead to increases in the cost per hour fall by more than would be worked in these industries of expected, based on the change in approximately 1 percent. Four other hours worked (adjusted for the industries – construction, services, expected rise in the claim rate) and government, and finance, insurance the long-term downward trend in and real estate – are expected to number of claims filed per hour of experience very small changes in work. It is difficult to know what cost per hour worked. Why do costs to make of the predicted decline increase? There are two main at this point. It may be due to the explanations: claim rates may rise recession or to other factors, or it when workers are laid off and the could simply be that the decline will duration of claims may rise if workers not be as large as the preliminary have a hard time finding new jobs estimates are indicating. If the drop during an economic downturn. in expected claims does hold up, however, it should be more than large enough to offset the relatively Effects on claim rates and modest cost increases that are duration It appears the main reason the cost predicted in Figure 2. per hour of work increases is that claim rates increase. A statistical A statistical analysis of the duration analysis of claim rates and changes of temporary total disability claims in employment suggests changes in suggests increased duration also claim rates explain about 80 percent explains part of the predicted of the short-term increase in costs. cost increases shown in Figure 2.
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Declines in industry employment appear to lead to increases in the claims rate and in system cost per hour worked. However, the effects are modest and short-term. Cost per hour worked appears to rise slightly when employment declines, mainly because the claim rate rises. Duration also increases somewhat when employment drops. More work will need to be done before the effects of the current downturn on workers’ compensation costs can be determined. More mature cost data from 2001 is needed. Also, the findings described here relate changes in hours worked in individual industries to costs in those industries. There may be other effects of recessions that were not captured by this analysis. For example, recessions might affect pricing for insurance companies, because recessions lower the stock market earnings of insurance companies’ investments. Also, large increases in statewide unemployment may increase system costs by increasing the time it takes for injured workers to return to work. Finally, the finding that the claims rate has risen when

Recession, from page 10

employment declined is somewhat at odds with preliminary estimates that predict a fairly large decline in the number of paid indemnity claims filed in 2001.
Note: Highlights of the report are presented here; the entire report will be available on the DLI Web site at

www.doli.state.mn.us/research.html. A printed copy of the report can be ordered by calling the Research and Statistics unit at (651) 284-5025.
See, in addition to other papers cited in this article, Cost Drivers in Six States by Gardner, Victor, Telles and Moss, Workers Compensation Research Institute, December 1992 and Revisiting Workers’ Compensation in California: Administrative Inventory by Telles and Fox, Workers Compensation Research Institute, June 1997.
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Workers’ Compensation in New Jersey: Administrative Inventory by Ballantyne and Dunleavy, Workers Compensation Research Institute, April 1994.

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The 1991 Reforms in Massachusetts by Gardner, Telles and Moss, Workers Compensation Research Institute, May 1996.

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Burton, John, F., “Workers’ Compensation: Developments Since 1960 and Prognostications for Benefits and Costs,” in Workers’ Compensation Policy Review, September/October 2001. Editor’s introduction to “Workers’ Comp and the Business Cycle” in On Workers’ Compensation, November 1994.

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Brooker and Sullivan, “Workers’ Comp and the Business Cycle” in On Workers’ Compensation, November 1994, and Howard, “Workers’ Compensation – Myths and Reality” in On Workers’ Compensation, June 1995.

New workers’ compensation directors named, continued ...
Mueller, from page 3

Mueller said he is looking forward to bringing his workplace safety experience to the workers’ compensation environment. “My goal is to help remove any barriers that would hinder employers and insurers abilities to comply with the statutes and to insure there is fair and uniform enforcement,” said Mueller. Compliance Services ensures prompt and full compliance with all benefit provisions of workers' compensation law is achieved in the workplace, including: issuing penalties for late payments; providing educational outreach; and auditing workers' compensation claims.
Moosbrugger, from page 3

September 2000, he was made supervisor of a team of six mediators in the department’s Customer Assistance unit. In November 2001, he was appointed to direct the agency’s “Assigned Risk Plan Settlement Project” involving settlement of long-term cases where the Special Compensation Fund is obligated to reimburse benefits. As SCF director, Moosbrugger said he hopes to play a part in improving relationships among the stakeholders in the workers’ compensation system. “I am very aware of the importance of fostering communication and understanding between the various competing interest groups – the labor, insurance, legal and business communities – and I want to work to help preserve and build on those relationships,” Moosbrugger said. The SCF administers the workers’ compensation claims of injured employees that worked for employers that did not carry workers’ compensation insurance or that were bankrupt. It also administers the asbestosis program and the supplementary benefit and second injury reimbursement programs.
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