Can we quantify the size of the worker deductible (waiting period) in workers' compensation?

The most recent NASI report on Workers’ Compensation Costs, Coverage and Benefits 2013 acknowledges  that “waiting periods” served by injured workers are  an “implicit” and “indirect” cost of workers’ compensation.  The report also notes the difficulties in estimating those costs.  Whether measured in terms of days away from work or lost wages,  waiting periods in the jurisdictions that have them are real costs borne by workers and their families.

A waiting period is a period of time or proportion of weekly-earnings loss that must be incurred by the worker before workers’ compensation for temporary disability begins.  Lost wages during the waiting period are uncompensated.  Waiting periods are present in every US workers’ compensation system but relatively rare in Canada (only three provinces have waiting periods:  3/5ths of a work week in New Brunswick and  2/5ths of a work week in Nova Scotia and Prince Edward Island) and absent  in all Australian schemes. 

In the US, waiting periods range from three to seven days(excluding the day of injury in most cases).  A waiting period is typically served when a worker is absent from work for the specified number of days due to work-related injury, illness or disease.  In all but two states (Hawaii and Rhode Island) waiting periods are waived or retroactively compensated for longer duration claims.  The length of this “retroactive period” varies from as little as five days (Nevada, North Dakota) to as long as six weeks (Nebraska).  While the insurer may pay medical costs during the waiting period, the worker bears the cost of lost wages during the waiting period.

Gunderson and Hyatt  (Waiting Periods and Direct Payments in Workers’ Compensation Prepared for the Royal Commission on Workers’ Compensation in British Columbia, June 1998) provide five policy rationales/objectives for waiting periods:

·         Reduce moral hazard

·         “Self-insuring” as a financial incentive for promoting safety

·         Reduce administrative costs

·         Reduce benefit costs

·         Cost sharing between injured workers and employers

Note that three of the above relate directly to shifting the financial cost of work-related injury, illness and disease from the employer to the worker in jurisdictions with waiting periods.  It follows that those with the longest waiting periods and long or non-existent retroactive periods shift more of the cost to workers and their families. 

A waiting period is a worker “deductible”.  Employer deductibles are quantified in the NASI report.  The waiting period and retroactive periods for each US jurisdiction are summarized in Table C (pages 66 – 72) of the report.  To the best of my knowledge, no state or public agency reports annual data on the waiting period cost in either dollar terms or days away from work.   This lack of workers’ compensation data on the worker waiting-period deductible has thus far made accounting for this workers’ compensation system “cost” too big a challenge for NASI and other investigators. 

A conservative estimate, however, may be gained by using other sources.  Given that all waiting periods in the US are of three or more days and given that no state has a retroactive period of less than five days,  a minimum estimate of this cost may be achieved by examining the number of cases of work absences due to work-related injury that range from 1 to 3 days. 

The US Bureau of Labor Statistics (BLS) reports that the median days away from work for occupational injuries in 2013 was 8 days, down one day from previous years.  In a state with a three day waiting period, the worker has no entitlement to compensation for the loss of 3/8ths or 37.5% of an 8 day loss.  If the days away from work are less than or equal to the waiting period, there is no entitlement to compensation; wages lost during the waiting period are uncompensated.  The worker and his or her family must bear the full cost of wages lost. 

2013  Cases of nonfatal occupational injuries resulting in days away from work. 

                        1 day               2 days              3-5 days          6-10 days    11-20 days

Male               90600              70550              118280            87330         82220

Female            67740              53540               80220             56450         49550

Not Specified     430                  190                    550                 440            540

( Data extracted on: September 2015

Nonfatal cases involving days away from work: selected characteristics    

Series Id:  CSUDAX0XXXXX6G000       

Area:       All U.S.        

Ownership:  All ownerships   

Data Type:  Injury and illness Cases  

Case Type:  Industry division or selected characteristic by gender) 

If you multiply the cases in each of the first three categories by 1, 2 and 3 days respectively, these cases of work absences of very short duration (1-5 days) represent more than a million days served by workers in waiting periods.

Now, think about the cases with more than three days away from work but less than the specified absence for the retroactive period to apply.  These cases are not subject to a retroactive period because their duration is too short.  The most common retroactive period is 21 days.  If days away from work extend beyond 21 days, the waiting period is typically compensated (except in RI and HI, where the waiting period is not compensated).  Cases involving work absence categories of 6-10 or 11-20 days away from work will have typically served a three day waiting period.  So, multiplying the number of cases in these categories by three will yield the number of days away from work that result in waiting period days (most of which represent days of wage loss that are uncompensated by workers' compensation).

Based on BLS nonfatal injury data for cases involving 1-20 days away from work, workers served more than 1.8 million days of  waiting period "deductible" in 2013.   

There are, of course, limitations to this method.  BLS data may include cases that are not covered by workers’ compensation and may exclude certain cases that result in compensation but are outside the definition of reportable work-injury absences used by BLS sources.  On the other hand, this method underestimates the impact waiting periods of longer than three days and retroactive periods greater than 21 days would have on the total of uncompensated days due to the waiting period.  BLS definitions of days away from work are based on calendar days so it is possible that some workers who work five days or less per week and are absent over a weekend would be captured within some of the counts.

Based on data from private industry, just over 70% of work-injury cases involve 30 or fewer days away from work.  More than 42% of cases involve 1-5 days away from work.  That means for the majority of work-injury cases, the waiting periods reduce the effective workers’ compensation benefit substantially. 

Workers with good sick leave or access to other short-term funding sources including savings may be able to cope with the financial loss associated with uncompensated days better than those without savings or access to other benefit programs  Waiting periods externalizes the cost of work-injury and  essentially constitute a premium rate subsidy—something that should be taken into account when comparing premium rates between jurisdictions or estimating the full cost of workers’ compensation system 

Waiting period costs may not be easy to calculate but every state and province that has a waiting period and a retroactive period has the data to quantify the number of cases that serve a waiting period, report the uncompensated work-absence days and estimate the financial cost workers bear for losses during the waiting period.  Quantifying the waiting period “deductible” will go a long way to creating a more complete picture of workers’ compensation costs, coverage and benefits.  

What is the purpose of a waiting period in Workers’ Compensation?

Waiting periods are a very common feature in US workers’ compensation systems but are relatively rare in the Canadian context and absent from Australian systems.   A waiting period in workers’ compensation is a form of worker deductible.  Most commonly, waiting periods start on the first day for which wages are lost and last anywhere from one day to one week with three and seven day waiting periods being very common.

Many systems allow for medical-only claims during the waiting period and most have no prohibition against the employer paying some benefits during this time.  In fact, collective agreements may contain provisions that require wage continuation during a workers’ compensation waiting period.  In such cases, there is no administrative or indemnity saving by introducing a waiting period.  All that changes is the pocket from which the benefit is paid.

Most systems with a waiting period have a retroactive point.  If the worker is off work beyond this point (ranging from one to four weeks but most commonly two weeks), the waiting period is waived and the worker receives wage-loss indemnity payments for the waiting period as part of the workers’ compensation claim.  Eliminating a waiting period impacts only the cases with durations less than the waiting period.

When workers’ compensation systems started, the waiting period was seen as a way to constrain insurance costs.  As may be deduced from the structure of the waiting-period deductible and the retroactive provision, the waiting period is targeted at less severe (in terms of duration) claims. Let me be clear, waiting periods limit cost to the insurer (and, through insurance rate-setting and experience-rating provisions, to the employer).  The human and financial cost of the injury for the waiting period is borne by the worker and his family unless this burden is offset by collective agreement provisions or employer practice of wage continuation (or access to sick leave or other paid leave provisions) provided by the employer. 

When workers’ compensation got started in BC in 1917, the waiting period was three days.   In 1972, the waiting period was eliminated.   This was part of a trend in Canada, however, there has been a recent trend to consider and implement waiting periods.  Prince Edward Island and Nova Scotia each have a “2/5^ths” of a week waiting period [which works well for 4 day weeks and other non-five days a week schedules] and New Brunswick has a 3 day waiting period. 

From a pure insurance point of view, the best injury claim is the one never filed.  Introducing waiting periods conceptually reduce administrative costs [assuming healthcare costs are paid by someone else] and indemnity costs but they may well discourage many claims of longer duration from ever being filed.  If sick leave or other leave provisions are in place, a worker may well elect to forgo a possible workers’ compensation claim with all the burden of filing and often with an implied or perceived onus of proving work-relatedness in favour of a simple sick leave application within the firm.  Firms may well tacitly approve this practice as it may (or may be perceived to) positively impact workers’ compensation premium rates through experience rating. 

For workplaces with no alternatives, a waiting period externalizes a cost of production [work-related injuries and illnesses] to workers.  If this forces the worker or a family to access other aspects of the social safety net [social welfare services] or community food banks, then the mere existence of a waiting period externalized costs beyond the workplace.  Put another way, those externalized costs amount to a subsidy (paid by workers’ families, taxpayers or the community) to businesses where injuries occur. 

Yes, the firm will have to hire a replacement worker for a few days or bear the costs of lost productivity, but that is the case regardless of the legislative existence of a waiting period.  Contrast a firm in a jurisdiction with a waiting period to one where work-related claims are payable from the day following the day of injury and the collective value of waiting periods is obvious. 

Some may argue that the financial subsidy or externalization of costs at the aggregate level is not large.  If this is the case, then reverse is also true: the cost of eliminating waiting periods where they exist will not be large either. If, however, the value of a waiting period is argued to be significant, then its cost or subsidy value should be part of the policy discussion. 

Every jurisdiction has to make its own decision regarding waiting periods in workers’ compensation.  That’s a matter for legislators and their electorates.  There may be good and valid reasons for waiting periods that outweigh the costs or justify the subsidy in a particular jurisdiction.  I am not saying the public policy choice to have or introduce a waiting period is always a bad one.  I am suggesting that the policy debate include a full discussion of the externalized costs and subsidy values involved.