The Impact of Benefit Generosity on Workers' Compensation Claims: Evidence and Implications

Marika Cabral, Marcus Dillender

NBER Working Paper No. 26976
Issued in April 2020
NBER Program(s):Health Care, Labor Studies, Public Economics

Optimal insurance benefit design requires understanding how coverage generosity impacts individual behavior and insured costs. Using unique comprehensive administrative data from Texas, we leverage a sharp increase in the maximum weekly wage replacement benefit in a difference-in-differences research design to identify the impact of workers' compensation wage replacement benefit generosity on individual behavior and program costs. We find that increasing the generosity of wage replacement benefits does not impact the number of claims but has a large impact on claimant behavior, leading to longer income benefit durations and increased medical spending. Our estimates indicate that behavioral responses to increased benefit generosity raised insured costs nearly 1.5 times as much as the mechanical effect on insured costs from the benefit increase. Drawing on these estimates along with an estimate of the consumption drop experienced by injured workers, we calibrate a model to estimate the marginal welfare impact of increasing the generosity of workers' compensation wage replacement benefits. This calibration suggests that increasing benefit generosity would not improve welfare, with much of the projected welfare loss attributable to the impact of income benefit generosity on medical spending.

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Document Object Identifier (DOI): 10.3386/w26976

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