Medical Care Spending and Labor Market Outcomes: Evidence from Workers' Compensation Reforms

56 Pages Posted: 28 Feb 2014 Last revised: 3 Dec 2014

See all articles by David Powell

David Powell

RAND Corporation

Seth A. Seabury

University of Southern California - Keck School of Medicine; University of Southern California - Schaeffer Center for Health Policy and Economics

Date Written: October 23, 2014

Abstract

Injuries sustained at work represent large income and welfare losses to households and there is a significant policy interest in reducing these burdens. Workers’ compensation program is a large government program which provides monetary and medical benefits to injured workers. Despite the potential importance of medical care in improving the health and labor productivity of injured workers, little research has addressed the relationship between medical care provided through workers’ compensation and post-injury labor outcomes. This paper exploits the 2003-2004 California workers’ compensation reforms which reduced medical care spending for injured workers with a disproportionate effect on workers suffering low back injuries. We study the differential impact of this reduction in medical care generosity on post-injury outcomes, using administrative data which includes claim-level medical costs, pre- and post-injury labor earnings, and earnings information for matched (uninjured) workers at the same preinjury firm. Our focus on labor outcomes is motivated by the importance of understanding the relationship between health and labor productivity more broadly and by the policy interest in mechanisms to improve the labor outcomes of injured workers. Adjusting for injury severity and selection into workers’ compensation, we find that workers with lower back injuries experienced a 7.3% greater decline in medical care after the reforms, and that this led to an 8.3% reduction in post-injury earnings relative to other injured workers. We estimate that this earnings decline is due both to an increase in injury duration and to lower earnings conditional on working.

Keywords: effectiveness of medical care, health, labor productivity, workers' compensation

JEL Classification: I12, J24, I13, J28, J38

Suggested Citation

Powell, David and Seabury, Seth A., Medical Care Spending and Labor Market Outcomes: Evidence from Workers' Compensation Reforms (October 23, 2014). RAND Working Paper Series WR-1028-1, Available at SSRN: https://ssrn.com/abstract=2401860 or http://dx.doi.org/10.2139/ssrn.2401860

David Powell (Contact Author)

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
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Seth A. Seabury

University of Southern California - Keck School of Medicine ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

University of Southern California - Schaeffer Center for Health Policy and Economics ( email )

635 Downey Way
Los Angeles, CA 90089-3333
United States

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