Effects of Employee Participation Plans on Claim Denials in the U.S. Workers Compensation Insurance System

This paper estimates the impacts of employee participation plans in decision making and/or firms financial returns on claim denials in the workers’ compensation system. Claim denials are used to measure employees’ propensity to file false claims, i.e. claims-reporting moral hazard behavior as claimants in the system. Workers’ compensation systems, like other insurance systems, generate two major types of moral hazard on the claimant’s side. The first type is ‘risk-bearing’ moral hazard, whereby compensation for injury induces workers to take more job-related risks than they would have in the absence of such compensation. The higher ex postcompensation therefore induces greater risk-taking by employees. The second type is ‘claims-reporting’ moral hazard, whereby expected benefits induce falseclaim filings. For example, employees may file claims for off-the-job injuries to receive benefits through the workers’compensation system. This type of moral hazard has no effect on actual injuries, but only on claims for compensation. Such moral hazardof claims-reporting behavior has been approximated by incidence of claim’s being denied in the U.S. workers compensation system. This paper, in particular, analyzes the question whether claims-reporting moral hazard of employees can be affected by human resource management plans and programs. In particular, we focus on plans and programs that provide employees with participation in decision-making (e.g., autonomous work teams, total quality management, quality circles, quality of work life, etc.), and in firm financial returns (e.g., employee stock ownership, group bonuses, profit sharing, etc.). Employee participation in decision-making and in financial returns accords employees the ability to affect certain aspects of the operation of the firm in which they work, and links a portion of their earnings or wealth to the wellbeing of the firm. Sample data for this study hasbeen constructed by matching a sample of 334 firms from the Minnesota Human Resource Management Practices Survey data and 3,659 workers’ compensation claims filed in Minnesota Department of Labor and Industry’s data base for those injuries occurred in 1992. Additional data were collected from the Minnesota Department of Economic Security on employment size of sample firms, and from US tax form 5,500 on the extent of employee financial participation in profit sharing and ESOPs. Empirical analysis of binomial Logit analysis has been conducted against this sample data in order to analyze the potential effects of employee participation plans on employee’s claims-reporting moral hazard which measured by insurer’s denial for liability in workers’ compensation system. Claimant characteristics such as age, occupation, gender, and injury type (e.g., sprains and strains, contusions, cuts, etc.) are included as control variables forthey may affect the probability of detection of false claims, related to either differential observability of employee actions, or to the likelihood of certain injuries to occur in certain industries or occupations. In this study, it is argued that claims-reporting moral hazard by employees is a double-edged phenomenon, consisting of individual employee’s making false claims, and of their coworkers not detecting and reporting them. Empirical results of this study show that; 1) employee participation plans in decision making without any financial involvement may increase group based self-opportunism by filing more fraudulent claims, 2) employee participation plans only in financial returns has increased the incidence of denials by insurers, and 3) employee participation plans both in decision-making and financial returns have been negatively correlated with the incidence of denial of liability. Finally, employee participation plans both in decision-making and financial returns have been negatively correlated with the incidence of denial of liability though not statistically significant. This result suggests that these two different types of employee participation rights can complement to each other resulting in more desirable outcome. For example, group based self-opportunism in case of participation in decision-making rights can be reduced by rendering employees have incentives of saving firm’s overall cost through participation in firm’s financial returns. Also, the problem such as free-ridership in practice of employee participation plans only in financial-returns can be reduced by peer monitoring pressures provided through employee involvement programs in decision making such as self-autonomous teams.