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PART II
THE EXTENT AND COST
OF THE PROBLEM
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6
Economic Issues and the
Cost of Disability
JO conomic studies have contributed substantially
~ to the understanding of many disability issues.
However, there have been no systematic economic inquiries into the
problem pain presents to disability systems. The reason is an absence
of data because of the many conceptual and measurement problems
mentioned in earlier chapters and discussed at length in the remainder
of this volume. Although we can say little about the economics of pain,
the committee thought it important to include some material on the
economics of disability in order to understand the larger context of
disability programs and the pain problem. This chapter summarizes
current disability-related expenditures and recent trends, and
presents an overview of some economic explanations for the observed
growth of the Social Security Administration (SSA) disability pro-
grams. It is not possible to know what proportion of disability expen-
ditures is attributable to pain claimants and beneficiaries.
The economic analysis of disability starts at the micro or individual
level with the basic notion that disability (i.e., the inability to work or
engage in one's accustomed role because of a medically definable impair-
ment) causes Tosses to the individual and to the economy. In addition to
monetary losses in earnings, losses in satisfaction and other aspects of
well-being are also considered. Economic studies seek to understand how
economic and other incentives motivate observed behaviors.
At the macro or economy-wide level, economists try to explain trends
in disability expenditures (and in the prevalence of disability), and
seek to identify cost-effective changes in the disability programs that
87
OCR for page 88
88 THE EXTENT ID COST OF THE PROBLEM
would limit the prevalence of disability while maximizing efficiency
and preserving equity and adequacy. Thus, in examining total disabil-
ity expenditures, economists pose several questions. Given the distri-
bution of these expenditures, for cash payments, medical care, and
direct services, would some other distribution better meet social and
programmatic objectives? Could the level of transfer payments and
medical care costs be reduced by preventing disabilities in the first
place or by rehabilitating disabled persons? Would some change in the
incentives or disincentives that govern decision making improve the
efficiency of the system? Are the levels of benefits high enough to pronde
an adequate replacement income for those who cannot work and not so
high that they discourage people who can work from doing so?
DISABILITY EXPENDITURES
Although the costs to disabled persons of their diminished well-be-
ing cannot be accurately measured, disability program expenditures
can be estimated. There are many programs and policies to serve
disabled workers. They differ in terms of their eligibility criteria, the
extent to which the receipt of benefits is subject to a means test, the
limits on the level of market earnings allowed for continuation of
benefits, and the degree to which these benefits are taxable. As
discussed in Chapter 2, these programs also differ in their philosophy
toward the disabled, which, in turn, dictates the nature of their
program response. Whereas some responses are "ameliorative," others
are "corrective" (Haveman et al., 1984a,b). Among the ameliorative
government programs are those that provide payments for income
support and medical care. By contrast, corrective responses are de-
signed to enhance the individual's ability to return to work and to
reduce or remove the disabling erects of the individual's impairment.
Training through vocational rehabilitation, sheltered workshops, pro-
grams for job accommodation, and employment subsidies may be
provided.
Cash Transfers
Cash (or transfer) payment programs can be divided into three
categories: social and private insurance, indemnity, and income sup-
port. Social and private insurance programs maintain incomes of
persons who have had their usual and regular earnings interrupted
because they are work disabled. Social Security Disability Insurance
(SSDI) is the largest government program targeted to the Tong-term
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ECONOMIC ISSUES AND THE COST OF DISABILITY 89
TABLE 5-1 Cash Disability Transfer Payments in
Fiscal Year 1982 (billions)
Program
Amount
Social insurance (SSDI)
Private insurance
Indemnity payments (WC. VA, auto, other)
Income support (SSI, VA, AFDC)
Total
$18.8
18.0
23.3
7.3
$67.4
NOTE: AFRO = Aid to Families with Dependent Children;
SSDI = Social Security Disability Insurance; SSI = Supplemen-
tal Security Income; ~ .A = ~ eterans Administration; and WC =
Workers' Compensation.
disabled population. In 1989 818.8 billion was paid out to beneficiaries
and their dependents. Another almost $18 billion was paid out by various
private insurance programs including individually purchased policies
and group plans offered by employers.
The largest indemnity program is Workers' Compensation, which
pays workers for injuries "arising out of and in the course of"
employment (Berkowitz, 198~. These programs provide cash benefits,
medical care, and rehabilitation services. In fiscal 1982 Workers'
Compensation expenditures amounted to $7.3 billion. Another indem-
nity-like government disability program is the Veterans Administra-
tion (VA) program, which accounted for $6.1 billion. Disability trans-
fer payments resulting from automotive-related bodily injuries
accounted for $4 billion, and indemnity transfers resulting from other
bodily injuries amounted to another $5.9 billion in fiscal 1982.
The third category of transfer payments are the income support
programs for the disabled "needy" who are subject to a financial means
test in order to qualify. These include SSA's Supplemental Security
Income (SSI) program, needy and disabled veterans, and recipients of
welfare payments from Aid to Families with Dependent Children who
live in households headed by a disabled person. Total disability
transfer payments are summarized in Table 5-1.
Medical Care
Medical care costs associated with the various disability transfers
totaled almost $52 bill-on in 1982. The social insurance category
includes only the Medicare program, which, since 1973, has covered
SSD! recipients. In 1982, hospital and supplementary medical insur-
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90 THE EXTENT AND COST OF THE PROBLEM
TABLE 5-2 Medical Care Payments for Disabled
Persons in Fiscal Year 1982 (billions)
Program
Amount
Social insurance (Medicare)
Private insurance
Indemnity (VA, WC, torts)
Income support (Medicaid)
Total
$ 9.8
24.0
6.4
11.7
$51.9
NOTE: VA = Veterans Administration; WC = Workers' Com-
pensation.
ance payments by Medicare for SSDI beneficiaries (and persons in the
special End Stage Renal Disease Program) totaled $9.8 billion.
Estimating the proportion of total expenditures by private insurers
attributable to medical care usage by disabled persons because of their
disabling conditions is Biscuit. The best estimate is that private and
employer-provided insurance paid $24 billion in fiscal 1982 for disabil-
ity-related medical expenses.
Indemnity medical payments from the veterans programs, federal
and state workers' compensation programs, and tort settlements are
estimated at $6.4 billion. Medicaid accounted for nearly all the $11.7
billion medical care expenditures to the disabled in the income support
category. Total medical care costs are summarized in Table 5-2.
Direct Services
Direct sernces provided to disabled persons include vocational
rehabilitation provided by the states under a joint federal-state pro-
gr~m and a separate vocational rehabilitation program for veterans;
various other services for disabled veterans, including appropriately
adapted vehicles, prosthetic appliances, and domiciliary care; and
government services for the deaf, blind, mentally ill, and developmen-
tally impaired. In addition to the direct services provided to the
disabled only, under Title XX some disabled people are eligible for
benefits from general federal programs that provide food stamps and
social services. Finally, there are a number of employment assistance
programs for handicapped federal government workers and others that
are designed to return people to the labor market or encourage their
initial entry. Table 5-3 summarizes expenditures for direct services to
the disabled in FY 1982.
The estimate of $3.0 billion for all direct services probably underes-
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ECONOMIC ISSUES ED THE COST OF DO - 91
TABLE 5-3 Direct Services Expenditures for Fiscal
Year 1982 (billions)
Program
Vocational rehabilitation and education
Veterans programs
Services for persons with specific impairments
General federal programs
Employment assistance programs
Total
Amount
$1.1
0.4
0.1
1.1
0.3
$3.0
timates the total because the costs associated with the many private
sector accommodations for disabled employees and the expenditures of
community groups are not included.
TRENDS IN EXPENDITURES
Between 1970 and 1982, estimated total disability expenditures
from all sources for members of the population age 18 to 64 years old
more than doubled, from $60.2 billion to $121.5 billion in real 1982
dollars (see Table 5-41. These costs increased as transfer payments and
medical care payments escalated. Between 1970 and 197S, the number
of SSDI recipients nearly doubled, from 1.5 million to 2.9 million (Reno
and Price, 19851.
Economists try to explain such patterns with statistical modeling
techniques. Such modeling requires certain assumptions and simplifi-
cations that may not appropriately reflect all the circumstances of
particular individuals or groups. For example, in exploring the rela-
tion between the rates of unemployment and disability, studies that
use national or statewide figures may not reflect local employment
circumstances. One of the primary economic assumptions is that
people make rational choices in order to maximize their welI-being.
Although recognizing that income is only one aspect of well-being,
economic models typically use income as a proxy for well-being because it
can be counted and measured more easily than other factors like job
satisfaction. The assumption that people behave rationally may not be
true for all individuals, including people with pain symptoms.
Numerous possible explanations of these trend data can be set forth.
One possibility is that a backlog of need is being met more appropri-
ately in recent years than formerly that is, a more realistic propor-
tion of the disabled population is now seeking and receiving benefits. A
contributory factor could be greater publicity about disability pro-
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92 THE EXTENT AND COST OF THE PROBLEM
TABLE 5-4 Total Disability Expenditures, from ail Sources for the
Population Ages 18-64, 1970-1982 (millions)
Transfer Program Medical Care Costs of Direct
Payments Payments Services Total
Current 1982 Current 1982 Current 1982 Current 1982
Year dollars dollars dollars dollars dollars dollars dollars dollars
1970 15,230 37,793 7,968 19,773 1,053 2,613 24,251 60,179
1975 31,470 56,341 16,158 28,928 2,308 4,132 49,936 89,402
1976 35,533 60,146 19,547 33,087 2,554 4,323 57,634 97,~55
1977 41,411 65,847 22,821 36,287 2,887 4,591 67,119 106,725
1978 45,700 67,532 27,353 40,420 2,877 4,251 75,930 112,204
1979 52,188 69,184 31,651 41,959 3,344 4,433 87,183 115,577
1980 58,335 68,160 36,399 42,529 3,395 3,967 98,129 114,656
1981 64,068 67,903 44,051 46,688 3,415 3,619 111,534 118,210
1982 67,377 67,377 51,197 51,197 2,950 2,950 121,524 121,524
SOURCE: Berkowitz, Monroe, 1985, Disability Expenditures, 1970-1982, Tables 7, 9,
and 11.
grams, including more active social work and legal avarice. Addition-
ally, both the absolute and relative number of people who are medi-
cally impaired, and hence eligible for disability benefits, may be rising
sharply. Although the population is aging, the elderly (who are most
likely to be work disabled by virture of a medical impair client) are not
covered by SSDI. Nonetheless, this demographic trend may account for
some of the increase in the 55- to 64-year-old group, but it is not
sufficient to account for the magnitude of the overall increase. Fur-
thermore, it is impossible to account for such a rapid rise in expendi-
tures on medical grounds alone. No epidemic swept the country during
those years leaving in its wake vast numbers of disabled persons. To
explain changes of such magnitude requires an understanding of
disability as a complex socioeconomic phenomenon.
One such explanation for the rapid increase in expenditures is that
the number of people who identify themselves as disabled fluctuates
with changing economic conditions. Several types of evidence support
this view. As discussed in Chapter 4, various features of the labor
market and the disability programs influence rates of disability and
hence expenditures. In the United States the disability program is not
used explicitly to counteract unemployment, but the labor market
appears to influence application rates. Even if the disability program
were administered in exactly the same way over the period of a
business cycle, economists would expect the number of applicants to
vary in accordance with changing economic activity, especially local
unemployment rates (I~ando, 1979~.
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ECONOMIC ISSUES ED THE COST OF DISK 93
The ratio of benefits to anticipated earnings also appears to influence
people's decisions to seek disability benefits. Economic studies use
regression analyses to estimate the relative contribution of different
factors (e.g., age structure of the population, unemployment rate, and
disability benefit levels) to rates of application to the Social Secur-
ity disability insurance programs. The most sophisticated of these
studies use some measure of the relative value of disability benefits
compared with earnings to determine the ejects of disability benefits
on labor force participation. A common measure in recent studies is the
replacement rate, the ratio of average disability award to average
wage. Estimates of the elasticity of the labor supply for every 10
percent increase in disability benefits range from -0.3 percent (Par-
sons, 1980a,b) to -0.0003 percent (Haveman and Wolfe, 19831. (This
means that for every 10 percent increase in the replacement rate,
aggregate labor supply drops by 0.3 percent or 0.0003 percent.) In
general, later studies have found smaller ejects of disability benefits
on labor supply.
In addition to economic influences, the increased use of medical
screening by employers may contribute to the increase in disability
applications. Employers use medical screening both to reduce their
future costs (e.g., health insurance and disability payments) and to
increase the safety of the work environment by taking employee
health into account in job placement and hiring. Such screening
results in the exclusion of some individuals who are able to work,
but who are perceived as being "high-risk" workers by potential
employers (Stone, 19871. An examination of the characteristics of the
disabled population, which elucidates some of these hypotheses, fol-
lows.
Disabled Persons
A Note About Measurement
Information about the prevalence of disability is available from a
variety of sources, including the U.S. Department of Labor, the SSA,
other disability programs, and special surveys of samples of the
general population (Haber, 19841. Although the definition of disability
generally includes the inability to work, the specific definition used in
each data set varies considerably. Each program has its own definition
of disability, usually linking it to a medical impairment, which is
variously defined. Surveys that ask respondents whether they are
limited in the amount or kind of work they can do because of a health
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94 THE EXTENT AND COST OF THE PROBLEM
condition are subject to individual interpretation. Moreover, that kind
of question may provide a very different estimate of the number of
disabled people than the actual number known to have withdrawn
from the labor force—which may, in turn, be significantly different
from the number of people receiving disability benefits. Long- and
short-term disability are not always distinguished. Among older work-
ers it may be impossible to distinguish disability withdrawals from the
labor force and withdrawals for other reasons.
For all of these reasons, the number of disabled people cannot be
estimated precisely. The best we can do is to calculate the number
using the sources most appropriate to the particular question of
interest—that is, the number of people receiving benefits, the number
who consider themselves disabled, or the number who have stopped
working because of a medical condition. These same kinds of defini-
tional and measurement problems hinder our ability to count the
number of pain-disabled people with precision (see Chapter 6~.
Number and Characteristics of the Disabled
Estimates of the proportion of disabled people in the noninstitu-
tionalized population from 18- to 64-years old range from 4.4 percent to
8.9 percent. The best estimate of the number of severely disabled
people (defined as those not working or not working regularly)
is 5.8 percent based on the 1978 Social Security Survey (Haber,
19841. This is more than 8 million people. Work disability increases
systematically with age. Controlling for age, work disability decreases
with education. Generally, blacks are more likely to be work disabled
than whites, with black women more likely to be disabled than
black men; among whites, men are more likely to be disabled than
women.
That the prevalence of disability increases with age is neither
surprising nor troubling. Both morbidity and the prevalence of poten-
tially disabling conditions (e.g., visual and hearing impairments,
circulatory and respiratory conditions) increase with age. The relation
between education and disability is another matter. It is likely that
those with less schooling work in jobs that involve greater risk of
occupational injury or illness. Furthermore, these jobs are likely to
require more physical exertion. The same condition that may force a
manual laborer to withdraw from the labor force may be only an
inconvenience to an office worker. Finally, individuals with less
education may face more restricted occupational choices than those
with more education.
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ECONOMIC ISSUES AND THE COST OF DISABILITY 95
Benefit Levels ant] Beneficiaries
The number of beneficiaries appears to be positively related to the
level of benefits in a number of ways. As discussed in Chapter 4, the
level of benefits is believed to provide an incentive for people to claim
disability if that level is higher than expected earnings (Addison, 1981;
Painter, 19801. In 1982, monthly SSDI benefits averaged $413 for all
disabled workers and $812 for workers with families (Reno and Price,
19851. Nearly one-fourth of the newly disabled workers were receiving
more in SSD] benefits than they had earned while working (Lando et
al., 1979, 19821. Observers agree that as benefit levels increase, the
number of people in the labor force decreases, although they disagree
on the magnitude of the relation (Leonard, 1979; Parsons, 1980a,b;
STade, 1984; Haveman and Wolfe, 19831. Furthermore, in addition to
cash benefits, the disabled are eligible for medical benefits. Although a
disabled person may be persuaded to give up a monthly disability
check for labor market earnings, he or she may be more cautious about
relinquishing Medicare eligibility if faced with an unknown future
medical liability.
Treite] (1979) and Berkowitz et al. (1976) found that as the benefits
to income replacement ratio increased, the likelihood that a recipient
of SSDI benefits would leave the disability rolls declined. Economists
also assert that the decision to apply for benefits is influenced more by
the level of benefits than by the probability of acceptance into the
program (Halpern and Hausman, 19841.
In any society there are individuals on the margins; whether they
persist in attempting to work or seek release depends to some extent on
the mix of incentives and disincentives. As noted in Chapter 4, most
people who report being disabled do continue to work. Some of these
people might meet the disability eligibility criteria, but for various
reasons do not apply for benefits even if working is difficult. Were this
situation to change, perhaps because of deterioration in health or job
skills as they grow older or because of some shift in the business cycle,
these people might be more likely to apply. Economic incentives
clearly affect application rates, but they are not the only influence.
Features of the disability program also are important to consider.
Program Influences
The rapid growth in the number of SSDI beneficiaries between 1970
and 1978 is probably due in part to some administrative changes in the
program. These changes included more lenient application of eligibil-
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96 THE EXTENT AND COST OF THE PROBLEM
ity criteria, cutbacks in federal reviews of the state agencies that
administer the SSD] program, and a reduction in the number of
continuing eligibility reviews (Weaver, 19861. The growth led to
congressional action to step up continuing reviews, which resulted in
many people being taken off the rolls, which in turn led to substantial
public pressure and the subsequent reinstatement of benefits to many.
The problems remain. The federal disability program is still criti-
cized for denying benefits to some people who really need them, while
allowing others on the rolls who are capable of working. As discussed
in the previous chapter, because disability is a judgment, some errors
are inevitable. The extent of such errors in the system as a whole is
unknown. Furthermore, given the present size and complexity of the
Social Security program, one would not want to recommend major
changes in the system without being fairly certain that such changes
would lead to significant improvement at acceptable costs.
Program Efficiency
Efficiency refers to meeting particular defined objectives at the
lowest possible cost. Assuming there were a method for ascertaining
the correctness of the decisions in light of the operational criteria, the
efficient solution would be one that, with a given amount of funds,
maximized the number of correct decisions and minimized the number
of incorrect decisions. The efficiency test becomes more complicated if
we assume that certain errors are worse than others and seek to
eliminate egregious errors, such as denying benefits to the older,
uneducated paraplegic, while perhaps tolerating marginal errors, such
as denying benefits to the middIe-ciass, educated applicant with Tow
back pain.
As discussed in earlier chapters, the sheer size of the work load faced
by the Social Security disability program boggles the imagination. It
would be extremely inefficient to require a thorough examination and
evaluation of each applicant for disability benefits. The program
necessarily operates by using administratively feasible tests that are
proxies for the existence of"disability." The less rigorous the criteria,
the greater the pool of potential applicants and the greater the ratio of
allowances to denials. Almost 4 percent of the program costs are spent
on administration. The administration of the program is expensive,
not only because of its size but also because of the complexity of its
administrative structure and eligibility rules. In 1977, the average
cost of processing a case was $105; in 1985 the average cost was $342.
The cost of processing cases has been growing in both absolute terms
OCR for page 97
ECONOMIC ISSUES ED THE COST OF DISABlLl~ 97
and as a percentage of contributions to the trust fund from which
disability payments are made.
PREVENTING DISABILITY BY REALLOCATING FUNDS
It is often alleged that if more money were spent on prevention we
would not have to spend as much on disability payments. Indeed, the
usual and historical rationale for public support of rehabilitation services
is that they are a good investment. The present value of an $800 per
month SSDI award to a 25-year-old beneficiary with a family is estimated
at $188,000. If at least some of this amount could be saved by providing
rehabilitation services, such expenditures would be worthwhile.
In fact, each of the benefit programs uses rehabilitation to some
extent, but expenditures for direct services, including rehabilitation,
appear to be decreasing relative to cash transfers and medical care
expenditures. It is estimated that 4.2 percent of all disability expen-
ditures in 1970 were for direct services of all kinds. By 1982, the
amount spent for direct services was an even smaller proportion of the
total disability dollar. Largely because of the rapid increases in
medical care payments, the proportion of total disability expenditures
allocated to direct services had shrunk to 2.4 percent.
Not enough is known about prevention and rehabilitation to war-
rant making major changes in the distribution of disability expendi-
tures at this time. As discussed in later chapters in this volume, this
lack of knowledge is especially apparent in the area of preventing and
rehabilitating people with chronic pain. We do not know how to
identify people early who are likely to develop chronic disabling
problems, and we know little about the efficacy of specific interventions
in preventing functional impairment or restoring function. Thus, al-
though in theory it would seem worthwhile to spend on a case until the
marginal dollar emended on rehabilitation equated a dollar in benefits,
at this point in time we lack sufficient knowledge to do this efficiently. We
do not know which individuals will improve and which will not. Further-
more, from a cost-benefit standpoint, just as we could spend too little on
rehabilitation, we could also spend too much. The experiences in the
Workers' Compensation jurisdictions of California, where costs soared
after the introduction of compulsory rehabilitation, and Washington
state, where the rehabilitation statute was amended to cut down on
services because of high costs, illustrate some of the problems involved
with increasing rehabilitation efforts (Berkowitz, 1986~.
Prevention requires a good deal more information than simply
knowing how much it is rational to spend. Both clinical and economic
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98 THE EXTENT ID COST OF THE PROBLEM
analyses are needed. What types of interventions yield what types of
benefits? Do employers have sufficient incentives to prevent the
worker on a short-term sickness benefit program from moving onto the
long-term rolls and eventually to the Social Security disability system?
If early intervention is indicated to prevent long-term disability, is it
possible to identify potential candidates in a cost-efficient manner?
THE ECONOMICS OF PAIN: GAPS IN THE LITERATURE
As mentioned previously, there appear to have been no systematic
economic inquiries into the pain issue. Given additional resources for
data collection, would it be possible to collect reliable data that could
aid in some cost estimates or help isolate the pain phenomenon in the
disability eligibility determination process? In most benefit programs,
pain itself is not taken into consideration. It may be a component in
any one of a number of preliminary stages of eligibility determination,
be it the classification of the medical condition or as contributory to the
impairment or the nature and extent of functional limitation. The
problem for the SSA is not with pain in general or with pain associated
with well-documented anatomical abnormalities or disease processes.
It is pain and its associated functional limitations that are not fully
explained by clinical findings. This complicates data collection activi-
ties substantially.
In terms of the costs associated with chronic pain, a few speculative
observations can be offered. First, people with chronic pain of uncer-
tain origin are known to be heavy users of health care services (see
Chapters ~ and 101. Thus, their medical care costs are likely to be
relatively high compared with those of people with some other condi-
tions. Second, the costs associated with the assessment of claimants
with pain and other symptom complaints that cannot be readily
explained are likely to be higher than for claimants with obvious
medical conditions. Administrative costs of consultative examinations
and tests, as well as appeals through the system, contribute to the high
costs of processing these claims. Finally, given the elasticity in the
system associated with changing economic and political conditions,
allowance rates for symptom complaints such as chronic pain may vary
more than for more clear-cut impairments.
CONCLUSIONS
Examination of the basic trends in disability, be they the fluctua-
tions of cash benefits over time or the distribution of disabled persons
OCR for page 99
ECONOMIC ISSUES AND THE COST OF DISABlLI~Y 99
by age or educational level, leads to the conclusion that disability
cannot be understood solely as a medical phenomenon. Economic
conditions, individuals' options and motivations, and program features
such as the level of benefits all exert an influence on the number of
disabled people. No matter what the eligibility criteria, it is likely that
a number of people in the population could qualify, but for various
reasons they do not apply; it is also likely that some people who
deserve benefits apply and are found ineligible.
The purpose of the Social Security disability system is to pay a
portion of predisab~lity wages as an income maintenance benefit to
those who are "truly" disabled. Yet there is no one truly disabled state;
each program chooses its eligibility criteria in light of the program's
purposes, and designs a determination process to fit within its time and
income restraints. Pain is an especially challenging problem, because
the more subjective the complaint, the more expensive it becomes to
establish its relation to the inability to work. The field is ripe for
controlled experiments and demonstrations that could provide infor-
mation about efficiently and fairly evaluating claimants, selecting
potential beneficiaries for preventive efforts, and determining the mix
of services that can equitably and efficiently encourage return to
substantial gainful activity.
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Representative terms from entire chapter:
disability expenditures
