In the early 2000s, California was facing a fiscal crisis.

Amid rising health care costs, the state had massive increases in spending for workers compensation, the state-run social insurance program for workers hurt on the job.

Workers comp costs spiked between 2000 and 2003, increasing to $6.29 per $100 of payroll from $2.69 just three years earlier. So, lawmakers tightened guidelines for who could qualify and put caps on certain types of treatment, such as chiropractic care.

A paper in the October issue of the American Economic Review examines how these reforms affected medical spending and, in turn, impacted labor market outcomes for injured workers. The paper highlights important consequences of such medical spending cuts for workers’ livelihoods.

Figure 2 from Powell et al. (2018)

Authors David Powell and Seth Seabury looked specifically at what happened to people with low back injuries, which were most affected by the changes.

The figure above shows a correlation between how medical expenditures and earnings for injured workers changed after the reform. The red line represents the ratio of average medical expenditures for low back injuries relative to other injuries, such as shoulder or knee problems. Low back problems were becoming increasingly expensive to treat compared to other injuries, but then dropped dramatically after the reform went into effect (represented by the shaded region).

The impact on wages followed the same basic pattern. The dashed blue line shows earnings for workers with low back issues relative to earnings for other injuries. The earnings ratio closely follows the relative drop in medical spending. Both were trending upward before the reform, but reversed course when the reforms went into effect.

Overall, the authors determine that California’s reforms reduced medical spending and earnings disproportionately for workers with low back injuries. Medical spending dropped by 7.6 percent more than spending for other injuries and relative earnings declined 8.1 percent, due largely to delays in returning to work.