Workers' compensation pays for medical care immediately after injury and pays cash benefits for last work time after a 3- to 7-day waiting period. As a source of support for disabled workers, it is surpassed in size only be the Social Security Disability Insurance program. This article traces the development of workers' compensation coverage, benefits, and employer costs in 2004.
Ishita Sengupta is the Workers' Compensation Research Associate and Virginia Reno is Vice President for Income Security Policy at the National Academy of Social Insurance (NASI). This article reports new estimates of workers' compensation coverage, benefits, and costs reported by NASI in Sengupta, Reno, and Burton (2006).
The findings and conclusions presented in the Bulletin are those of the authors and do not necessarily represent the views of the Social Security Administration.
Workers' compensation provides cash benefits and medical care to employees who are injured on the job and survivor benefits to the dependents of workers whose deaths result from work-related incidents. Workers' compensation programs in the 50 states and the District of Columbia and federal programs together paid $56.0 billion in medical and cash benefits in 2004, an increase of 2.3 percent over 2003 payments. Of the total, $26.1 billion was for medical care and $29.9 billion was for cash benefits. Employers' costs for workers' compensation in 2004 were $87.4 billion, an increase of 7.0 percent over 2003 spending. Workers' compensation programs and spending vary greatly from state to state.
As a source of support for disabled workers, workers' compensation is currently surpassed in size only by Social Security Disability Insurance (DI), which covers impairments of any cause that are significant, long-term impediments to work. Although most recipients of workers' compensation recover and return to work, those with lasting impairments may become eligible for DI benefits, subject to an offset to avoid excessive wage replacement from both programs.
Origins of Workers' Compensation
Workers' compensation was the first form of social insurance in the United States. The first U.S. workers' compensation law was enacted in 1908 to cover federal civilian employees engaged in hazardous work. The rest of the federal workforce was covered in 1916. Nine states enacted workers' compensation laws in 1911. By 1921, all but six states and the District of Columbia had workers' compensation laws. Today each of the 50 states has its own program, as do the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Federal laws provide benefits to coal miners with black lung disease and certain energy employees exposed to hazardous material. The laws also set rules for federal workers' compensation programs covering persons outside the jurisdiction of individual states, such as longshore and harbor workers and persons working overseas for companies under contract with the U.S. government.
Before workers' compensation laws were enacted, a worker's only legal remedy for a work-related injury was to bring a tort suit against the employer and prove that the employer's negligence caused the injury. Under the tort system, workers often did not recover damages and experienced delays or high costs when they did. Although employers often prevailed in court, they were at risk for large and unpredictable losses when workers' suits were successful. Ultimately, both employers and workers favored legislation to ensure that a worker who sustained an occupational injury or disease arising out of or in the course of employment would receive predictable compensation without delay, irrespective of who was at fault. In return, the employers' liability was limited. Under the "exclusive remedy" concept in workers' compensation, the worker accepts program payments as compensation in full and gives up the right to sue for damages.
Workers' compensation programs vary across states in terms of who is allowed to provide insurance, which injuries or illnesses are compensable, and the level of benefits. Generally, state laws require employers to obtain workers' compensation insurance or prove that they have the financial ability to carry their own risk (self-insure).
Scope of Coverage
Every state except Texas requires employers to provide workers' compensation coverage. In Texas, employers can choose not to cover their employees, but if they make that choice they are not protected from tort suits filed by injured employees.
Some states exempt from mandatory coverage certain categories of workers, such as those in very small firms, certain agricultural workers, household workers, employees of charitable or religious organizations, or employees of some units of state and local government. Employers with fewer than three workers are exempt from mandatory workers' compensation coverage in Arkansas, Colorado, Georgia, Michigan, New Mexico, North Carolina, Virginia, and Wisconsin. Employers with fewer than four workers are exempt in Florida and South Carolina. Those with fewer than five employees are exempt in Alabama, Mississippi, Missouri, and Tennessee.
The rules for agricultural workers vary among states. In 16 states (in addition to Texas), farm employers are exempt from mandatory coverage altogether. In other states, coverage is compulsory for some or all farm employees.
Two groups outside the coverage of workers' compensation laws are railroad employees engaged in interstate commerce and seamen in the U.S. Merchant Marine. These workers have health insurance and short- and long-term cash benefit plans that cover disabilities whether or not the conditions are work related. In addition, under federal laws these workers retain the right to bring tort suits against their employers for negligence in the case of work-related injuries or illnesses.
In 2004, state and federal workers' compensation laws covered an estimated 125.9 million employees, or 97.4 percent of all workers covered by unemployment insurance. In all, about 94 percent of all U.S. wage and salary workers are covered by workers' compensation laws. Self-employed persons are not covered by workers' compensation or unemployment insurance. Covered payroll—that is, total wages paid to workers covered by workers' compensation—was $4,953 billion in 2004.
Types of Workers' Compensation Benefits
Workers' compensation pays for medical care immediately and pays cash benefits for lost work time after a 3- to 7-day waiting period. Most workers' compensation cases involve relatively minor injuries that do not result in lost work time greater than the waiting period for cash benefits. In these cases, only medical benefits are paid. Although medical-only cases are common, they account for a small share of benefits paid, according to information about insured employers in 39 states. Medical-only cases accounted for 78 percent of the workers' compensation cases but for only 6 percent of benefits paid in recent years. At the same time, the 22 percent of cases that involved cash benefits accounted for 94 percent of total benefits for medical care and cash benefits combined (NCCI 2004).
Cash benefits vary according to the duration and severity of the worker's disability. Temporary total disability benefits are paid when the worker is precluded from performing the preinjury job or another job with the employer that the worker could have performed before the injury. Most states pay weekly benefits for temporary total disability that replace two-thirds of the worker's preinjury wage, subject to a dollar maximum that varies from state to state. In most cases, workers fully recover, return to work, and their benefits end. In some cases, they return to work before reaching maximum medical improvement and have reduced responsibilities and lower pay. In those cases, they receive temporary partial disability benefits. Temporary disability benefits are the most common type of cash benefit. They account for 65 percent of cases involving cash benefits and 21 percent of benefit payments incurred (Chart 1).
Types of disabilities as a share of workers' compensation cases with cash benefits and of benefit payments incurred, 2001
If a worker has very significant impairments that are judged to be permanent after he or she reaches maximum medical improvement, permanent total disability benefits might be paid. These cases are relatively rare. Permanent total disabilities, together with fatalities, account for 1 percent of all cases that involve cash benefits and 12 percent of total benefit liabilities.
Permanent partial disability benefits are paid when the worker has impairments that, although permanent, do not completely limit his or her ability to work. States differ in their methods for determining whether a worker is entitled to permanent partial benefits, the degree of partial disability, and the amount of benefits to be paid (Barth and Niss 1999, Burton 2005). Cash benefits for permanent partial disability are frequently limited to a specified duration or an aggregate dollar limit. Permanent partial disabilities account for 34 percent of cases that involve any cash benefits and for 67 percent of benefit spending.
Benefits and Employer Costs in 2004
Workers' compensation programs in the 50 states and the District of Columbia and federal programs together paid $56.0 billion in workers' compensation benefits in 2004—$26.1 billion for medical care and $29.9 billion for cash benefits (Table 1). Payments to medical providers and benefits paid directly to workers each rose by 2.3 percent between 2003 and 2004.
|Covered workers (thousands)||124,685||125,863||. . .||0.9|
|Covered wages (billions of dollars)||4,717||4,953||. . .||5.0|
|Benefits paid (billions of dollars)||54.7||56.0||. . .||2.3|
|Medical payments||25.5||26.1||. . .||2.3|
|Cash benefits||29.2||29.9||. . .||2.3|
|Employers' costs for workers' compensation (billions of dollars)||81.7||87.4||. . .||7.0|
|Per $100 of covered wages (dollars)|
|Benefits paid||1.16||1.13||-0.03||. . .|
|Medical payments||0.54||0.53||-0.01||. . .|
|Cash payments to workers||0.62||0.60||-0.02||. . .|
|Employers' costs||1.73||1.76||0.03||. . .|
|SOURCE: National Academy of Social Insurance estimates.|
|NOTES: Benefits are payments in the calendar year to injured workers and to providers of their medical care.|
|Costs are employers' expenditures in the calendar year for workers' compensation benefits, administrative costs, and insurance premiums. Costs for self-insuring employers are benefits paid in the calendar year plus the administrative costs associated with providing those benefits. Costs for employers who purchase insurance include the insurance premiums paid during the calendar year plus the benefits paid under large deductible plans during the year. The insurance premiums must pay for all of the compensable consequences of the injuries that occur during the year, including the benefits paid in the current year as well as future years.|
|. . . = not applicable.|
Employers' costs in 2004 were $87.4 billion, an increase of 7.0 percent over 2003 costs. For employers who self-insure, costs are benefits paid plus administrative costs. For employers who buy insurance, costs are payments for premiums and for benefits paid in large deductibles under insurance policies that have this feature. Premiums paid in a given year do not necessarily correspond to benefits paid in that year because premiums reflect future liabilities for injuries that occur in that year.
When measured relative to aggregate wages of covered workers, the costs to employers rose by $0.03 per $100 of wages, from $1.73 in 2003 to $1.76 in 2004 (Table 1). In contrast, total workers' compensation payments to workers fell by $0.03 for every $100 of wages, from $1.16 in 2003 to $1.13 in 2004. The drop occurred in payments for medical care, which fell from $0.54 to $0.53 per $100 of wages in 2004, and in cash benefits paid to injured workers, which fell from $0.62 to $0.60 per $100 of wages.
During the 16-year period 1989–2004, workers' compensation benefits paid and employers' costs relative to wages peaked in the early 1990s and declined to a low in 2000. As of 2004, employers' costs had increased by more than benefits, but both benefits and costs remained far below their peak levels relative to wages. Total benefits peaked in 1992 at $1.68 per $100 of covered wages, which is $0.55 higher than the 2004 figure. Total costs to employers peaked in 1990 at $2.18 per $100 of covered wages, which is $0.42 higher than in 2004 (Chart 2).
Workers' compensation benefits and employers' costs per $100 of covered wages, 1989–2004 (in dollars)
During this 16-year period, both components of benefits (cash and medical payments) relative to wages reached peaks in the early 1990s and lows in 1999–2000. They have grown somewhat since then but are still substantially below their peaks (Chart 2). Medical payments have risen to account for a larger share of total benefits in 2004 than they did in the mid- to late 1990s.
Workers' compensation programs differ in the methods used to ensure that benefits will be paid when due. Employers generally provide the required protection through one of three methods: purchasing private insurance; purchasing insurance from a state fund, where available; or self-insuring (a method used mainly by large employers who are able to prove to state regulatory agencies that they are financially able to carry their own risk).
Options are limited in North Dakota and Wyoming because those states require employers to buy insurance through an exclusive state fund. In three other states in 2004—Ohio, Washington, and West Virginia—employers had to either self-insure or buy insurance through an exclusive state fund. In other jurisdictions, employers can purchase private insurance. In 2004, private insurers paid $28.3 billion (50.6 percent of benefits), state funds paid $11.0 billion (19.7 percent), and self-insured employees paid $13.3 billion (23.8 percent) (Table 2). Federal benefits accounted for $3.3 billion (5.8 percent).
|Amount (dollars)||As a share of all benefits|
|Alabama||575,697||277,585||. . .||298,112||357,739||62.1 b|
|Alaska||194,195||142,286||. . .||51,910||108,348||55.8 b|
|Arkansas||225,689||160,642||. . .||65,047||136,946||60.7 b|
|Connecticut||684,930||433,077||. . .||251,853||271,039||39.6 b|
|Delaware||158,190||113,948||. . .||44,242||75,711||47.9 c|
|District of Columbia||98,443||75,415||. . .||23,029||38,089||38.7 b|
|Florida||2,759,712||2,219,913||. . .||539,799||1,637,270||59.3 b|
|Georgia||1,127,654||768,478||. . .||359,176||538,764||47.8 b|
|Illinois||2,213,372||1,646,713||. . .||566,659||1,073,614||48.5 b|
|Indiana||608,717||489,351||. . .||119,366||413,979||68.0 b|
|Iowa||445,832||337,824||. . .||108,008||230,117||51.6 b|
|Kansas||365,546||241,025||. . .||124,522||200,913||55.0 b|
|Massachusetts||1,045,747||900,741||. . .||145,006||358,708||34.3|
|Michigan||1,517,386||827,277||. . .||690,109||569,855||37.6|
|Mississippi||305,516||172,433||. . .||133,083||170,668||55.9 b|
|Nebraska||283,148||218,113||. . .||65,035||166,863||58.9 b|
|Nevada||357,937||239,619||. . .||118,317||175,796||49.1 b|
|New Hampshire||213,964||167,868||. . .||46,096||119,685||55.9 b|
|New Jersey||1,398,358||1,278,746||. . .||119,612||669,265||47.9 c|
|New Mexico||196,123||87,748||32,170||76,205||115,830||59.1 b|
|North Carolina||1,159,117||844,199||. . .||314,919||512,146||44.2 b|
|North Dakota||83,237||260 d||82,977||. . .||46,870||56.3|
|Rhode Island||142,268||40,504||85,096||16,669||49,990||35.1 b|
|South Carolina||688,115||461,543||49,629||176,944||318,811||46.3 b|
|South Dakota||76,472||72,749||. . .||3,723||48,122||62.9 b|
|Tennessee||895,808||649,333||. . .||246,475||462,466||51.6 b|
|Vermont||128,076||106,192||. . .||21,884||58,611||45.8 b|
|Virginia||762,067||554,397||. . .||207,670||419,955||55.1 b|
|West Virginia||741,034||7,317 d||629,617||104,100||354,665||47.9 c|
|Wisconsin||1,042,725||840,423||. . .||202,302||499,057||47.9 c|
|Wyoming||120,062||3,534 d||116,528||. . .||57,463||47.9 c|
|Total federal e||3,256,239||f||f||f||870,872||26.7|
|SOURCE: National Academy of Social Insurance estimates based on data received from state agencies, the U.S. Department of Labor, A.M. Best, and the National Council on Compensation Insurance.|
|NOTE: . . . = not applicable.|
|a. Self-insurance includes individual self-insurers and group self-insurance.|
|b. Medical percentage is based on data provided by the National Council on Compensation Insurance; see Sengupta, Reno, and Burton (2006), Appendix F.|
|c. Medical percentage is based on the weighted average of states for which medical data were available; see Sengupta, Reno, and Burton (2006), Appendix F.|
|d. States with exclusive funds (North Dakota, Ohio, Washington, West Virginia, and Wyoming) may have small amounts of benefits paid in the "Private insurers" category. Two factors account for these small amounts: some companies have group policies that overlap states, and some companies include excess workers' compensation coverage in their reports of workers' compensation benefits to A.M. Best.|
|e. Federal benefits include those paid under the Federal Employees' Compensation Act for civilian employees, the portion of the Black Lung benefit program that is financed by employers, and a portion of benefits under the Longshore and Harbor Workers' Compensation Act (LHWCA) that are not reflected in state data, namely, benefits paid by self-insured employers and by special funds under the LHWCA. For more information about federal programs, see Sengupta, Reno, and Burton (2006), Appendix H.|
|f. Data are not available by category.|
The great variations in the total benefits paid in each state reflect, among other things, the size of the labor force and prevailing wages in the state. California is the largest state, and its payments of $12.5 billion accounted for about 22 percent of total workers' compensation benefits paid in 2004 (Table 2).
The share of benefits for medical care also varies among states. In 2004, that share ranged from lows of less than 40 percent (in Connecticut, the District of Columbia, Hawaii, Massachusetts, Michigan, New York, Rhode Island, and Washington) to highs of more than 60 percent (in Alabama, Arizona, Arkansas, Indiana, South Dakota, Texas, and Utah) (Table 2). Many factors in a state can influence the relative share of benefits for medical care as opposed to cash wage-replacement or survivor benefits, including
- different levels of earnings replacement provided by cash benefits, which mean that, all else being equal, states with more generous cash benefits have a lower share of benefits used for medical care;
- differences in medical costs, medical practices, and the role of workers' compensation programs in regulating allowable medical costs;
- differences in waiting periods for cash benefits and in statutes determining permanent disability awards; and
- the industry mix in each state, which influences the types of illnesses and injuries that occur and thus the level of medical costs.
For the nation as a whole, payments for medical care and cash benefits both rose by 2.3 percent between 2003 and 2004. But in most jurisdictions, one component of workers' compensation grew more rapidly than the other (Table 3). In California, cash benefits rose by 5.1 percent while payments to medical care providers fell by 4.1 percent. In other states, payments to medical care providers grew more rapidly than did cash benefits to workers. In Michigan, for example, payments to medical providers rose by 5.0 percent while payments to workers rose by just 1.4 percent. In New York, medical payments increased by 8.4 percent while payments to workers increased by only 1.3 percent. In most jurisdictions, medical payments rose more than did payments to workers: in 27 jurisdictions, medical benefits either rose faster than cash benefits or rose while cash payments fell. In 16 jurisdictions, cash benefits to workers either grew faster than did medical payments or rose while medical payments fell.
|State||2003||2004||Percentage change, 2003–2004|
|District of Columbia||32,973||56,135||89,108||38,089||60,354||98,443||15.5||7.5||10.5|
|North Dakota a||43,102||35,352||78,453||46,870||36,367||83,237||8.7||2.9||6.1|
|West Virginia a||241,676||587,237||828,913||354,665||386,369||741,034||46.8||-34.2||-10.6|
|SOURCE: National Academy of Social Insurance estimates based on data from state agencies and A.M. Best.|
|a. Some of the percentage change in benefits for the 2 years being compared might be due to differences in methods used for at least one component of the estimates. For more detail on state-by-state methodologies, see Sources and Methods: A Companion to Workers' Compensation: Benefits, Coverage, and Costs, 2004, available at http://www.nasi.org.|
These estimates of workers' compensation benefits and costs are reported in the Annual Statistical Supplement to the Social Security Bulletin and in the Statistical Abstract of the United States, which is published by the U.S. Census Bureau. More details about the estimates and methods for producing them are included in Workers' Compensation: Benefits, Coverage and Costs, 2004, available from the National Academy of Social Insurance at http:// www.nasi.org/.
Barth, Peter, and Michael Niss. 1999. Permanent partial disability benefits: Interstate differences. Cambridge, MA: Workers Compensation Research Institute.
Burton, John F. Jr. 2005. Permanent partial disability benefits. In Workplace injuries and diseases: Prevention and compensation—Essays in honor of Terry Thomason, ed. Karen Roberts, John F. Burton Jr., and Matthew M. Bodah, Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.
[NCCI] National Council on Compensation Insurance. 2004. Annual Statistical Bulletin, 2004 edition. Boca Raton, FL: NCCI.
Sengupta, Ishita, Virginia Reno, and John F. Burton Jr. 2006. Workers' compensation: Benefits, coverage, and costs, 2004. Washington, DC: National Academy of Social Insurance.
Table A–1 shows the data for Chart 2.
|Year||Benefits||Employer costs||Benefits per $100 of covered wages|
|SOURCE: National Academy of Social Insurance estimates.|