Workers’ compensation provides medical care, rehabilitation, and cash benefits for workers who are injured on the job or who contract work-related illnesses. It also pays benefits to families of workers who die of work-related causes. Each state regulates its own workers’ compensation program, with no standard reporting requirements. Unlike other U.S. social insurance programs, state workers’ compensation programs are not federally financed or administered. And, unlike private pensions or employer-sponsored health benefits that receive favorable federal tax treatment, no federal laws set standards for “tax-qualified” plans or require comprehensive reporting of workers’ compensation coverage and benefits.
Historically, workers’ compensation has been the first social insurance program adopted in developed countries. In the U.S. most states adopted workers’ compensation laws in a relatively short period between 1910 and 1920. The first workers’ compensation law in the United States was enacted in 1908 to cover certain federal civilian workers. The first constitutional state laws were passed in 1911 by New Jersey and Wisconsin. The last state to pass a workers’ compensation law was Mississippi, in 1948.
Workers’ compensation as a source of disability benefits is surpassed in size only by the federal Social Security Disability Insurance (SSDI) program and Medicare. These programs provide cash and medical benefits respectively to workers with disabilities who become unable to work prior to normal retirement age. Workers’ compensation paid $29.5 billion in cash benefits and $28.1 billion for medical care in 2010. In that year, Social Security paid $124.2 billion in wage replacement benefits to disabled workers and their dependents, and Medicare paid $73.9 billion for medical and hospital care for disabled persons under age 65.
Workers’ compensation costs to employers were $71.3 billion in 2010, a decrease of 2.7 percent from 2009. For employers who purchase insurance from private carriers and state funds, these costs consist of premiums written in the calendar year plus benefit payments made under deductible provisions. For self-insured employers, the costs include benefit payments made during the calendar year and administrative costs associated with providing those benefits.
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Workers' compensation pays for medical care for work-related injuries immediately; it pays temporary disability benefits after a waiting period of three to seven days; and it pays permanent partial and permanent total disability benefits to workers who have lasting consequences of disabilities caused on the job. This is in contrast to Social Security Disability Insurance payments, which begin five months after the onset of the injury or condition that makes the individual unable to work. Medicare coverage begins 29 months after the onset of the injury.
Medical only: Workers’ compensation pays 100 percent of medical costs for injured workers and pays cash benefits for lost work time after a three-to-seven-day waiting period. Most workers’ compensation cases do not involve lost work time greater than the waiting period for cash benefits. In these cases, only medical costs are paid. “Medical only” cases are quite common in workers’ compensation, but they represent only a small share of overall payments. According to the National Council on Compensation Insurance (NCCI), medical-only cases accounted for 76 percent of workers’ compensation cases, but only 7 percent of all payments of cash and medical benefits in the 37 NCCI-covered states for policy years spanning 1998–2007.
Temporary disability: Cash benefits differ according to the duration and severity of the worker’s disability. Temporary total disability (TTD) benefits are paid when a work-related injury or illness temporarily prevents a worker from returning to the pre-injury job or another job for the same employer for which the worker is otherwise qualified. Most workers who receive TTD benefits fully recover and return to work, at which time benefits end. In some cases, however, injured workers return to work before they reach maximum medical improvement, often with restricted duties and lower or differential pay. When injured workers return to work at less than the pre-injury wage, they receive temporary partial disability (TPD) benefits in most states. Temporary disability benefits are the most common type of cash benefits. They account for 61 percent of cases involving cash benefits and 17 percent of total benefits (cash plus medical) in those cases.
Permanent disability: If an injured worker has severe impairments that are judged to be permanent after he or she reaches maximum medical improvement, permanent disability benefits may be paid. Permanent total disability (PTD) benefits are paid to workers who are unable to work because of a work-related injury or illness. Permanent partial disability (PPD) benefits are paid when the worker has physical impairments that, although permanent, do not completely limit his or her ability to work. Permanent total disabilities account for less than one percent of all cases that involve cash benefits, and only 9 percent of total cash benefit payments.
Workers’ compensation benefits are paid by private insurance carriers, by state or federal workers’ compensation funds, or by self-insured employers.
Private insurance carriers remained the largest source of workers’ compensation benefits in 2010, accounting for slightly more than half (53.0%) of all benefits paid. Private carriers currently are allowed to sell workers’ compensation insurance in all but four states that have exclusive state funds—Ohio, North Dakota, Washington, and Wyoming. The share of benefits paid by private carriers has varied between 47.7 and 62.6 percent since 1960.
Self-insured employers were the second largest source of workers’ compensation benefits, accounting for approximately one-fourth (23.3%) of all benefits paid in 2010. The share of benefits accounted for by self-insured employers has varied between 11.6 and 26.7 percent since 1960.
State funds accounted for 17.3 percent of workers’ compensation benefits in 2010. The share of benefits paid by state funds has varied from 12.5 percent to 20.7 percent since 1960.
Federal funds accounted for 6.4 percent of all workers compensation payments in 2010. Payments of workers’ compensation benefits by federal funds have varied between 4.1 and 25.0 percent of all benefit payments since 1960.
Total cash benefits to injured workers and medical payments for their health care were $57.5 billion in 2010, a 0.7 percent decrease from $57.9 billion in 2009. Medical payments decreased by 2.1 percent to $28.1 billion, but cash benefits to injured workers increased by 0.7 percent to $29.5 billion.
Workers’ compensation costs to employers were $71.3 billion in 2010, a decrease of 2.7 percent from 2009. This decrease in employer costs is a continuation of the downward trend in employer costs since 2006, which reflects the overall decline in employment in the recession.
The number of workers covered by workers’ compensation in 2010 was 0.3 percent smaller than in 2009 and 4.7 percent smaller than in 2008. Moreover, the sluggish economy of 2010 saw even sharper declines in the construction industry, a sector that has above average workers’ compensation costs due to a higher frequency and severity of workplace injuries. Construction was the hardest hit industry in the recession with a decline in employment of 19 percent between 2008 and 2009 and a further decline of 8.3 percent between 2009 and 2010.
Relative to wages, benefits and costs peaked in the early 1990s, declined sharply to a low in 2000, rebounded somewhat after 2000, and then declined in recent years. Since 2005, workers’ compensation benefits and employers’ cost relative to covered wages have been on the decline and continued to fall in 2010. Nationally, employer costs of $1.23 per $100 of covered wages in 2010 were at the lowest point since 1980, the earliest date when comparable data are available. Benefits per $100 of payroll were $0.99 in 2010, three cents less than $1.02 in 2009.
Other sources of support for workers with disabilities include sick leave, short-term and long-term disability benefits, Social Security Disability Insurance, and Medicare. These programs are not limited to injuries or illnesses caused on the job. However, some of these programs are not available to workers receiving workers’ compensation benefits and some programs reduce benefits for workers receiving workers’ compensation. In addition, Supplemental Security Income (SSI) and Medicaid provide cash and medical assistance to disabled individuals who have low incomes.
Three types of benefits for short-term disability are available to at least some workers: sick leave, state-mandated disability insurance, and employer-provided disability insurance.
Sick leave is a common form of wage replacement for short-term absences from work due to illness or injury. State laws require employers to provide short to medium-term disability insurance in five states: California, Hawaii, New Jersey, New York, and Rhode Island. Benefits typically replace about half of the worker’s prior earnings. Some private employers offer short-term disability insurance to their workers. Both employers and employees may be required to contribute to the cost of the short-term disability insurance. Long-term disability insurance that is financed, at least in part, by employers, covers about 32 percent of private sector employees. Such coverage is most common among relatively high-paying management, professional, and related occupations.
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Workers’ compensation as a source of disability benefits is surpassed in size only by the federal Social Security Disability Insurance (SSDI) program and Medicare. These programs provide cash and medical benefits respectively to workers with disabilities who become unable to work prior to normal retirement age.
While Social Security disability benefits and workers’ compensation are the nation’s two largest work-based disability benefit programs, the two programs differ in many respects. Workers’ compensation benefits cover only those disabilities arising out of and in the course of employment, whereas Social Security disability benefits are provided whether the disability arises on or off the job. Workers are eligible for workers’ compensation benefits from their first day of employment, while eligibility for SSDI requires workers to have a substantial work history. Workers’ compensation provides benefits for both short-term and long-term disabilities, and for partial as well as total disabilities. Social Security disability benefits are paid only to workers who have long-term impairments that preclude any gainful work. Workers’ compensation cash benefits begin after a few days’ work absence, and medical benefits are available immediately. Social Security disability benefits begin after a five month waiting period.
Medicare coverage begins for those on SSDI after a further 24-month waiting period, or 29 months after the onset of disability. Medicare covers all medical conditions, not just work-related injuries or illnesses. As a result of the Medicare Secondary Payer Act, when a worker receiving workers’ compensation is a Medicare beneficiary, workers’ compensation is the primary payer and Medicare is the secondary payer for care related to the occupational injury.
If a worker becomes eligible for both workers’ compensation and Social Security disability insurance benefits, one or both of the programs will limit benefits to avoid making excessive payments relative to the worker’s past earnings. The Social Security amendments of 1965 require that Social Security disability benefits be reduced (or “offset”) so that the combined totals of workers’ compensation and Social Security disability benefits do not exceed 80 percent of the workers’ prior earnings. Some states, however, had established reverse offset laws prior to the 1965 legislation, whereby workers’ compensation payments are reduced if the worker receives Social Security disability benefits. Legislation in 1981 eliminated the states’ option to adopt reverse offset laws, but the 15 states that already had such laws in place were exempted.
For more information on how age and disability benefit program interact, see: