Workers' Compensation and Disability

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.

An Overview

Historically, workers’ compensation has been the first social insurance program adopted in developed countries. In the U.S. most states adopted workers’ compensation laws during 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. In 2015, workers’ compensation paid $30.7 billion in cash benefits and $31.1 billion for medical care, a total of $61.9 billion. In that year, Social Security paid $143.4 billion in wage replacement benefits to disabled workers and their dependents, and Medicare paid $93.4 billion for medical and hospital care for disabled persons under age 65.

Workers’ compensation costs to employers were $94.8 billion in 2015, an increase of 20.1 percent from 2011. 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 these benefits.

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Types of Workers' Compensation Benefits

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 75 percent of workers’ compensation cases, but only 7 percent of all payments of cash and medical benefits in the 38 NCCI-covered states for policy years spanning 1993–2013.

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. Among NCCI states, TTD cases have varied between 58-72 percent of cases involving cash benefits in the years 1993-2013 but accounted for less than 34 percent of cash benefits paid 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. In NCCI states, PPD cases have varied between 27-41 percent of cases involving cash benefits in the years 1993-2013 but accounted for 56-69 percent of cash benefits paid. Permanent total disability cases are relatively rare, accounting for less than 1 percent of cases involving cash benefits and 6-12 percent of total payments for cases in the period 1993-2013.

Fatalities: Workers’ compensation programs also pay death benefits when a work-related illness or injury is fatal.  The benefits typically include an amount for funeral and burial expenses, and cash benefits for the worker’s family or dependents. For workers who die without dependents, benefits are limited to funeral and burial expenses.  Between 1993 and 2013, on an annual basis, fatalities accounted for less than 0.5 percent of cases involving cash benefits and between 2 to 3 percent of total payments in NCCI states. 

Trends in Workers' Compensation Benefits, by Insurance Provider

Non-federal employers pay for workers’ compensation by purchasing insurance from a private insurance carrier, a state workers’ compensation insurance plan (called a state fund), or by self-insuring.  Federal workers’ compensation insurance covers federal civilian employees and some private sector workers employed in high-risk jobs or jobs related to national defense.  Many states also have special workers’ compensation funds to cover exceptional circumstances, such as a second work-related injury.   

Private insurance carriers remained the largest source of workers’ compensation benefits in 2015, accounting for slightly more than half (55%) 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 are the second largest source of workers’ compensation benefits, accounting for approximately one-fourth (24.5%) of all benefits paid in 2015.  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 14.6 percent of workers’ compensation benefits in 2015. The share of benefits paid by state funds has varied from 12.5 percent to 20.7 percent since 1960.

Federal funds accounted for 6.0 percent of all workers’ compensation payments in 2015. Payments of workers’ compensation benefits by federal funds have varied between 4.1 and 25.0 percent of all benefit payments since 1960.

Overall Trends in Workers’ Compensation Benefits and Employer Costs

Workers’ compensation employer costs as a share of payroll declined in 2015, reversing a four-year trend, and benefits as a share of payroll fell for the fourth straight year, according to the report, Workers’ Compensation: Benefits, Coverage, and Costs

As the economic recovery has spurred growth in employment and a corresponding increase in employees covered by workers’ compensation, benefits per $100 of payroll fell from $0.92 in 2014 to $0.86 in 2015—the lowest level since 1980. Between 2011 and 2015, benefits as a share of payroll fell in all but three states, continuing a national trend of declining benefits relative to payroll that began in the 1990s. 

Meanwhile, workers’ compensation employer costs per $100 of payroll ticked down to $1.32 in 2015—the fourth lowest level since 1980. Employer costs as a share of payroll had increased consistently after the Great Recession, but leveled off in 2014 and declined in 2015, reversing its previous trend.  Between 2011 and 2015, employer costs as a share of payroll declined in 27 states.

In aggregate, workers’ compensation benefits paid in 2015 were $61.9 billion, a 0.7 percent increase from 2011. Aggregate employer costs for workers’ compensation increased by 20.1 percent across the same period, reaching $94.8 billion in 2015. Most of the growth in employer costs occurred between 2011 and 2014; in 2015 costs increased only 2.3 percent from the previous year.

In 2015, total wages covered by workers’ compensation exceeded $7 trillion for the first time, increasing by nearly 19 percent between 2011 and 2015. Overall, in 2015, workers’ compensation coverage extended to an estimated 86.3 percent of all jobs in the employed workforce, comprising more than 135 million workers.

Other Forms of Support for Workers with Disabilities

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 33 percent of private sector employees. Such coverage is most common among relatively high-paying management, professional, and related occupations.

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Coordination Between Workers’ Compensation, Social Security Disability Insurance, and Medicare

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: