Workers’ Comp explained in 800 words

Peter Rousmaniere
published 9/18/19 by

Workers’ compensation is a safety net which helps people after an injury at work.

For the worker, the originally expressed purpose was to fairly compensate them for their injuries.  More recently the system has focused on the best outcome: bringing the worker back to productive and earning capacity.  Employers want a system that is affordable and manageable.

The safety net overall was created in the 1910s, drawing upon European models. Each state is responsible for its own program.  Despite occasional calls for federalization, the system remained steadfastly state-run.  The federal government has one for federal employees. A few federally-run programs or special coverages exist for certain sectors such as maritime, miners, and railroad workers.

Generally speaking, workers’ comp operates without coordination with other state or federal worker protections or other insurance programs. But Injured workers are eligible for some disability protections, including the federal Americans with Disabilities Act.

All state systems adhere to a common general design that is mandatory. (The sole major exception is Texas, which permits employers to “opt-out” of the system.)  Virtually all who work as employees and virtually all employers participate. Rules are applied to determine if a worker is an employee.  Independent workers such a “gig” workers are not covered.

States recognize most types of physical injuries and some diseases. Long latency diseases and mental conditions such as PTSD are typically not or only partly covered. Reduction in work capacity due to aging or personal health problems is not covered. The system pays for all medical care to treat the injury. Wage replacement typically is equivalent to about 85% of the worker’s pre-injury after-tax take home pay.  Rules determine how long wage replacement will last, from as little as a day to, for the most severe injuries, a lifetime.  Depending on the state, insurers can refuse to pay for medical care on grounds of lack of efficacy.

Injured workers cannot sue their employer for safety negligence. Employers are severely restricted from denying benefits on the grounds of employee behavior. Thus the system is considered a “no fault” system. Yet often disputes arise over the work-relatedness of an injury, medical care options, and duration of wage replacement. Many cases (“claims”) end in a negotiated settlement providing the worker a lump sum amount. The large majority of cases are free of disputes.

The system is intended to be self-financed by employers. The vast majority of employers purchase insurance.  Many choose very high deductible plans. States permit large employers to self-insure, buying an insurance policy to cover very high costs.

Very small employers have insurance policies that are not based on their individual experience. For larger insured employers, “experience rated” premiums reflect their pattern of injuries and costs in prior years.

Insurance pricing draws upon very large, system-wide shared databases of claims, summarized as a cost per $100 of annual payroll, or “rate,” which is calculated for hundreds of classes of occupations in each state.  The National Council on Compensation Insurance does the calculations for most states. Rates range from pennies per $100 of annual payroll for office workers to over $15 for roofers.

Average state-wide insurance costs are about $1.75 per $100 in payroll, varying by state. This variance is driven by the relative generosity of benefits, the litigation culture of the state, and the ability of a state’s procedures to resolve disputes quickly. Excepting some outliers, state-wide average rates hover within 20% of the median state’s average rate.

The annual cost of benefits (medical spending and wage replacement) is about $60 billion nationwide. The total cost to employers, including insurance premiums, is about $85 billion. Of the three million private sector injuries a year, about 250,000 require at least a month of recovery. Relatively few involve complete disability from any work. Some 6,000 work fatalities occur, 40% of which are vehicle-related.  The most severe injuries include the spinal cord, brain, burns, or trauma throughout the body.

The workplace has become much safer. The frequency of injuries has declined by about 3% per year since the early 1990s, in about every industry. Better safety practices and automation are the major factors, more than de-industrialization. Mirroring the evolution of medicine in society overall, medical care has become more complex, taxing the capacity of insurers to coordinate medical treatment. Thus, medical costs make up an increasing share of benefits.  And, aging of work has added many non-work-related co-morbidities that cannot be ignored.

The employer community shows no interest in radical change with the exception of advocates for an “opt-out” option.  Nor is organized labor arguing for radical change. But lack of coverage for gig workers, limited coverage for diseases, and long-lasting financial setbacks of some workers are persistent problems. There is widespread perception that the system is overly complicated for all participants.  The risk of abuses of the system is a concern.

Due to its statutory isolation (a legacy of its very early creation), the system is hard for many to understand and to integrate into overall workforce planning.