Workers’ Compensation: A Safety Net that still Works

by Leigh Ann Pusey

Before Social Security or the concept of a “social safety net,” America had workers’ compensation. At the turn of the 20th Century, policymakers struck what they called a grand bargain. Employers would provide medical treatment and income support for lost wages to injured workers – payable regardless of fault – and in exchange employees gave up their right to sue the employer for damages, including for pain and suffering.

In the 100 years since, workers’ compensation has expanded significantly. Virtually all U.S. workers are covered; exemptions are narrow and rare. In addition, occupation-related diseases are fully covered that didn’t even exist at the start. In 2012, workers’ compensation covered nearly 128 million workers – more than 90% of the workforce – according to the National Association of Social Insurance. That same year, it paid out $31 billion in medical benefits and an equal amount in wage replacement benefits for a total of $61.9 billion. Employer costs were $83.2 billion, which includes insurance premiums and administrative costs for employers who insure themselves.

Workers’ compensation is a disability program, not a medical plan, and treatment is geared to getting an injured employee back to work. Unlike regular health insurance, workers’ compensation pays for at-home medical care and nursing home stays. It is also first-dollar coverage, which means there are no copays or deductibles, and no employee contribution to the cost of insurance.

States generally pay two thirds of a worker’s pre-injury wages – tax free – to a maximum based on the statewide average weekly wage. The maximum is normally indexed to inflation annually, so injuries are subject to an updated maximum benefit. Ultimately, workers receive a benefit that often approaches and in some cases exceeds pre-injury after-tax income, which is, by design, a robust benefit.

If a worker dies because of the work injury, workers’ compensation provides wage replacement benefits to the surviving spouse, normally based on the deceased employee’s average weekly wages. These benefits in several states are uncapped and payable for life or until remarriage. Other dependents, typically children, are also covered. Minor children receive income benefits until age 18 or, if enrolled full-time in a higher education program, until age 22 or older. Workers’ comp also pays for vocational and physical rehabilitation and job retraining.

The workers’ compensation system also has played a significant role in improving worker safety. As an incentive to improve workplace conditions, safe employers pay less and less-safe employers are required to pay more. This incentive has partly been responsible for the fact that in 21 of the past 24 years, the frequency rate of workplace injuries severe enough to cause workers to spend time away from the job has declined – in almost every industry and occupation.

Indeed, lost-time claims due to injury have been declining for decades. According to the National Council on Compensation Insurance, from 1991 to 2013, lost-time claims fell 58%. In addition, the annual number of work-related fatalities is down more than 25% and the number of non-fatal work-related injuries has declined 55% in the past two decades. The incidence of non-fatal occupational injuries and illnesses declined from 8.9 per 100 full-time workers in 1992 to 3.4 per 100 in 2012.

This is a long way from a quarter century ago when workers’ compensation was jeopardized by a financial crisis. Exploding benefit costs threatened to destroy the entire system. Insurers lost billions during the late-1980s and early 1990s. But employers, labor leaders and insurers worked with state legislatures and governors to manage costs better.
By the mid-1990s, the workers’ compensation system had recovered its financial footing. Its costs weren’t set exorbitantly high nor were its benefits dismantled. Despite ongoing challenges, the system remains sound today.

Workers’ compensation isn’t perfect, as a recent, hyperbolic series by ProPublica and National Public Radio goes to great lengths to point out. But our nation’s oldest social insurance system is alive and well, as are the millions of Americans who have benefited from it.

Leigh Ann Pusey is president and chief executive officer of the American Insurance Association.