Workers' compensation programs provide protection to workers a and their families. The programs compensate for lost wages and medical expenses incurred as a result of work-related injuries or illnesses. Survivor benefits are also provided when the disabilities result in death. In 1991, about $16.11 billion in medical benefits and $25.3 billion in wage-loss compensation was paid in settlement of claims filed for disabled or deceased workers.
These benefits were paid by private carriers, by State funds, or by self-insuring companies as determined by laws in each State. The employer's cost of providing workers' compensation coverage generally varies according to risk, industrial classification, and experience rating. Nationally, such costs were approximately 2.4 percent of payroll or about $590 for each of the 93.6 million protected employees. This article examines the recent changes in coverage, in benefit levels, and in employer costs and the factors influencing such changes. Over the past decade, workers' compensation benefits have increased by 157 percent and employer costs by 143 percent. In the same period, the number of covered employees has risen 22 percent and the amount of covered wage and salary payroll, 77 percent.
Payments to beneficiaries covered under workers' compensation programs in the United States rose more than 10 percent to $42.2 billion between 1990 and 1991, the eighth consecutive year of double-digit increases. Premium costs to employers rose by less than 4 percent to $55.2 billion in the same period, while the number of workers covered under the various State and Federal programs decreased to 93.6 million, a decline of 1.6 percent from 1990. This drop reflected a similar decline in the total work force, and the proportion of covered workers remained about the same at 87 percent of all wage and salary workers.
The workers' compensation program provides medical care, hospitalization benefits, and income-maintenance protection to workers whose disabilities are the result of work-related injuries or illnesses. The income-maintenance benefits are intended as partial replacement for lost wages. The program also provides survivor benefits to the dependents of deceased works whose deaths result from job-related accidents and/or occupational diseases. Before the enactment of workers' compensation laws, an injured worker could recover damages only if he or she could establish that the incident was due to the negligence of the employer. Currently, proof of employer negligence is not a prerequisite for benefit payment.
As the workers' compensation system grows, it continues to be of significant interest to administrators of the Social Security system because both are programs that provide for payments to disabled workers and to the survivors of workers. The 1965 Amendments to the Social Security Act provide for a reduction in Social Security payments so that total benefits under both programs do not exceed the higher of either 80 percent of a worker's former earnings or the total family benefit under Social Security.(1) The gaps and overlaps in coverage and the benefits and costs incurred under both the Social Security and workers' compensation programs are vital considerations in the effective implementation of the Social Security program.
The Federal Act of 1908 was the first workers' compensation law in the United States. This legislation provided limited benefits for certain Federal employees engaged in hazardous work. By 1911, workers' compensation legislation had been enacted in nine States and, by 1920, all but seven States had established such programs. However, it was not until 1949 that all States had programs to furnish income-maintenance protection. Today, workers' compensation consists of separate programs in 50 States and the District of Columbia, and two Federal programs: the Federal Employees Compensation Act covering civilian Federal Government employees and the Longshoremen's and Harbor Workers' Compensation Act covering longshore and harbor workers.
In addition, the Federal Black Lung program, a specialized workers' compensation program, protects coal miners with pneumoconiosis ("black lung" disease). Under this Federal program, enacted into law in 1969, monthly cash benefits are payable to miners disabled by black lung disease and to their dependents or survivors. Medical benefits are also payable for diagnosis of pneumoconiosis and treatment for conditions resulting from the disease. Claims filed prior to July 1973 are paid from general revenues under a program administered by the Social Security system; those filed after that date are paid from a Department of Labor-administered trust fund financed by an excise tax on coal.
The State workers' compensation programs generally are administered by industrial commissions or special units within each States department of labor, and the Federal programs are administered by the Department of Labor (except for the District of Columbia, which administers its own program). Although all programs are based on the principle of compensation without regard to fault, the enactment of a different law in each jurisdiction and repeated subsequent amendments to these laws result in many variations among the State programs.
Approximately 93.6 million persons were protected under workers' compensation programs in 1991. This figure represents a decline of 1.6 percent of the workers covered by laws in 1990, following an increase of 1.5 percent in the number of covered workers in the 1989-90 period. Although coverage levels are primarily impacted by employment changes in the economy, legislative activity may also add or delete workers from coverage.
For instance, during 1991, licensed real estate brokers, salespersons, and appraisers were removed from coverage in Connecticut; unpaid officers of non-profit organizations were removed from mandatory coverage in Nevada; and, certain farm and ranch laborers were added to coverage in Colorado. Also in this year, substantial legislative changes were made in Colorado, Connecticut, Indiana, Maine, Montana, New Hampshire, and North Dakota. The impact of these changes on the total number of protected workers was negligible.
Many programs exempt from coverage those employees of nonprofit, charitable, or religious institutions and some limit coverage provided to workers in hazardous occupations. Among the most common exemptions are domestic service, agricultural employment, casual labor, and State and local employees. In addition, not all covered workers employed in small firms (less than five employees) are covered. Eight States exempt employers with fewer than three employees, three States exempt those with fewer than four employees, and three States exempt those with fewer than five employees.
Coverage is compulsory for most private employment, except in New Jersey, South Carolina, and Texas. In these three States, the programs are elective--that is, employers may accept or reject coverage under the law; but, if they reject such coverage, they lose the customary common-law defenses against suits filed by employees.
Wage and salary payroll of workers covered by workers' compensation totaled $2,300 billion in 1991, about 84 percent of all civilian wage and salary disbursements in that year. Covered payroll was about 2.2 percent higher than in the previous year and increases in average weekly wages were partially offset by the decline in the number of covered workers.
An estimated $42.2 billion was paid in workers' compensation benefits in 1991 or about $450 for every worker protected by workers' compensation laws. In 1991, the rate of increase in to benefits paid over that in 1990 was 10.3 percent, a rate slightly lower than the 10.9 percent average annual increase for the 1981-91 period. The total amount paid in benefits was about $4 billion more than in 1990 and more than double the $19.7 billion paid in 1984.
Regular program benefits (those payable under all programs except the Black Lung program) increased by 10.8 percent from 1990 to 1991, but were less than the 11.9 percent average annual increase since 1981. Also in 1991, Black Lung payments declined 3 percent, the eighth consecutive annual decrease.
Increases in benefit payments may be the result of a variety of causes. One of the most important causes in recent years has been the interaction of rising wage levels and increasing statutory benefit amounts. Because cash benefits are usually calculated as a percentage of weekly earnings at the time of injury or death--usually 66-2/3 percent--increases in benefits partially reflect wage increases that averaged 4 percent from 1990 to 1991.
Changes in the incidence and severity of occupational injuries and diseases also influence the level of benefits paid for workers' compensation. Survey data available from the Bureau of Labor Statistics indicate that the rate of on-the-job injuries and illnesses per 100 full-time equivalent workers (working 40 hours per week, 50 weeks per year) was 8.4 in 1991, down from 8.8 in 1990. However, the number of workdays lost per lost workday case was 22.2 (compared with 18.0 in 1986), the highest in more than 50 years of collecting such data.(2)
Finally, the increasing cost of medical care also contributes to the rising level of workers' compensation benefits. The Bureau of Labor Statistics reported that its medical care index for all urban consumers in 1991 rose 8.7 percent over the 1990 level, following an increase of 9 percent from 1989 to 1990.
States do have the legislative authority to adjust the amount of benefits paid out as wage-loss compensation. All programs place dollar maximums on the weekly amounts payable to disabled workers or to survivors. As a result, even though most programs base the maximums on automatic adjustments that reflect changes in the States average weekly wages, some beneficiaries (generally higher-paid workers) receive less than the amount indicated by these percentages. In addition, States may mandate changes in benefit amounts for burial expenses and scheduled injuries (those that are clearly measurable such as the loss of a part of the body) as well as adjust the maximum length of the payment period.
States may also pass laws to adjust the levels of benefits paid and the lengths of the waiting periods before these benefits can be paid, to establish competitive State-operated funds, and to impose policy deductibles. During 1991, Connecticut became the fourth State to change the method of calculating benefits from 66-2/3 percent of the worker's average weekly wage to 80 percent of spendable wages. State legislatures in Louisiana, Maine, and Texas established State funds while eight States initiated or revised provisions relating to policy deductibles.
Also, protection against occupational disease is still restricted in many States because of time limitations on the filing of claims. Benefits for diseases with long latency periods are either restricted or not payable in many cases because most State laws pay benefits only if the disabilities or deaths occur within a relatively short period after the last exposure to the occupational disease. As States implement restrictions on coverage. payments will decrease accordingly.
TYPES OF PAYMENTS
In 1991, covered workers received $16.8 billion in medical and hospital care for work-related disabilities (table 1). (Table 1 omitted) This care included first-aid treatment, physician services, surgical and hospital services, nursing services, medical drugs and supplies, and appliances and prosthetic devices. The cost of this care accounted for 40 percent of the $42.2 billion total. In contrast, medical payments to Black Lung beneficiaries constituted only 8 percent of all Black Lung payments.
Cash compensation payments accounted for the remaining 60 percent of to program expenditures in 1991. Of the $25.3 billion in cash compensation, more than 92 percent ($23.4 billion) was paid to disabled workers and the remainder was paid to the survivors of deceased workers in the form of death and funeral benefits. Most programs provide weekly or monthly payments to the spouses of deceased workers for life or until remarriage, while all programs provide payments to children up to age 18 (later, if incapacitated or a student). Among the regular cash compensation payments--those that exclude Black Lung program compensation--$22.8 billion (or 95 percent) of the $24.1 billion total was paid to disabled workers. Lump-sum payments are permitted under most programs.
In 1991, Black Lung benefit payments totaled $1.4 billion, a decrease of 25 percent from the peak year of 1980. This decrease was the tenth in the past 11 years and is a result of the imbalance that occurs as older beneficiaries die and are only partially replaced by a smaller number of new claimants.
At the end of 1991, approximately 275,000 disabled workers, dependents, and survivors were receiving Black Lung cash benefit payments. The monthly amount payable to a disabled miner or a surviving dependent was $403.30. For a disabled worker with three or more dependents, the maximum monthly amount was $806.60.
Black Lung benefits are paid regardless of the age of the miner or dependent (other than a child) or the length of time from which the miner's disability began or death occurred. Benefit payments are reduced if the beneficiary is also receiving payments for disability (due to black lung) under a State workers' compensation program. Black Lung benefits are not considered workers' compensation payments for purposes of applying the workers' compensation offset provisions contained in the Social Security Disability Insurance (DI) provisions, and thus are not reduced due to receipt of DI benefits.
TYPES OF INSURERS
Workers' compensation programs vary according to the methods used to assure that compensation will be paid when due. Employers generally insure workers for the required protection by three different methods: private insurance, publicly operated State funds, or self-insurance (used primarily by employers who have a large number of employees and who are able to provide proof of their financial ability to carry their own risk). However, because only 22 States have operating State funds, employers in most States either insure privately or self-insure.
Insurance options are also limited for employers in North Dakota and Wyoming because employers must insure through an exclusive State fund. In four other States--Nevada, Ohio, Washington, and West Virginia--employers must either self-insure or provide protection through an exclusive State-insurance fund. Federal employees are provided protection through a system that is federally financed and operated, the Federal Employee Compensation program. In 1991, about 58.1 percent of all benefits were pd by private insurers, 23.0 percent by State and Federal funds, and 18.8 percent by self-insurers (table 2). (Table 2 omitted)
Private insurance and self-insurance payments each have increased, at an annual rate of about 12 percent since 1982, compared with an increase of more than 8 percent in State and Federal fund disbursements. Excluding Black Lung program benefits, State fund payments increased at an annual average of nearly 12 percent over the 9-year period from 1982 through 1991.
Each year, wide variation occurs both in the amount of benefits paid in each State and in the amount of benefits paid, by type of insurance. This range reflects a number of influences, such as the variation in State benefit formulas and maximum benefit amounts, the differences in methods of administration, the extent of litigation, the occupational distributions and incidence of disability, and, most importantly, the overall size of the labor force.
Workers' compensation benefits paid in California exceeded $7.2 billion in 1991. This amount was higher than the sum of benefits paid in 28 smaller States (table 3). (Table 3 omitted) Benefit levels were $2 billion or more in Texas ($3.3 billion), Pennsylvania ($2.3 billion), Ohio ($2.2 billion), and New York ($2.0 billion). These five States accounted for $17 billion in benefits, or more than two-fifths of the amount paid out under all State programs.
Premiums paid by employers (including an estimate of the amount of hypothetical premiums from those employers financially able to carry their own risk) exceeded $55.2 billion in 1991, about $2 billion more than the premiums in 1990. This total was nearly 4 percent above the 1990 level, the smallest increase since 1982-83 and the first year since 1984 that the increase has fallen below 10 percent. The total cost represents about $590 for each worker protected by workers' compensation programs compared with $296 in 1982 (table 4). (Table 4 omitted) The premium consists of the amount needed to pay benefits and to administer the insurance operation, including sales and operating costs, claims administration, rehabilitation costs, profits, taxes, and reserves for future. benefits.
As presented in table 5, the $55.2 billion expended by employers in 1991 included:
(1) $35.7 billion to private carriers (2 percent higher than in 1990);
(2) $10.8 billion to State funds and for Federal programs (the Federal Employee Compensation program and that part of the Federal Black Lung program financed by employers); and
(3) $8.7 billion in the cost of self-insurance (benefits paid by self-insurers plus estimated administrative expenses). (Table 5 omitted)
The relationship of costs to benefits has remained relatively stable in recent years despite the steady increase in employer costs. Although this ratio usually has fluctuated between 0.55 and 0.70, the disproportionate increase in costs (4 percent) and benefits (10 percent) between 1990 and 1991 resulted in a higher-than-average ratio of 0.76 in 1991. This relationship--also called the loss ratio when expressed as a percent--permits an examination of the percent of the employer contribution that is being pd as benefits to disabled workers and their dependents or survivors.(3) Costs may also be related to payroll covered under workers' compensation. This measure provides a perspective in relation to workers' compensation as a component of labor costs. In 1991, the premium cost per $100 of covered payroll was $2.40, the seventh consecutive annual increase since its decrease to $1.66 in 1984. This cost had been below $1 prior to 1965.
The wide differences that exist along individual employers are, of course, hidden by these overall cost ratios. The major factors in the differences are the employer's industrial classification and the hazards of that industry as modified by experience rating. The premium rate that an employer pays, in comparison with the ratio for the same industry classification in another State, so reflects the level of benefits provided in his or her jurisdiction and the method used to insure--commercial carrier, exclusive or competitive State fund, or self-insurance.
1 Disabled worker benefits are payable monthly under Social Security to the worker, spouse, and children up to a family maximum ($1,688 as of December 1991) based on the worker's earnings. In those cases where the disabled worker is also entitled to a workers' compensation benefit and the offset is applied (89,000 disabled workers as of September 1989), the Social Security disability benefit is reduced dollar-for-dollar until the combined payment under both programs reaches the higher of the two specified limits. Combined payments after reduction will never be less than the total Social Security benefit before reduction. The offset is not applied, however, if the State law offsets the workers' compensation benefit. Although 13 States have such provisions, the Omnibus Budget Reconciliation Act of 1981 eliminated the preference for any additional States.
2 Occupational Injuries and Illnesses in the United States by Industry, 1987, Bureau of Labor Statistics, Department of Labor, 1989.
3 These benefit estimates exclude amounts paid from general revenues, which cover most Federal Black Lung program benefits and, in a few States, supplemental pensions.