Workers Compensation How the System Works

National Center For Policy Analysis, Apr 10, 2007

Workers’ Compensation: Rx for Policy Reform How the System Works. 
 

Each state has designed its own workers' compensation system, and no two are exactly alike.  The types and levels of benefits, the cost of claims and the structure of the system vary widely. The premiums paid by employers also vary widely by state, size of firm and industry. However, the rising cost of workers' compensation to employers - a cost implicitly borne in part by workers - is a common problem. In this section we will examine major features of state systems and the effects they have on claims and costs.

Employers Are Required to Provide Benefits. Employers are held strictly liable for workers' compensation benefits. Specific state statutes generally replaced the tort liability system - but not completely or in every state:

• Currently, Texas is the only state that routinely allows employers to opt out of the statutory system.1  Employers that opt out, however, are still liable for workplace injuries under the negligence standard. 
• In five states - North Dakota, Ohio, Washington, West Virginia and Wyoming - employers are obligated to either buy insurance coverage from a state-owned fund or obtain approval from the state agency to self-insure.
• In a number of other jurisdictions, state or residual (assigned risk) funds provide insurance as a last resort to employers that are unable to obtain insurance from private carriers.  Such risk pools are necessary because, when employers are required to have coverage, the state must make an alternative available.

Benefits to Replace Wages and Compensate Injured Workers. There are three main types of wage replacement (or indemnity) benefits. When the employee is recuperating and unable to work he can receive temporary total disability (TTD) payments. When workers are permanently disabled and unable to work, the system provides permanent total disability (PTD) benefits. A third type of benefit is permanent partial disability (PPD), generally paid when an injured employee attains the maximum medical improvement expected for an injury but still has either a residual physical impairment or occupational disability that prevents the worker from continuing in his former occupation.  

The maximum amount of wage replacement benefits and the length of time a worker can receive them varies considerably among the states, For example: 

• The maximum weekly benefit for TTD ranged from a high of $1,133 per week in Iowa to a low of $351 in Mississippi, and in most states is equal to the state's average weekly wage.
• The maximum duration of payments ranged from a high of 500 weeks (nearly 10 years) in Virginia to a low of 104 weeks (two years) in South Carolina and a number of other states.

PPD benefits also vary widely among the states:

• The weekly maximum payment for PPD ranged from a low of $220 in Alabama to a high of $1,070 in New Hampshire.
• The maximum duration of weekly payments was shortest in New Hampshire (262 weeks), but many states have no maximum, implying weekly benefits may be paid for as long as the disability lasts.
• For workers' compensation policies effective 2000 to 2001, the costs incurred for PPD benefits averaged $61,327 and ranged from a high of $184,257 in Michigan to a low of $32,425 in Missouri.
   
  

Decline in the Frequency of Claims. Data on accidental fatalities indicate that workplaces are now arguably safer than workers' homes. Throughout the second half of the 20th century, as deadly home accidents increased, workplace injuries resulting in death declined steadily in the United States.

The decline in claim frequency, however, was not the same in every state. For example, in California the frequency of all claims declined 22 percent between 1992 and 2001, considerably less than the countrywide decline (29 percent), while permanent partial disability (PPD) cases actually increased 13 percent.  This suggests that features of the California state system encourage more claims for PPD, relative to other types of claims and other states' systems.