The purpose of worker’s compensation insurance is to cover the cost of medical and rehabilitation costs for workers injured while on the job. It generally includes coverage for lost wages while away from work due to the illness or injury, and may cover death benefits for the employees dependents if they are killed in a work related accident, including terrorist attacks.
Workers comp is an “exclusive remedy” for injuries or illness sustained while on the job. This means the employee give up the right to sue the employer for the injuries or illness incurred, even if it is due to negligence on behalf of the employer. In return, the employee received the benefits of worker’s compensation insurance without regard to who or what caused the accident or illness, as long as it occurred as a result of performing work duties.
How did Workers Comp start?
During the 1800’s, industrial expansion saw a huge uptick in work related accidents and illnesses. At the time, the only remedy for an employee was to sue their employer for negligence. Proving this was costly and time consuming, and the employees often lost their cases. By the turn of the 20th century, most states had taken legislative action to provide immediate remedies to employees and worker’s compensation insurance emerged as a Business Insurance solution to this ever growing problem.
Since it’s inception, workers comp coverage has increased in scope, and specifically in 1972, states added to their paws to meet performance standards set by the National Commission on State Workmen’s Compensation Laws. Most states not only expanded benefits, but also began to cover employees not previously covered under the older laws.
Nonetheless, not all states treat worker’s comp the same. Some states are considered to have inadequate coverage, while others are overly generous. This has become a criteria used by large employers when deciding where to open or relocate business units, often choosing states where the coverage is minimal, to lower their costs of operations.
How Workers Compensation Insurance Works
Worker’s comp laws are set by each state, and vary greatly between states. Texas is the only state where an employer can opt out of carrying worker’s comp insurance, but in doing so waives the exclusive remedy right to not be sued.
Employers have the option of purchasing their worker’s comp coverage from private insurance companies, state-run workers agencies, or may choose to self insure. The only state where workers compensation coverage it truly optional is Texas, where approximately one third of employers opt out of the system. But as mentioned previously, these employers open them selves up to lawsuits.
Approximately 90% of the national workforce is protected by workers compensation insurance.
Review of Associated Costs
Although most claims only require medical care, lost time claims, which include medical care and lost income payments consume most of the systems resources. Claims are ranked by impairment, either permanent or temporary. Impairment is often defined by several criteria. Payments can be based on a set schedule, such has $10,000 for a lost hand. For losses not on a schedule, payments are based on degree of impairment or loss of future or current earning capacity, generally using the American Medical Association (AMA) definitions.
Cost to Employers
Employer costs include paying the insurance premiums, any payments made to employees that are under the deductible amount, and administrative costs incurred by the employer to handle the claims. Insurance premiums, while variable between states, are also based on the level of risk for the employee. Higher risk jobs (e.g. Working on an oil rig) have much higher premiums than low risk jobs (general office workers).
Cost for Claims
There are two types of claims costs: payment for medical care, and payment for lost income. Lost income payments are generally calculated based on the states average weekly wage, known as indemnity costs. Whereas indemnity costs were higher than medical care costs in the past, that has begun to shift. This is due to the fact that medical care costs for workers comp have grown at a much steeper rate than general healthcare industry averages. This is believed to be caused by the fact that workers comp claims have higher volumes, longer duration and a broader mix of required services than normal healthcare.
Some good news is that although the cost of each incident has been increasing, the number of workers comp claims has decreased year over year.
Reducing Costs
Worker compensation systems are ever evolving. States reform the process continuously, and the complex system gets out of balance. Then employers complain about the costs, which drives new legislation, which alters the dynamic of the system. It is an ever changing system that ebbs and flows between lowering costs and sufficiently protecting employees.
Closing Comments
As you can see, workers comp is a necessary part of any business. Each state decides how much coverage is required, and balances the need of the employers to keep costs low, while making sure the employees are adequately covered in case of accident or illness.
