Workers' Compensation: Rx for Policy Reform

Policy Reports | Welfare

No. 287
Wednesday, September 13, 2006
by N. Michael Helvacian


Workers' compensation is the oldest government-mandated employee benefit program in the United States.  Each state has its own system.  The features of the state systems vary, but they all provide three basic types of benefits when a worker is injured on the job or has a work-related illness: (a) coverage of medical costs, (b) replacement of lost wages and (c) payment for death or dismemberment.  An injured worker typically receives medical treatments paid for by the employer or employer's insurance carrier; if the injury results in lost time from work (beyond a statutory waiting period) he or she receives wage replacement (indemnity) benefits; and in cases of permanent injury or death, the worker (or the worker's family) is compensated.   

“Workers’ compensation is the oldest government-mandated benefit in the United States.”

Each state sets employee benefit levels and regulates insurance arrangements and premiums that cover benefit costs.  Employers are obligated by law either to purchase insurance or to self-insure and pay the claim costs. Employees as a group, however, implicitly pay part of the costs of these benefits in the form of lower wages.  All states require employers and their insurers to cover the full cost of medical services without any employee copayments or deductible amounts.

This paper discusses how the levels of state mandated benefits and other features of state systems distort the incentives of employees, employers, medical service providers and attorneys in cost-increasing ways.  After identifying the problems these perverse incentives create, it suggests solutions designed to align the incentives of all the players in the system in ways that will reduce claim costs and employers' costs and improve employee safety and benefits.

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