Workers' Compensation: Healthcare Costs Crush Workers' Compensation

The cost of medical treatment is not just rising — it is accelerating. And nowhere is this felt more sharply than in the workers' compensation system, where medical payments now constitute a dominant and growing share of every claim. What was a slow-burning crisis a decade ago has become an urgent structural challenge for employers, insurers, policymakers, and injured workers alike.

The Numbers Tell the Story

In 2024, U.S. national health expenditures reached $5.3 trillion, an increase of 7.2% from the prior year and accounting for 18% of the nation's GDP. That translates to $15,474 spent per person — a figure that CMS projects will climb to over $24,000 per capita by 2033. Health spending growth has now outpaced GDP growth for two consecutive years, a pattern not seen since the early 1990s, and CMS actuaries project that trend will continue through 2033, when healthcare could consume more than 20% of GDP.

For workers' compensation, the implications are direct. Medical cost increases within workers' comp claims — driven by both inflationary pressures and higher utilization of services — are now a primary force behind rising claim severity. According to WCRI's 2025 CompScope Medical Benchmarks, medical payments per claim have begun rising again after a brief post-pandemic plateau, with hospital outpatient payments increasing 3–4% annually between 2020 and 2024 and inpatient payments climbing 4–5% per year. Of the 30 states studied in a related WCRI report, 20 saw cumulative medical price increases exceeding 5% between 2021 and 2024 — nine of those states recorded double-digit increases.

The Administrative Burden: America's Unique Drag

One of the oldest and most persistent explanations for sky-high U.S. healthcare costs remains stubbornly relevant. Administrative spending in the American healthcare system is roughly five times that of other wealthy nations per capita. The Peterson-KFF Health System Tracker reports that the U.S. spends $925 per person on health administration compared to an average of $245 in comparable OECD countries — a gap of $680 per person that amounts to hundreds of billions of dollars annually. A recent KFF international comparison estimates U.S. administrative costs at over $1,078 per capita, driven by the complexity of a system with more than 900 payers, 6,000 hospitals, and 11,000 non-employee physician groups.

In 2013, Harvard economist David Cutler noted that a single U.S. hospital could employ more billing clerks than an entire Canadian hospital system. That dynamic has not improved. U.S. healthcare administrative spending now totals approximately $1 trillion annually, and the average claim takes four to six weeks and costs $12 to $19 to process — numbers that ripple directly into workers' compensation, where the complexity of multi-party billing, prior authorization, and fee schedule disputes adds cost at every step.

For workers' compensation specifically, states without standardized medical fee schedules — such as New Jersey, which relies on a "usual and customary" charge system — experience some of the highest medical costs in the nation. The absence of regulatory pricing discipline results in administrative complexity that directly translates into inflated claim costs.

The Physician Shortage: A Ticking Clock

Superimposed on rising costs is a worsening access-to-care crisis that will reshape how workers' compensation claims are managed. The Association of American Medical Colleges projects a deficit of up to 86,000 physicians by 2036, and HRSA's workforce projections paint an even starker picture — an overall shortage of 141,160 physicians by 2038, with 30 of 35 specialties projected to face shortages. Rural and nonmetro areas will bear the brunt, facing a projected 58% physician shortage by 2038.

For workers' comp, delayed access to care is not just inconvenient — it is expensive. Delayed treatment prolongs disability, extends temporary total disability durations, increases litigation risk, and can allow minor injuries to become chronic conditions. Sedgwick's 2024 data shows that employees over 60 — now the fastest-growing segment of the workforce — experienced a 35% increase in average medical service costs compared to younger workers. As the workforce ages and physician supply shrinks, these cost pressures will only intensify.

The WCRI's 2025 study on changes in the medical workforce documented an increasing reliance on non-physician providers, such as nurse practitioners and physician assistants, for evaluation and management in workers' compensation—a structural shift that reflects the shrinking physician workforce and has significant implications for treatment continuity, clinical authority, and claim outcomes.

Where Prices Diverge: The U.S. vs. the World

The United States spent an estimated $14,885 per person on healthcare in 2024, according to Peterson-KFF — more than double the average of comparable wealthy OECD countries ($7,393). Switzerland, the second-highest spender, recorded $9,963. Despite this enormous spending gap, U.S. health outcomes—measured by life expectancy, effectiveness of preventive care, and management of chronic disease —do not match the investment. Americans live, on average, three years less than the mean life expectancy in other high-income nations.

The Commonwealth Fund's analysis identified the drivers of excess U.S. spending: insurance administrative costs (~15%), provider administrative costs (~15%), prescription drugs (~10%), physician wages (~10%), and nursing wages (~5%). Prices — not utilization — are the primary culprit. Americans actually use fewer hospital days and make fewer physician visits per capita than many peer nations. They simply pay dramatically more for each service.

These price disparities flow into workers' compensation. When the underlying cost of a surgical procedure, a specialist consultation, or a course of physical therapy is significantly higher in the U.S. than in peer countries, every workers' comp claim absorbs that premium.

What This Means for Workers' Compensation Going Forward

The convergence of rising healthcare inflation, an aging workforce, a shrinking physician supply, and deep structural inefficiencies in the U.S. health system creates a compounding cost environment for workers' compensation that demands systemic responses — not incremental ones.

For employers and insurers, the priorities are clear. Investing in early intervention and occupational health programs can reduce claim severity before costs compound. Ensuring robust provider networks—particularly in regions facing physician shortages—can prevent delays that can turn manageable injuries into expensive long-term claims. Advocating for state-level fee schedule reforms and administrative simplification in workers' compensation medical billing can reduce the overhead that inflates every claim.

For policymakers, the math is unavoidable. Healthcare spending is projected to account for more than 20% of GDP by 2033. Workers' compensation medical costs are rising faster than general inflation in many states, and the structural forces behind that trend — an aging workforce, a thinning physician supply, and a healthcare system burdened by administrative complexity — are not going away. The question is not whether medical costs will continue to drive workers' compensation premiums higher. It is whether the system will adapt quickly enough to manage them.

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