Disability Insurance Costs by Employers

Disability benefits provided by employers follow a similar financing and regulatory structure as life insurance benefits. Depending on the benefit design, disability is defined as the inability to work in any occupation or in one’s own occupation. Group disability coverage replaces a portion of the income that was earned by a disabled worker before the disability. Employers provide two distinct types of disability insurance to employees (23,24). These include 1) short-term disability, which provides cash payments beginning when sick days or paid time off are exhausted and continues until long-term disability begins; and 2) long-term disability, which provides cash payments after a 3- to 9-month elimination period following the date of disability. The most common income replacement payment across short-term disability and long-term disability insurance plans is 60% to 80% of final salary. Disability benefits are paid monthly while the person remains both alive and disabled. Group long-term disability benefits are typically subject to a maximum duration until age 65 or death. However, insurers do sell products that continue payments beyond age 65 until death or for some specified period, such as 5 years. Most plans reduce their payment by the amount of any other disability benefits provided through other sources, such as Social Security Disability Insurance, worker’s compensation, pension benefits, and disability plans with other employers. Most group long-term disability programs do not contain inflation adjustment benefits.

Most employers who provide disability plans offer both long-term disability and short-term disability plans. Long-term disability benefits are commonly designed to begin when short-term disability benefits expire so that benefits continue without interruption for disabled employees. Given the chronic nature of ESRD, most workers with the condition are expected to transition from short-term disability to long-term disability unless they receive a kidney transplant.

The first step was to estimate the rate of ESRD-related disability claims. This was done by assuming that 90% of all new cases of ESRD due to diabetes (stratified by age and sex) identified from the USRDS would become eligible for disability benefits within the calendar year. This assumption was based on our discussions with three insurance company medical directors who specialize in disability insurance. Because the assumption of 90% was not based on published data, we have tested this assumption as part of our sensitivity analysis.

Next, they estimated the present value of all expected future disability benefits (PVFB) that will be made to claimants who become disabled due to ESRD and diabetes in that year. This is because, unlike life insurance benefits, which are one-time lump-sum benefits, disability benefits may be paid for many years after an individual initially becomes eligible for benefits. For an individual with a disability, the PVFB as of the end of the elimination period (i.e., period after which disability payments begin) may be expressed as a function of the monthly benefit amount, continuance factors, and the discount rate.