This paper describes a new design concept of automatically diagnosing and compensating LED degradations in distributed solid state lighting (SSL) systems. A failed LED may significantly reduce the overall illumination level, and destroy the uniform illumination distribution achieved by a nominal system. To our knowledge, an automatic scheme to compensate LED degradations has not yet been seen in the literature, which requires a diagnostic step followed by control reconfigurations. The main challenge in diagnosing LED degradations lies in the usually unsatisfactory observability in a distributed SSL system, because the LED light output is usually not individually measured. In this work, we tackle this difficulty by using pulse width modulated (PWM) drive currents with a unique fundamental frequency assigned to each LED. Signal processing methods are applied in estimating the individual illumination flux of each LED. Statistical tests are developed to diagnose the degradation of LEDs. Duty cycle of the drive current signal to each LED is re-optimized once a fault is detected, in order to compensate the destruction of the uniform illumination pattern by the failed LED.