Throughout much of the country declining Workers’ Compensation
rates are music to employers’ ears. After all, that seems like long-awaited
good news, particularly since Workers’ Compensation is more often than not
viewed as a necessity and a significant cost of doing business.
Yet, looking at Workers’ Compensation as a business necessity or
a commodity is a major fallacy. Although most employers fail to recognize it,
Workers’ Compensation is a core business practice and a means for improving the
Rather than diverting attention and finances during periods of
lower Workers’ Compensation rates to other business priorities, employers can
benefit by taking steps to guarantee long-term savings. Here are eight mistakes
employers should avoid so they can achieve long-term Workers’ Compensation
Confusing lower premium rates with cost reductions.
Many employers are often surprised to learn that a reduction in
rates does not always mean a reduction in costs. Let’s begin with a basic
understanding of what determines the cost of Workers’ Compensation insurance.
Unlike other insurance, Workers’ Compensation functions like a credit line to
finance the costs of injuries. As such, rates alone do not determine the
overall cost. An Experience Modification Factor (Mod) tailors the cost of
insurance to the individual loss performance of an employer. A Workers’
Compensation premium is calculated by this formula: Rate x $100 Payroll x
The Mod calculation is complex, but in general, an employer is
compared with similar employers in the same industry classification, and if
past losses are lower than average, a credit rating reduces the premium.
Conversely, if past losses are higher than average, a debit rating can actually
increase costs in spite of lower rates.
Declining rates act as blinders for many employers. With lower
prices it’s easy to shift focus away from injury management and cost
containment to other more pressing business matters.
While increased attention to safety led to a decline in the number
of workplace accidents, which resulted in fewer claims and lower rates, claim
frequency is only one part of the equation. The other part, claim cost
including indemnity (lost wages) and medical care, continues to rise.
In many industries where there are tight labor markets, wage
gains are expected to trend higher, suggesting further increases in indemnity
severity. At the same time, medical care costs have marched relentlessly upward
since the mid 1990s.
Even more disturbing is the fact that the growth in Workers’
Compensation medical costs has been much steeper than in the health care
industry as a whole, indicating that it is not only medical inflation but a mix
of services and over-utilization that are driving up costs.
If claims remain open and injury costs escalate, reserves
(estimate of ultimate cost of injury) rise and adversely affect the employer’s
Experience Modification Factor, thus increasing costs. Employers need to
understand what is impacting medical costs and measure key metrics such as cost
per claim trends adjusted for diagnosis and severity.
Focusing on direct costs only.
Ask a businessperson how much they spend on Workers’ Compensation
and almost all will respond with the price of the premium. Yet, the direct
costs of Workers’ Compensation often represent only 20-30 percent of the
overall injury expenses.
Indirect costs, including overtime, temporary labor, increased
training, supervisor time, production delays, unhappy customers, increased
stress, and property or equipment damage represent several times the direct
cost of the injury. A 2002 Safety Index report by Liberty Mutual tallied the
direct cost of workplace injuries at $40.1 billion. The total financial impact
of both direct and indirect costs was estimated to be as much as $240 billion.
Injury costs - both direct and indirect - will have a much
greater impact on an employer’s overall costs than rate decreases.
Thinking that rates will stay low.
Historically, the Workers’ Compensation price cycle has repeated
in a predictable pattern - rates decline, insurance is purchased for a lower
price, employers shift focus away from Workers’ Compensation, claim costs do
not fall in relationship to reduced rates and employers’ Mod increases,
legislative reforms erode or become ineffective, insurance company profits
diminish, and rates increase.
During a declining rate cycle, the plan expects that if rates go
down, so should injury costs. If employers do not manage injury effectively and
claims do not go down, the employers’ Mod will go up. When rates rise again,
the increased Mod will wipe out any savings garnered during the declining rate
Viewing Workers’ Compensation as an
Employers should recognize that Workers’ Compensation is more
than a necessary expense; it is a controllable aspect of business that if
managed properly will have a measurable and positive return on investment
In ROI Selling
, authors Michael Nick and Kurt
Koenig note three measures of ROI: “Return on investment occurs when a company
realizes an increase in revenue, a reduction in cost, or an avoidance of cost.”
Viewing Workers’ Compensation as an ongoing process and not an
expense can accomplish all three. When injuries do occur, employers can
increase their revenues by getting employees back to work quickly and reduce
their costs by managing the injury effectively. By recognizing that Workers’
Compensation begins at the date of hire, employers can avoid costs by hiring
the right people.
Separating Workers’ Compensation from
Retaining skilled employees is one of the most difficult
challenges facing businesses today. Turnover is extremely costly. According to
estimates it is anywhere from 50 percent to 150 percent of an employee’s annual
If a work-related injury is not managed properly it can result in
the unnecessary loss of a skilled, trained employee. The longer employees are
away from the job, the less likely they are to return. Statistics show that if
employees are not back to work within 12 weeks, they only have a 50 percent
chance of ever returning.
The fundamental reason for most lost time is not medical
necessity but the non-medical decision-making and lack of a process that occurs
after an employee is injured. The workplace response is key - studies show that
employees’ satisfaction with their employer’s response has a much larger impact
on employment stability than does their satisfaction with health care itself.
Being guided by a plan that focuses on communication and return to work will be
far more effective than declining rates in both reducing Workers’ Compensation
costs and improving productivity.
Devaluing your relationship with the
insurance company or agency.
In a time of declining rates and new competition, there is a
tendency to shop for the lowest price. The insurance industry is not immune to
the old adage, “you get what you pay for.” Chasing the lowest rate can result
in poor service or having to deal with an insurance company’s unstable
finances. In every “soft market” cycle, insurance companies have gone bankrupt and
been unable to pay claims. It is critical for employers to investigate the
insurer’s stability as well as its long-term commitment to the Workers’
Compensation market to mitigate the possibility of a financial failure.
Furthermore, selecting an agent and carrier with an excellent
understanding of Workers’ Compensation is very important. The added benefits of
improved hiring practices, medical relationships, and comprehensive injury
management services will reduce both the number of claims and the costs of
claims resulting in a lower Mod. Unlike declining rates, a reduced Mod is a
guaranteed way to drive down costs over the long-term.
Measuring the wrong thing.
John Tukey, Ph.D., the prominent statistician, said, “When the
right thing can only be measured poorly, it tends to cause the wrong thing to
be measured well. And, it is often much worse to have a good measurement of the
wrong thing, especially when it is so often the case that the wrong thing will,
in fact, be used as a indicator of the right thing, than to have a poor measure
of the right thing.”
When Workers’ Compensation is treated as a commodity, the
decision is reduced to the lowest possible common denominator - price. This
shortsighted approach is equivalent to expecting gourmet food on a fast food
budget. If employers are not measuring the true financial impact of
work-related injuries, they cannot effectively manage them.
Viewing Workers’ Compensation as a core business practice of
comprehensive risk management, the focus shifts from price to tangible metrics
that are driving claims costs. With this information, employers can address the
underlying circumstances and conditions that are pushing up work-related injury
costs and measure the value of their actions.
The declining rate period provides an opportunity and a challenge
for employers. The opportunity is to use the “found” money to implement
practices that will improve their company and profits - better hiring, injury
management, and improved education and training. The one constant that
separates employers from their competitors is their workforce. The challenge is
to protect it.