Workers’ compensation insurance pays for occupational injuries and illnesses and frequently is an employer’s single most expensive line of coverage.
However, what many people fail to grasp is that there are significant indirect costs not covered by insurance. In addition, if a company is large enough to have an experience modification rate, every claim will affect the mod factor and directly impact costs.
The direct costs of a workers’ compensation claim are pretty straightforward. Generally speaking, they include the medical costs and any indemnity (wage replacement) payments. It is this dollar amount that the insurance company will pay to resolve a claim and it is also this dollar amount that will factor into the experience modification. However, employers also experience significant indirect costs.
According to a study done by the Stanford University Department of Civil Engineering, these indirect costs often exceed the direct costs. For example, a fracture on average generates direct costs of $50,000. The indirect costs are estimated at $55,000.
Indirect costs include, but are not limited to, the following:
- any wages paid to the injured employee for absences not covered by workers’ compensation;
- wage costs related to time lost through work stoppage associated with the worker’s injury;
- overtime costs;
- time spent by administrators, supervisors, safety personnel and many others who have to handle the claim;
- cost of hiring and training a replacement worker;
- lost productivity related to work rescheduling, new employee learning curves and accommodating the injured employee; and
- cost to clean up, repair, and replace equipment and machinery damaged by the accident.
There could be other indirect costs, including OSHA fines, third-party liability costs, legal fees, workers’ pain and suffering costs, and loss of good will.
The impact a claim will have on the experience modification and insurance cost also must be taken into consideration. For example, the base premium (before application of the mod and other credits) is $160,000 for a company that has not had any claims (a claim-free experience modification). The claim-free rating is a company’s best possible experience modification for the year the rating is effective. Note that experience modifications are based on the last four years of experience, excluding the current year.
The actual claim-free rating depends on the size of the business and variables such as expected loss rates, as determined by the Workers’ Compensation Insurance Rating Bureau. In this example, the claim-free experience mod is 66 percent, which means the premium for the workers’ compensation policy is $105,600.
However, this single claim, where the fracture with direct costs is $50,000, will drive the mod up 15 points. When this claim hits the mod (experience modifications are based on the last four years of experience, excluding the current year), the premium will go up by $24,000 to $129,600. This claim will stay in the company’s experience modification formula for three years. In other words, this $50,000 claim ultimately will end up costing $72,000 in additional insurance premiums. In addition to this, there is another $55,000 in indirect costs, making the total cost of this claim $127,000! If the company has a 10 percent profit margin, it will need to generate an additional $1,270,000 to cover these costs.
The indirect costs and the additional premiums caused by an increase in the experience modification underscore why it is so important to be proactive in safety efforts and to develop effective claims management strategies to deal with inevitable claims.
Workers’ compensation is more like a finance tool than an insurance policy. Ultimately, through the experience modification, companies will pay for the actual claims. The only way to lower the cost of workers’ compensation in the long run is to lower the frequency and severity of the claims that are driving those costs.
Top 10 Things to Do to Manage Workers’ Compensation Exposure
- Develop a compliant and effective injury and illness prevention program.
- Make certain supervisors have received the appropriate safety training and that safety is part of their annual review.
- Hold regular safety meetings and make sure they are effective.
- Develop a relationship with the right occupational medical clinic that participates in the insurance company’s Medical Provider Network (MPN) and make sure the entire staff knows where to go in the event of a non-emergency accident.
- Pay for any claims that qualify as first Aid.
- Develop a post-accident response protocol and make sure the appropriate people know what to do in response to an employee injury.
- Implement a transitional duty return-to-work program.
- Actively manage any open claims to make certain the treatment is proceeding as it should and the reserves are fair and not excessive.
- Understand and manage the experience modification.
- Choose the right broker.