Expose "Hidden" Costs of Workers' Comp

by Marcia DeWitt

Risk and benefit managers searching for new ways to decrease workers' compensation costs might start by acknowledging the current practice of employers paying employees not to work.

When companies start digging through their workers' comp payouts trying to fathom why their costs are so high, the answers are often startling.

Workers' comp costs can be divided into two categories: medical and indemnity. It seems reasonable that 45 cents of every workers' comp dollar spent goes to providing care to injured workers. Unfortunately, the lion's share of the dollar, 55 cents, goes to indemnity costs – in other words, toward paying employees not to work.

Indemnity Costs.

Conventional wisdom has emphasized the importance of lowering medical costs associated with workers' comp cases. Make no mistake, it is important to closely manage medical care utilization and delivery. But indemnity costs are where the employer has the most control.

Employees often rack up lost workdays simply waiting for doctors. Patients may have to wait days or weeks for appointments, especially if specialists are needed. At the same time, a worker who is off the job for more than three months is at risk of never returning.

Paying an injured employee and their replacement during lengthy periods while waiting for treatment or during recuperation and rehabilitation is a wildly expensive proposition. Minimizing lost workdays and their ancillary costs requires staying close to workers throughout the entire injury treatment and recovery process, with a goal of returning the employee to work in some capacity.

Cost Control.

Why is cost control critical in the workers' comp arena? Average workers' comp insurance premiums and other costs run 2 to 3 percent of payroll and, in extreme cases with small businesses, can equal as much as 80 percent of payroll. Yet only 10 percent of U.S. employers are aware of or audit workers' comp costs and even fewer actively manage those costs.

Employers don't consider that the average costs of employee injuries are rising steadily with no end in sight, or that the indirect costs of lost workdays can be as much as 20 times greater than any direct workers' comp costs. Reining in these costs can dramatically affect a firm's profit margin, ability to offer jobs and the ultimate pricing of their product or service.

Both direct and indirect costs associated with workers' comp need management attention.

Direct Costs.

Direct costs are those paid directly from operating expenses by the employer. Although direct costs are measurable and definable, for the privately insured, premiums tend to hide direct workers' comp costs, such as medical expenses, disability payments to injured employees, claims expenses and fees to third-party administrators and case managers.

When business owners study the workers' comp profile, like any other company balance sheet, these losses can be cut by 25 to 50 percent simply by managing these issues instead of hoping that doctors, lawyers or insurers will.

Indirect Costs.

Indirect costs are more difficult to manage due to their hidden and more subjective nature. Typically, indirect costs are between 20 and 30 percent of direct costs or premium payments. Indirect costs include such items as work spoilage, public relations problems, lawyers' fees and lost workdays.

The average indirect costs of lost workdays resulting from a job injury can be 5 to 20 times greater than direct costs. These hidden costs are the true waste in the workers' comp system, because they are seldom identified and quantified by employers.

Because a carefully managed workers' comp system that effectively reduces lost workdays requires significant employee buy-in, such a system tends to improve employee morale and team spirit in general.

Care and Concern.

Employees who believe their employer is genuinely interested in making workers' comp more efficient tend to stay healthy and work better. When these employees do get sick or injured, they heal and return to work faster. It is truly a system that, once in place, is self-promoting.

Implementing such a system requires an aggressive, multidisciplinary, multiphase cost-control approach.

That means employers and employees alike must think differently about the whole system and take an aggressive, managed cost-control approach, with an eye toward quality medical care and returning the injured or ill employee to productive work as soon as possible. This results in a cutting of lost workdays and enables employers to come out ahead.

Action Plan.

What can risk and benefits managers do to get ahead of the lost workday's curve and keep dollars on the positive side of the ledger? Consider these 10 steps:

• Identify items that cost the business the most.
  

  Develop a plan that addresses each item. While experts have identified 75 items that influence workers' comp costs, the typical program is driven by only 6 to 10 key factors. Identifying and understanding this handful of cost drivers is the critical first step in gaining control of costs.

• Analyze claims history.
  

  Make a careful study of existing company injury-incident records and analyze incidents and claims by worker, position, job type, location, training and length of service, equipment type and any other factors relevant to controlling accident claims.

• Practice early accident intervention.
  

  Employers need to integrate and apply the principle of early intervention. They also need to actually train and drill the front-line support staff on the procedure for quick response to injury cases.

• Realize that traditional approaches to health care may be the most expensive.
  

  The most common and expensive way to treat injuries is through the emergency room. Emergency rooms are expensive and time-consuming. Workplace injuries require special care. That care is best provided by customized provider networks and occupational medicine specialists.

• Demonstrate concern.
  

  Immediately following an accident, the employer should communicate to the employee that the case is being handled quickly, fairly and in accordance with the company's established workers' comp program.

  Besides thoughtful words, employers should take quick action to demonstrate the injured employee is a valued team member. This may help to head off costs of a legal action brought by an employee who might otherwise feel neglected, ignored or financially damaged by the injury.

• Establish a transitional return-to-work program with maximum flexibility.
  

  It is certainly not essential that an injured employee reach 100 percent recovery before returning to work. On the contrary, company policy should provide for an injured employee to return to alternative duties as soon as medically possible.

  Accommodate individual needs and strive to ring employees back to work in some capacity. Employers pay employees approximately the same amount to stay home or come in to work. Having that employee return to some type of work duty is a savings.

• Recognize that workers' comp is an integrated management issue.
  

  Clearly communicate the company's commitment to deal fairly and quickly with injured employees and its intention to cut costs and results as they occur.

  Employers should place workers' comp issues such as safety awareness, injury case and claims management, early return to work, and cost control squarely on every employee's shoulders. Each department should be responsible for its workers' comp performance, just as it is responsible for its profit and loss performance.

  Their entire operation can benefit from this. So many areas are touched by workers' comp: safety awareness, equipment design, work-site standards, productivity and morale.

• Call in experts when needed.
  

  An experienced workers' comp management consultant can help employers put a plan in place that will identify, analyze, and assess workers' compensation costs. Consultants can identify site problem areas, monitor provider performance in measurable outcomes and put the company on the road to long-term cost control.

• Follow through and follow-up.
  No consultant in the world can fix a problem the company itself has not committed to fixing. It is crucial to first assess the firm's readiness to change the way it does business in this area, then create the plan and finally execute it as an integral part of doing business. Workers' comp is a cost of doing business, but it does not have to be provided at great cost.
  
• Stress safety and prevention.
  The most inexpensive workers' comp claim is the one that is never filed. Emphasize workplace safety through bulletin board postings, seminars, driver safety clinics, safety awareness days and employee safety incentive programs.
  Controlling lost days is no simple task, but it is the most sensible way to realize major savings in workers' comp costs. With the very real prospect of rising premiums on the horizon, managers with workers' comp responsibilities should think seriously about implementing the fundamental changes that will save their company money today, and for years to come.