GuilfordPare Press Room.

Contractors can be empowered to gain control of workers' compensation costs.

By Marcia P. DeWitt

What do dragons and workers' compensation have in common? Both are ugly, persistent, destructive and larger than life. And both have a tendency to rear their ugly heads just when we think we have felled them once and for all. The one key difference is that dragons are fictitious creatures whose damage is confined to the stories of folklore. Unfortunately, workers' compensation is a very real antagonist terrorizing construction companies' bottom lines year after year.

It's true. The construction industry has earned the reputation of being one of the most dangerous occupations due to a proportionately high fatality rate and a constantly changing work force. Managers responsible for workers' compensation in the construction business should seriously consider implementing fundamental changes to save their company big money in the long run.
Workers' compensation claims incurred on a construction job site have been reported to result in greater losses and higher exposures for contractors than in any other industry. In fact, the construction industry reports 300 percent higher workers' compensation costs than the national average, according to results from a casualty risk study released by Marsh Inc. in February 2003. The study found that for every $1,000 in revenue, contractors spend $4.54 on workers' compensation in comparison to the national average of $1.52 per $1,000 in revenue.

Based on Bureau of Labor Statistics data from 2001, 21 percent of private industry fatalities occur in the construction industry. Considering that construction makes up only 7 percent of private industry employment, the industry has earned a seemingly permanent spot on the black list of insurance carriers. The costs continue to increase exponentially, despite OSHA compliance and well-intended efforts to minimize hazard exposures on the job site.

Because of the dangers prevalent in many forms of construction work, serious injuries and even fatalities are not uncommon. With serious injuries come significant medical care and prescription costs - both of which have experienced high rates of price inflation. Further, when an injured worker misses work, the contractor is effectively paying two people to do one job - one wage to the injured worker and one to a replacement.

Oftentimes, when an accident leads to a serious injury, the injured employee may file a lawsuit - which adds legal expenses and potentially a settlement offer to the contractor's mounting costs. Self-insured contractors will feel this effect immediately, but even those that are insured by a carrier will experience a cost increase in the form of higher future premiums and a higher experience modification.
These are staggering statistics for contractors and risk managers who have been fighting what seems an uphill battle to control their workers' compensation costs - especially in the face of a sputtering economy. Although workers' compensation payouts and increased insurance premiums are hardly new maladies, these costs have inarguably reached a critical stage and warrant a new commitment by industry professionals.

Before taking action, CEOs and risk managers first need to embrace a new way of looking at workers' compensation. Contractors have become so accustomed to increasing workers' compensation costs that many feel there is little to be done at any level to effectively reduce overall workers' compensation expenditures.

Change of View

Risk management professionals in the construction industry must begin to view insurance premiums and workers' compensation costs as variable costs, not fixed costs. In other words, by recognizing cost-savings opportunities while also minimizing risk, management can gain control of workers' compensation and ultimately impact the company's bottom line.

You may be nodding your head, thinking this notion seems completely logical. But tactically speaking, how does one see beyond the gloom and doom and finally "slay the dragon?"

Claims Closure

Many general contractors mistakenly think the company's insurance carrier is looking out for their best financial interests. Think again! Just because you pay a lofty annual premium does not mean that the carrier is doing all it can to aggressively close claims.

With today's carriers experiencing frequent mergers, reorganizations and "right-sizing," claims adjusters often subscribe to the belief that there is safety in numbers - the more open claims, the better their sense of job security.

Claim audits commonly turn up open claims dating back decades. Open claims are a substantial drain on resources. Resolve these, start with a clean slate and proactively manage the new ones to prevent proliferation.

Closing or containing old claims can have an immediate and positive effect on a contractor's current-year costs for workers' compensation. This method works not only for those employers with loss-sensitive insurance coverage, but even for those with guaranteed costs.

Safety Management

The most successfully implemented workers' compensation management program is the one that prevents job site accidents from occurring in the first place. Excellent safety management not only serves the humanitarian goal of eliminating injuries and fatalities, but also achieves tremendous savings through the elimination of consequent claims and indirect costs. Unless managers at all levels are held accountable for safety along with productivity and quality, even the best safety program is destined for failure.

Knights in Shining Armor

Unlike most other industries, the exposures in construction change daily. Each phase of the job presents different hazards, as does the weather. Due to these two factors, daily safety meetings are recommended to advise of potential hazards and outline safety precautions.

Because supervisors are on the job every day, they are the first employees to recognize unanticipated hazard exposures and thereby are responsible for closely observing the behavior of the crew. The good news is that companies with extremely active and aggressive safety management programs are often the most productive and profitable.

Medical Management Control

Construction companies are wise to pre-designate a list of approved and experienced medical care providers who specialize in occupational injuries. Having this list on-hand and available to every manager and supervisor before accidents happen will ensure that injured employees receive appropriate and high-quality medical care. This puts management in control of which doctors are being utilized and ultimately how much is being paid for medical care.

While some insurance carriers have designated low-cost providers to minimize costs, in reality, this medical care may end up costing more. Many low-cost providers make their money by referring injured workers for physical therapy and frequent, although unnecessary, return visits. Especially for large projects, management should pre-designate high-quality healthcare providers who are equally motivated to return the worker to health as quickly possible.

Typically, the approved physician or clinic is less expensive than ER doctors, and provides the follow-up necessary to properly supervise the injured employee's recovery. A proven formula for success is a three-point approach by the employer, employee and medical care provider to address an injury or illness within 24 hours of the occurrence, followed by routine communication amongst the trio. Nearly 100 percent of the time, this approach leads to better and more complete care for the workers.

Return To Work

Another key to reducing workers' compensation costs is to control lost days. No contractor can afford to pay two people to do one job, especially not long-term. For every dollar spent on workers' compensation, 40 cents are allocated for medical expenses and 60 cents cover lost wages.

If an employer simply focuses on cutting back on medical costs, the savings amounts to approximately 30 percent of the 40 cents. Contrarily, a return-to-work program has the potential to save as much as 80 to 100 percent of the 60 cents in lost wages, making this the more cost-effective strategy.

Unless the employee's injury is catastrophic, chances are the employee can be brought back to the work force sooner with some modification of his or her job responsibilities. Construction companies are better off establishing a transitional duty program under which the company finds another position or temporarily redefines the injured worker's previous job responsibility until the individual can resume full duties.

Actions such as these increase the likelihood that the employee will eventually return to work full-time. It also eliminates the need to hire and train a replacement.

Drug Testing

Drug testing is experiencing widespread acceptance from employers in the construction industry. According to an independent 2000 Cornell University research project on drug testing in the construction industry, on average, companies that tested employees and job applicants for drugs experienced a 51 percent reduction in injury rates within two years of implementation. The average company in the study that tested personnel for drug use experienced an 11.41 percent reduction in its workers' compensation experience modification factor.

By executing each of these best practices, your construction company will be on its way to slaying the dragon in no time. Long-term solvency, increased productivity, better ratings, higher morale and smiling CEOs are not the stuff of fairytales. With a forward-looking approach and a sound strategy for your company's workers' compensation costs, these rewards are right around the corner.

Marcia DeWitt is president and CEO of Baltimore based GuilfordPare, which recently launched a new division to cater to the risk management needs of construction industry clients. For more information, visit www.guilfordpare.com or call 410.532.2336