The Eight Major Mistakes
Employers Make When Workers’ Compensation Rates Go Down
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 bottom line.
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 savings.
1. 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 Experience Modifier.
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.
2. Becoming complacent
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 1990’s.
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 also 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.
3. 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% 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 employers’ overall costs than rate decreases.
4. 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 cycle.
5. Viewing Workers’ Compensation as an expense
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 (ROI).
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.
6. Separating Workers’ Compensation from Employee Retention
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% to 150% of an employee’s annual salary.
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% 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.
7. 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.
8. 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. |