By Frank Pennachio
One of the most confusing components of an employer's Workers' Compensation
Policy is the Experience Modification Factor. They watch it increase and
decrease from year to year – higher Experience Modification Factors
generally increase costs and lower factors reduce them. What's often missing
is an understanding of how the Experience Mod factor works and what an
employer can do to manage it to the absolute minimum.
Employers intuitively suspect that if they have injuries, their Experience
Mods will go up and if they reduce or eliminate injuries they will go
down. At a basic level, their intuition is correct, but there is much
more to know and do to actually control Workers' Compensation costs.
The designers of the formula for calculating the Experience
Mod complain bitterly about any reference that the
Experience Mod is meant to be punitive. Their theory is that
it should operate as a "predictive indicator” of future losses.
In other words, if you have had injuries in the past, then you
are more likely to have them in the future, so you should pay
more.
The use of the Experience Mod causes Workers'
Compensation policies to behave more like a line of credit
than an insurance policy. Ultimately, in almost all
instances,
employers pay for their employees' injuries. In many cases,
employers will pay back more than the cost of the injuries
because of the impact of the Experience Mod. In effect,
because of the use of the Experience Mod, employers are
simply financing their injuries, not insuring them.
When an Experience Mod is analyzed, employers can see:
- The cost of the injuries by employee name
- The number of Modification points attributed
to each
injury
- The current year increase in premium cost due to
that specific injury
- The cumulative increased premium cost over a three-
year period, which is how long a claim has an effect on the
Mod.
Employers' perceptions of Workers' Compensation change when they grasp
this analysis. They recognize clearly and quantifiably that they themselves
ultimately pay for employee injuries and the insurance company is just financing
them. As a result, driving down injury costs makes the employer more profitable
and competitive.
This shift in understanding needs to be driven through the employer's
entire organization. It's critical that not only management, but also
supervisors and front-line staff are aware that it is the employer's
money that is being spent, not that of the insurance company. Employers
must foster a change in the predominant view of employees that "accidents
happen, that's why we have insurance."
Employers buy Workers' Compensation Insurance for two reasons. First,
it is usually a state Law. Second, a Workers' Compensation Policy levels
out the peaks and valleys of injury costs by financing them over a three-
to four-year period.
Another number employers need to know is their lowest
possible Experience Mod. Many employers are amazed
when
they discover that their Mod could be as much as 80 points
lower than it is. When employers see their lowest Mods
compared to where they are now, their focus shifts even
more. The gap between costs generated by the current
Mod
and the best possible Mod is a controllable cost. A solid
business objective is to approach or attain the lowest possible
Experience Modification Factor.
When this gap is exposed, it becomes apparent that "getting quotes"
on Workers' Compensation has little to do with reducing costs. Going
out to bid actually limits the
employer's cost reduction method to what the insurance marketplace and
pricing cycle offers them. A reduction in a "rate" from one year
to the next may have minimal or no impact on the employer's total "cost."
For example, the rate may decline by 15 percent, but the costs increase
by 30 percent because of an increase in the Experience Mod.
In order to reduce costs, employers must move beyond the
bidding process and the basic commodity transaction of
placing insurance. They need and should demand assistance
with the implementation of practical and proven methods for
reducing your Experience Modification Factor.
The most obvious but often over-hyped solution is the
prevention of injuries through a focus on safety programs.
Certainly, a safe workplace and safe work practices are
essential to reducing injuries, but safety programs are a far
from sufficient factor in driving down injuries and their
related costs.
Employers must also address these areas:
- Effective hiring practices and employee relationships
- Modified Duty and Return to Work Programs
- Medical Clinic relationships
- Supervisor Training
When a challenging injury occurs, employers often say, "I should have
never hired that person or I should have gotten rid of him when I had the
chance." Dealing with Human Resource problems inside the Workers' Compensation
system is usually a costly endeavor. Plus, hiring the employee that is fit
for the job is a major step in reducing costs.
Supervisors often resist bringing an injured employee back to work before
they are fully recovered. They typically want a "whole person, or no person."
However, the longer an injured employee is away from the workplace the more
injury costs rise. You will find that supervisors are far more likely to
support an injured employee with frequent communication and modified work
if they know the money is coming out of the employer's pocket instead of
some faceless insurance company.
In addition, compensation and performance bonuses can be
tied to injury costs by departments. Supervisors compensated
on a production-only basis can actually be operating their unit
at a loss due to injury costs.
The right physician providing the right treatment at the
right
time is essential to controlling costs. Not all doctors are
skilled in job-related injury care. Careful attention should be
taken in selecting medical providers. Otherwise, you may be
handing them a blank check and the injured employee may
be receiving less than optimum care.
Employers that shift their thinking and view Workers' Compensation insurance
as a financing mechanism are on their way to reducing a mandatory cost.
Less attention should be paid to "going out for bids" and more devoted
to those factors that actually reduce costs and increase profits.
The key is changing your perception of Workers'
Compensation and then taking the steps that can make a
dramatic difference.