Control Workers’ Compensation Costs
Understanding how it works could save you money:
For many companies, workers’ compensation insurance is a necessary evil that is often ignored and left uncontrolled. It is viewed as a commodity which is a mistake. By ignoring this major business expense, you may experience increased premiums or the inability to obtain a policy from a standard carrier. The resulting financial impact on your business could include price increases to consumers, the inability to offer competitive wages, or a reduction in operations. To control your costs, it’s important to have a clear understanding of what workers’ compensation is and what role you play in the process. It also helps to work with a broker that has the knowledge, tools and resources to help you improve your work comp program.
- A No-Fault System
Workers’ compensation is a no-fault system established under individual state law that provides medical and wage loss payment to employees injured in the course and scope of their employment. Wisconsin was the first state to enact a workers’ compensation law in 1911. Prior to this time, an employee had to prove negligence on the part of the employer. Under the current system, employees waive their right to sue their employer and the employer is obligated to provide benefits for work-related injuries without regard to who is at fault for the cause of injury.
In most states, regardless of employer size, workers’ compensation insurance is mandatory. Aside from payroll, it is quite often the highest expense business owners have.
- How Is Cost Determined?
Insurance premiums are calculated based on your payroll, the states in which you operate, the types of employees you have and your loss experience. The insurer may make further adjustments to the premium based on more subjective factors such as site inspections or safety programs.
Your loss experience can influence your premium greatly. Part of the calculation process involves determining the experience modification factor, which measures how your claims experience compares to an employer of similar size, in your states of operation and classifications of employees. The loss experience period is typically based on the past three years of claims experience. To determine your experience mod in 2016, payroll and claim experience from 2012, 2013 and 2014 will be used. The incurred value (paid plus reserve) of each claim will be reviewed as well as the frequency of claims.
Also, some states allow for a percentage of medical-only claims to be included in the formula. Currently, the National Council on Compensation Insurance (NCCI) reduces the effect of medical-only claims by 70 percent. This is called Experience Rating Adjustment(ERA). This can have a dramatic effect on your experience modification factor if you can keep claims medical-only.
To control your experience mod, focus on loss control that reduces frequency. The more frequently losses occur, the higher the chance of experiencing a severe loss. It is also important to be involved in the claims process. It is advised that you conduct regular claim reviews with your adjuster to make certain reserves are appropriate. At least one of the reviews should occur prior to the calculation of your experience modification. Insurance carriers are required to submit payroll and loss data to the rating bureau 18 months after policy inception and yearly thereafter. If your workers’ compensation renewal date is Jan. 1, your loss data will be submitted to the rating bureau on July 1. A review of all claims during June will result in a more accurate loss picture and premium calculation.
- The Hidden Costs of Accidents
Do you know the real financial impact a loss has on your business? Studies have shown that the hidden costs of an accident can equal four to seven times of the actual claim cost. The hidden cost factors can include time lost from work by the injured employee, loss of efficiency due to break-up of team, lost time by fellow workers’ due to morale issues, cost of training a new person or loss of production. These indirect costs are not covered by a workers’ compensation policy.
For example, one medical-only loss that costs $1,000 could have indirect costs equal to $4,000, which makes the true cost of that claim $5,000. If your profit margin is 5 percent, you would need an additional $100,000 in revenue to pay for this one claim.
- Compensated Claims
You may have heard an adjuster say that in order to be accepted, the injury in question must have been “sustained in the course and scope of employment.” This simply means that the injury must have occurred as a result of work activities or the work environment. In order to determine this, adjusters will ask questions relating to the time the injury occurred, the place the injury happened, the job duties that were being performed, and whether the injury was related to specific trauma, repetitive or cumulative trauma.
There are three primary types of compensation benefits available to an injured employee:
Medical Benefits – provide payment of medical treatment that is reasonable and necessary and directly related to the work injury.
Indemnity Benefits – provide payment of wage loss due to the work injury at two-thirds of the pre-injury wage and permanent partial disability.
Rehabilitation Benefits – when an injured employee is unable to return to their usual occupation.
- Understanding Your Reserves
Like the underwriter, the claim adjuster does not use smoke and mirrors to set the reserve for a claim. Reserving is an art, not an exact science. To better understand your reserves, you must first learn what they are. A reserve is the amount of money the insurance company sets aside to pay for the claim. The reserve is set using the current known facts based on the most probable final outcome. As facts change, so will the reserve. You can influence the reserves, both positively and negatively.
Communicating with the adjuster will ensure the most current facts of the case are being addressed. If an adjuster does not know what is happening with a work schedule or what to expect for medical treatment, the reserves may not be correct. Also, if you do not practice return-to-work, your reserves will be higher due to the length of time it takes the employee to return to full duty.
Our Claims Advocate averages almost $3,000,000 a year in reserve reductions which saves our clients almost $1 million in premiums!
- You Can Make A Difference
One of the easiest ways to reduce your workers’ compensation costs is to report your claims in a timely manner. You should report all injuries to the insurance carrier, regardless of severity, within 24 hours of occurrence. Submitting a first report of injury is not an admission of liability. Fines may be imposed for late or non-reporting. A delay in reporting claims makes the adjuster unable to investigate the claim thoroughly by shortening the timelines for accepting or denying compensation.
The NCCI has published studies that show the cost of a claim increases by 4 percent for each day of delay in reporting. Claims that are filed between 11 and 20 days increase the cost of injury by 29 percent. Between 21 and 30 days, the increase is 39 percent. Claims reported more than 30 days late increase by 48 percent. Litigation rates also increase. If a claim is reported within 10 days, the litigation rate is 22 percent. For claims filed more than 30 days late, the litigation rate skyrockets to 47 percent.
- Why Use a Return-To-Work program?
Return-to-work or modified duty programs help reduce indemnity claim costs. It is a proactive approach, endorsed by many health care providers, designed to restore injured workers to their pre-injury status. It develops a partnership between workers, employers and health care providers. Return-to-work avoids overtime, hiring and retraining costs, reduces chances for litigation and keeps the employee’s mindset on working. Studies have shown injured employees who have been off work for four weeks have about a 90 percent chance of returning to work. The rate drops to 50 percent for injured employees off work for 12 weeks and to 25 percent for employees off work for 25 weeks.
A good return-to-work program ensures there is a plan of action when an injury occurs, detailing responsibilities and expectations. It allows an injured employee to continue to be productive and contribute to your organization. It also continues the communication between the supervisor and injured employee. Return-to-work reinforces a company’s concern for injured employees and helps injured employees maintain their self-esteem. It reduces the “disability” attitude associated with an injury.
- Cost-Saving Practices
With the current state of medical inflation, it is especially important to ensure the employee receives the most appropriate care at the time of injury. If emergency treatment is not necessary, occupational health or urgent care clinics are a lower-cost alternative to the emergency room.
Communication is a key component in cost savings. Discuss the claims process with the employee and provide him with the name, telephone number and address of the insurance carrier. Discuss work expectations with the employee, encourage him to follow the treatment plan and advise his adjuster and supervisor of changes in medical conditions, appointments and restrictions.
Advise the employee that you expect an acceptable level of performance and will not tolerate unexcused absences or disruptive behavior in the workplace. Constant communication with the employee, medical provider and claim adjuster is a key to successful management of the claims process. Since the burden of proof rests with the employer, it is a good idea to keep written notes of meetings and conversations with injured employees. It is also a good idea to keep your workers’ compensation records separate from the employees’ personnel files.
We are considered work comp experts and have been recognized nationally for our work comp services. We have proven outcomes that show we can help you lower your workers’ compensation costs.