Plugging the Leaky Bucket: Assessing and Reducing Workers' Comp Costs

While safety is important, putting safety first sends the wrong message to our organization. Here's why.

Are your company"s profits being sucked down the drain to pay the mounting costs of workers' compensation? Is too much of your corporate income tied up in legal and medical expenses?

If so, your company is one of thousands that suffers from the "leaky bucket syndrome." As fast as income can be poured into them, it drains out through holes created by accidents and injuries. The more accidents, the more holes, and the more serious the accidents, the bigger the holes become.

Every dollar that's drained off by legal and medical expenses is one that could have been spent in the improvement of people, processes and products-an absolute necessity in today's hyper-competitive marketplace. When a company improves its infrastructure it levels the competitive playing field, while dollars lost to legal and medical expenses not only increase the cost of doing business but significantly decrease a company's ability to compete. And in today's marketplace, companies that fail to control their workers' compensation costs may find themselves out of the game entirely.

How Much Is It Costing You?

Workers' compensation was originally envisioned as a means of helping both employers and employees by eliminating costly litigation following an injury. The basic principle was simple: With attorneys out of the picture, injured employees could be properly compensated and employers would still save money. Unfortunately, thanks to imprecise statutory language that left legal loopholes, litigation is still common. What was to have been a win-win situation has become, in many cases, a no-win situation.

In 1989, the first year that data were available, workers' compensation cost U.S. employers $48 billion. Since then this amount has grown by more than 15 percent annually. In the past decade alone, the average cost of a serious injury rose by more than 300 percent for lost wages and 400 percent for medical costs.

When determining just how much a company spends on workers' compensation and related costs, the first thing to bear in mind is that salaries are not the only things for which employers pay. There are additional costs, some that the employee may never see, let alone use. Included in this are supplemental pay, retirement costs, legally mandated benefits, paid leave and insurance. In fact, actual wages account for just 68.2 percent of the cost of an employee in the goods-producing industries (defined as manufacturing, construction and mining).

Safety- and health-related costs constitute 7.5 percent of the total expenditure. Translated, this means employees who earn the national average of $21.86 per hour cost their employer $1.66 in safety- and health-related insurance for every hour they work. Insurance costs for a single employee drive up the employer"s expense by more than $3,000 annually, without adding even a dime of value to the product. To compound the problem, a serious on-the-job injury -- one that requires at least a week away from work -- will cost more than $5,000 in lost wages and approximately $15,000 in medical costs.

What Drives the Cost of Workers' Compensation?

The driving forces behind workers' compensation expenses are three-fold: the type of employment activity, job classification and the company's past accident record. Just as employers have no control over the first two factors, likewise they are often powerless to affect change in the very areas that are pushing workers' compensation costs sky-high.

Increased wages are one such example. As an employee's wages increase, so does the workers' compensation premium. A 10 percent increase in wages will result in a corresponding 10 percent premium increase. Lost-wage benefits also figure into the equation. In most states, these are paid out only after an employee has been off the job for a week or more; a policy that is seen by some as encouraging employees who could return to work earlier to remain home. Because lost-wage benefits are a percentage of an employee's basic wage, lost-wage benefits increase as salaries increase.

While employers can't control medical costs, they can, through effective safety management, significantly reduce the amount of medical care required. An important issue when one considers that most states require insurance companies to pay all medical costs related to an on-site injury, a sum that typically exceeds 40 percent of all workers' compensation benefits paid.

Another factor contributing to rising worker's compensation expenses is legal in nature, and although eliminating the need for costly litigation is a basic tenet of workers' compensationensation, the incidence of litigation has nearly tripled in recent years. This is due in part to ambiguous wording in workers' compensationensation statutes. Since loose wording creates legal loopholes, it's no wonder attorneys have found workers' compensation law to be both inviting and lucrative. Administrative costs also serve to jack-up premiums.

Perhaps the most insidious cause of growing workers' compensation costs can be traced to fraud such as when an employee fakes an injury or claims one is more serious than it really is. A less obvious side to fraud may also occur when medical providers over-treat or when attorneys contribute in any way to fraudulent conduct on the part of an employee during a workers' compensation proceeding.

Strategies to Success

Is trying to reduce workers' compensation costs a waste of time? Without a proactive plan to manage these costs, maybe. But according to Randall Wright, all is not lost. In his book How to Manage Workers' Compensation Costs, he writes: "Effective disability management programs create a win-win situation for both employer and employee .... After the first year of implementation, based on reports from self-insured employers, it is not unrealistic to expect a 25 to 35 percent drop in annual workers' compensation costs and a 55-percent savings on long-term or inactive cases."

A 25 percent reduction in workers' compensation costs is not an unrealistic goal, but getting there is another matter. The following are strategies that have proven effective in quelling these expenses:

Strategic Planning. Executive-level commitment to effective safety management is critical to reduce workers' compensation costs. Once it is in place, providing a safe and healthy work environment will be a fundamental plank in a company's strategic plan.

Response Procedures. Companies should adopt a standard procedure for responding quickly and effectively in the event of an injury. At minimum, it should include a means of securing immediate, appropriate medical attention; plans for caring for the injured worker and his family promptly and properly (which includes assuring them that their immediate concerns, such as income and medical expenses, will be taken care of); and an accident investigation policy to determine cause rather than to assess blame. Visiting the injured employee regularly and keeping him apprised of his workers' compensation benefits also must be included. Finally, companies should work closely with medical professionalsto get the employee back to work as quickly as possible, even in a diminished capacity.

Case Management. Establish an internal case management system to guide injured employees and their families through their recovery and their return-to-work program.

Return-to-Work. Return-to-work programs, which provide injured employees with safe job alternatives, have proven effective in reducing litigation, fraudulent claims and the cost of training replacement workers. The hallmark of an effective program is communication with injured employees, medical professionals and insurance carriers alike.

Training. Supervisors can be an effective part of a return-to-work program if they're trained to properly apply corporate policy, to comply with medical restrictions and to be sensitive to the physical and emotional effects of injuries on an employee's performance.

Experience Modification Factor. Employers can't change the industry classification that determines the basic premium for workers' compensation insurance. However, they can change their safety record. By adopting an effective safety management program which decreases the accident rate for a period of three years or more, a company can reduce its experience modification factor, resulting in a lower net-premium rate.

If your company suffers from the leaky-bucket syndrome, don't despair. There is a host of things your company can do to plug the leaks. Talk to your supervisors, your insurance agent and even the company down the road to see how they are doing it and then formulate your own plan. You may not be able to control everything on the job, but workers' compensation costs are something you can control.

David L. Goetsch, Ph.D., is Provost of the Joint Campus of the University of West Florida and Okaloosa-Walton Community College, Professor of Safety and Quality Management and author of "Occupational Safety and Health," 3rd Edition, Prentice Hall, 1999.

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.