The Hidden Costs Of Workers’ Compensation Claims

Many companies attempting to navigate the choppy waters of workers’ compensation costs fail to see what a certain luxury liner also over looked: total accident costs in the workplace are similar to an iceberg. The part of the iceberg that is visible is like the direct accident costs of a claim, while the larger, indirect costs remain hidden beneath the surface. And it is these costs that can do the real damage to your company’s bottom line.

Mary Murray, President of Work Smart, a company specializing in workers’ compensation loss-cost analysis, says that there is almost a universal need for knowledge among employers when it comes to the true hidden costs of workers’ comp claims. "Employers often try to downplay the costs of accidents by saying that they are covered by insurance," says Murray, "Their attitude is often: My claims don’t cost me anything. Isn’t that why I have workers’ comp?"

The belief that workers’ comp insurance covers the full cost of an injury claim can be an expensive misconception, keeping from sight the exorbitant costs that injuries take from an employers profits, says Murray.

Of course, work place accidents have obvious financial ramifications, including medical, hospital, and rehabilitation expenses, higher insurance premiums, or in some cases a total loss of insurability. But there are many less obvious, indirect costs that are usually uninsured and affect the employer’s bottom line profits:

• Time lost from work by the injured employee
• Damage to company morale
• Cost of breaking in new employees
• Loss of production
• Possible damage to equipment

In fact, according to most insurance loss control experts, the indirect costs of workplace injuries (costs that are usually NOT covered by insurance) can range anywhere from two to seventeen times the cost of the face value of the claim.

According to several insurance industry experts, there are practical steps employers can take to reduce the costs of injury claims most of that involve bringing the true and complete costs of injuries into the light. Knowledge about the insurance industry, better work place communication, and implementing a workers’ comp tracking and analysis system are ways that employers can get control of the costs, both direct and indirect, of workers’ compensation claims.

Lost in the Maze

One of the first things Murray addresses when working with experienced and rated clients is the impact of claims, especially frequent, small claims, on the insurance rating of the company.

She offers an example of a $2000 comp claim. Sure the insurance company pays that claim on behalf of the employer, but that amount is factored into the experience rating of the employer and affects premiums for three years. So that $2000 claim can actually end up costing the employer $6000.

"What is lacking is a full consideration of the complete costs of work-related injuries on employers insurance premiums," says Murray.

"Each workplace injury that results in a claim drives up employer costs through increases in workers’ comp premiums, which are hard to track because they are buried in the complicated maze of THE insurance rating system. Combine this with the indirect costs of a claim and were talking big money."

For example, a $29,000 carpal tunnel claim can actually cost an employer $37,400 in premiums over three years–adding in the indirect costs can push the total costs to $71,450. A lumbar injury, due to heavy lifting in a factory or on an assembly line, which costs $65,000 can generate $58,645 in additional premiums and jump to $131,380 when indirect costs are factored in.

Murray, who recently tracked losses in the trucking industry, presented her findings in a language that was easily understood: to cover the bottom line total (indirect and direct) costs of a dozen $500 comp losses, a trucker would have to drive almost 450,000 miles or 17 times around the earth.

Unfortunately, the complexity of workers’ compensation rating systems is usually not fully explained to employers by the insurance industry. Murray suggests that employers urge their agents to help them proactively get control of premium increases. "Employers should ask insurance agents with help in tracking losses and identifying trends about where and why injuries are happening.

Thomas Lundberg, President of Shadetree Landscape and author of the book "Slash Your Workers’ Comp Costs, agrees with Murray that knowledge is power when it comes to lowering workers’ comp costs. "Getting a grip on the hidden costs of claims involves insider knowledge," says Lundberg. "The workers’ compensation industry is highly misunderstood-by employees and employers alike, and the reasons behind those costs are misunderstood."

Lundberg believes that the way to avoid the exorbitant hidden costs of claims is simple: pay attention. Lundberg says that he lowered his claims, and subsequently cut his insurance premiums in half, by observing vigilant safety practices (such as installing anti-skid foot holds on all of his trucks), and by aggressively pursuing the insurance carrier for information.

"Employers have to treat injuries to their employees very seriously," Lundberg says. "Unfortunately, we have a very complex system that isn’t really designed for lay people to understand. A business owner has got to take an active approach in finding out if there’s an active reserve, what the standing is, and what would be necessary to close it. The whole thing could be solved with a simple phone call, or a medical statement from a physician."

An Atmosphere of Continual Improvement

To stamp out excessive injury claims, and the costs that accompany them, it is important to take a proactive attitude toward workplace injuries that involves employers, employees, and insurance carriers. Eliminating unnecessary claims costs can be surprisingly easy if employers have the cooperation of all people involved.

Creating an atmosphere that encourages employees to speak up about injury risks and early warning signs is key. But according to Phil Mullhollon, Manager of Workers’ Compensation for the Chevron Corp., one of the hidden cost factors of claims is ironically enough, safety incentives. "The downside to the safety incentive programs is that it can create a lack of communication between the employees and their employers," Mullhollon says. "And that can have a direct and often overlooked impact on claims."

Mullhollon believes that safety incentives can sometimes be detrimental because companies continually "up the ante" with more lucrative awards for lowering claims. This not only keeps employees with their eyes solely on the prize, but also makes them reticent to mention an injury that could affect their safety bonuses.

"Safety incentives exist to make people cognizant of safety issues," Millhollon says. "However, because there are great rewards for having a good safety record, more and more people are reluctant to report an injury when it’s in the early phases. If someone feels reluctant to report an injury when it first appears, by the time they finally do report it, the situation may require surgery or extensive time off when a physician could have treated the injury conservatively at its outset."

Building a close relationship with injury-related vendors is another strategy. Lorenzo Alvarez, Loss Control Supervisor at William Bolthouse Farms Inc., believes it is important for employers to partner with their health care facilities, to get them connected in the daily workings of the business, in order to keep down the cost of claims. "Our facility has over 2,300 employees, and produces a sizeable percentage of the worlds carrots," Alvarez says. "So we carefully select the health care facilities that we use, making sure they are specialists in industrial medicine and that they understand the type of work we do. That way they can provide good advice on how to nip potential injury mushrooms into a huge claim."

Communicating the message that employers care about employee health and safety is key to create an atmosphere where employees are inclined to be part of the solution in reducing workplace injuries and excessive claims. "The last thing we want is employees sitting at home, watching TV commercials with workers’ comp attorneys telling them to dial 1-800-WE-CARE. Because if it gets to that stage, you can bet that your claims are going to skyrocket."

When developing a claims cost reduction strategy, one of the most important aspects is getting a handle on a workplace and its history of claims. It is important to track and allocate all claims to both determine the real cost of a company’s injuries and to identify the source of problems either with the help of an insurance agent or done in-house with the help of a software program.

Murray's company, Work Smart, has developed a software package that assists CFOs and insurance loss departments in gathering and analyzing the nature of their workers’ compensation claims. For example, Work Smart helps employers generate an "Anatomy of Bottom Line Cost" chart, which displays the origin and cost of all workplace injury claims, FUTURE premium costs, and the indirect costs of injuries.

"Excessive injury costs take money away from businesses that could have been used as working capital, for future investments, or for shareholder dividends," says Murray, who hammers home the point that although it may require work to uncover the hidden costs of workplace injuries, it is effort well spent.

"It may seem like an inconvenience to track losses across an entire company," says Murray. "But if you consider that just one $500 class on lifting techniques or one $500 software package that tracks and allocates losses can potentially eliminate tens or hundreds of thousands of dollars in claims and future comp premiums, I think its easy to see that this is an investment companies cant afford to pass up."

Mary Murray is a worker’s compensation consultant based in San Francisco, California, with over 14 years experience in the insurance industry. She has consulted with hundreds of firms to analyze and lower their worker’s comp premiums. Her newly developed software product Work-Smart is designed to help employers take charge of claims while lowering their worker’s compensation by providing claims tracking and allocation. Contact Mary at 415/ 461-0909 or visit her web site at www.smart-comp.com.