The Cost of Comp
by Jon Gice, President & Chief Operating Officer, ManagedComp
Workers' compensation is a substantial cost of doing business, depleting money and time that should be devoted to your core business. Understanding the cost drivers is the first step in wisely selecting strategies to minimize this cost.
The Workers' Compensation System
Workers' Compensation is a form of insurance that protects employees when they are injured on the job. The origin of workers' compensation date back to the early 1900s. Prior to that time, workers had to file a lawsuit against their employer to prove that an injury was the employer's fault. When workers lost the lawsuit, they would not have any means to replace lost wages during their recovery nor have money to pay for their medical expenses. When employers lost the lawsuit, they did not have insurance to help cover the judgement.
Since 1911, when the first workers' compensation law was enacted in the United States, a "no fault" system was established. If injured on the job, it was no longer necessary for a worker to sue their employer to recover lost wages or medical care. Employers would pay for lost wages and medical care through workers' compensation insurance and in exchange, workers would lose the right to sue for damages. Workers' compensation became the exclusive remedy for covering the cost of workplace injuries. Specific regulations and benefits can vary rather substantially state to state since individual states have jurisdiction over their own systems.
Workers' Compensation Benefits
Workers' compensation affords two types of benefits: wage replacement (also called "indemnity") and payment for medical care related to the injury.
The amount and duration of wage replacement benefits vary based on each state workers' compensation law. The following are the most common types of benefits:
• Temporary Total - lost wages during recovery from an injury that is temporary in nature.
• Permanent Total - lost wages for serious injuries where a return to work is not possible.
• Temporary Partial - lost wage differential when a worker returns to work at lower wages.
• Permanent Partial - future lost wage potential based on the residual of an injury.
• Death - lost wages for a fatal injury paid to a surviving spouse and/or dependent children.
Medical benefits also vary state to state, but are generally quite liberal and the injured worker rarely faces out-of-pocket costs.
Workers' Compensation Premiums
Workers' compensation coverage and benefits are available through workers' compensation policies issued by hundreds of insurance companies throughout the country. There are also a number of states that have their own "state funds" that compete with private insurance companies in offering workers' compensation insurance. Both insurance companies and state funds offer this insurance in exchange for premium dollars paid by the employer. The cost for premium is based on anticipated loss experience and comprised of two basic components: Manual Premium and Modified Premium
Manual Premium
Each state creates a rate for workers' compensation insurance coverage based on the aggregate loss experience for the type of jobs people work. Each specific job type is categorized in both a "class" and "class code" so that some degree of comparison can be made between states in developing rates. For example, a file clerk works in a class of employment known as "clerical" and the loss experience associated with that class is generally very favorable. In contrast, a delivery person works in a class of employment known as "trucker" and the loss experience associated with that class is generally less favorable. Based purely on these rates, premium would be far less for an employer who employs mostly clerical workers than for an employer who employs mostly delivery people.
Since most employers have a combination of classes in their employee population, the manual premium is computed by multiplying the rate for each class by $100 of payroll in that class. For example, a manufacturer may pay the following:
Modified Premium
After an employer's manual premium is determined, it is multiplied by an Experience Modification Factor ("e-mod."). While classes are based on aggregate experience, the e-mod is a reflection of each individual employer's loss experience at their own workplace. Generally, employers who keep their workplace safe and help injured employees get back to work quickly have a favorable loss experience, resulting in an e-mod that is less than 1.0. Conversely, employers who are careless in maintaining a safe workplace or who fail to help injured workers return to employment have a poor loss experience resulting in an e-mod that is greater than 1.0. Review the following example to see the impact this can have on premium cost:
Employer A: Weak safety performance, little emphasis on return to work Manual premium = $100,000 x 1.50 e-mod = $150,000 in modified premium
Employer B: Safe workplace, strong return to work efforts Manual premium = $100,000 0.50 e-mod = $50,000 in modified premium.
The e-mod is a critical factor in the final cost of an employer's workers' compensation policy. And much like the experience rating system used by many states to develop auto insurance rates, a bad year can haunt an employer for years to come - three consecutive years' experience are used to develop a workers' compensation e-mod.
Uninsured Expenses
Beyond the premium that your employer pays for workers' compensation, on-the-job injuries also produce costs that are not covered by workers' compensation insurance. Some examples of these uninsured costs include:
• Production down-time and inefficiencies
• Replacement cost for temporary labor
• Training temporary labor or replacement workers
Many experts believe that the uninsured costs of on-the-job injuries can be as much as 2 or 3 times the actual premium paid for workers' compensation insurance! Finding solutions to the cost of workers' compensation is critical to the health of a company, both in economic as well as human terms.
Jon Gice is president and chief operating officer of Massachusetts-based ManagedComp.