Measuring and Mitigating Workers’ Compensation Costs
Calculating Cost
Workers’ Compensation claims requires employers to know the right math equation to determine the effect to your company’s bottom line. This issue of News For You shows you how to solve the problem. It also suggests ways to reduce the occurrence of worksite injuries and their financial impact.
Every time a Workers’ Compensation claim is made, direct costs are incurred. Direct costs are tangible and include medical bills, time-off wages, and permanent disability benefits — plus insurance premium impact. But the total expense is hidden in the indirect cost. To calculate indirect cost, consider the areas that contribute:
- Production delays/work stoppage
- Accident investigation
- OSHA penalties
- Equipment damage
- Hiring and training
- Clean-up and rework
- Legal fees
- Increased stress
- Decreased morale and productivity
- Delivery delays and unhappy customers
Because indirect costs represent between 70 to 80 percent of the total cost of injuries, it is important to calculate their impact. A basic two-step formula helps measure the total cost of a Workers’ Compensation claim:
STEP ONE: Direct Cost X Cost Multiplier = Indirect Cost
STEP TWO: Direct Cost + Indirect Cost = Total Cost
The “cost multiplier” in Step One varies with the level of direct cost. Use the following chart to determine the cost multiplier.
| Direct Cost | Multiplier |
| $0 - $2,999 | 4.5 |
| $3,000 - $4,999 | 1.6 |
| $5,000 - $9,999 | 1.2 |
| $10,000 and above | 1.1 |
Profitability Impact
Cost comes at a price: impact on profitability. This is where the numbers get really scary. Another two-step calculation translates the Workers’ Compensation injury or illness into terms your CFO and sales force can appreciate.
STEP THREE: Total Profits (divided by) Total Sales = Profit Margin
STEP FOUR: Total Cost of Work Comp Claim (divided by) Profit Margin = Sales Needed To Pay For Claim
In a “textbook” example, a company that operates at a 5 percent profit margin could need to increase sales by more than $200,000 to cover the cost of a $4,000 Workers’ Compensation claim. Or, it could come out of profitability.
Preventive Measures
Some fundamental safety standards and practices go a long way toward preventing Workers’ Compensation injuries and illnesses. Begin with a walk-through of the worksite to identify — and correct — potential hazards. Maintain the worksite with preventive and routine clean-up and repairs. Establish a “safety first” environment with an enforced and documented safety program. Offer wellness and exercise programs. And discourage costly unnecessarily extended employee absences by having a return to work program.
Supervisor’s Impact
Improving the hiring process is just one step. Enhanced orientation and training programs are also essential in reducing workplace injuries. A culture of safety can exist if supervisors understand how Workers’ Compensation and they themselves affect employee education, safe work practices, safety programs, accident investigation, and return-to-work success rate.
Immediate Action
Delays in accident investigation and reporting can compound the situation. Failure to take immediate action leads to increased liability, disgruntled employees, and the potential for additional injuries from the same or similar hazards. Supervisors who are supportive and treat injured and recovering employees with respect can help reduce the length of absence.
Return to Work
Most Workers’ Compensation experts advise a return to work program for reducing cost by as much as 20 to 50 percent. Records show employees who are off the job more than three months have a 50 percent likelihood of never returning. Injury-related turnover adds recruitment and retraining to the list of hidden expenses for employers — often at a cost of 50 to 150 percent of an employee’s annual salary.
Claim Management
Claim management should not be left to the untrained or uninformed. This is where an insurance broker who is an advocate for his or her client can help shorten the “life of the claim.” The shorter time the claim is open the less likely it will escalate from a medical only to a more costly indemnity claim.
To learn more about how Holmes Murphy can advise and advocate for you, contact a Holmes Murphy broker today.