How to Avoid the Workers' Comp Cost Cycle

By Les Breedlove

With few exceptions, workers' compensation insurance rates are in decline across the country. However, declines in workers' compensation rates are historically just the calm before the next storm. Usually businesses will pay back all their "savings," and then some, as the workers' comp cost cycle moves to the next phase.

The cycle maintains a predictable pattern:

• Public outcry from business leaders triggers legislative reforms.
• Insurance companies increase competitive efforts, which produces price wars.
  
• Businesses "shop for the best deal."
  
• Lower prices lead to complacency as employers lose focus on injury prevention and cost containment.
  
• Claim costs do not fall in relation to the reduced rates. Employers suffer from increased experience modification factors.
  
• Legislative reforms erode or prove ineffective in addressing real cost drivers and abuses in the system.
  
• Insurance company profits dwindle; "low-ball deals" go away.
  
• Employers are left with fewer choices, higher experience modification factors, and higher costs.
• A renewed outcry restarts the cycle.

Relying exclusively on legislative reforms and the insurance marketplace for stable cost reduction is a fool's errand. While reforms can help in the short-term, driving down workers' compensation costs in the long-term requires a proactive approach.

The first step is to understand that workers' compensation insurance functions more like a credit line than insurance, financing injury costs through the policy. The experience rating plan, an integral component of the final cost of workers' compensation insurance, is a method for tailoring the cost of insurance to the individual characteristics of an employer. Therefore, employers can manage expenses through cost-saving programs. However, the plan cuts both ways and high injury costs are translated into higher insurance costs.

Actual payroll and loss data for the individual employer are analyzed - usually over the latest available three years - and compared to similar businesses to calculate the experience modification factor. An employer with better-than-average injury expenses receives a credit, thus reducing the premium. On the other hand, employers with worse-than-average injury costs will carry a debit rating, and pay more.

Due to the inner workings of the plan, it is difficult for employers to lower their experience modification factors during a declining rate cycle. The plan expects that if rates go down, so should injury costs. If injury costs fail to decline in proportion to rates, then experience modification factors increase, usually wiping out any savings from the rate reduction. Employers may actually find their costs going up even though premiums have gone down.

To avoid this, employers must be vigilant and proactive in reducing injury expenses. Ultimately, an employer's injury costs have a far greater impact than reforms and rate decreases. This shifts the responsibility of cost reduction directly to the employer.

But employers, often unaware of processes that can dramatically improve outcomes, feel helpless in managing injury costs. It often takes an act of faith before discovering that the strategies and methods for controlling workers' comp costs will work.

Reducing injury costs can be broken down into two primary categories - what to do before and after an injury occurs.

The key steps employers must take before an injury occurs include:

• Select and train an injury coordinator.
• Establish a return-to-work program.
  
• Hire people fit for the job.
  
• Establish a relationship and get commitments from your primary care physician.
  
• Train supervisors on what to do and say when an injury occurs.
  
• Address human resource issues before an injury occurs.

Steps to take after an injury occurs include:

• Follow a written, repeatable, step-by-step process.
  
• Return the injured employee to work as soon as medically possible, even if in a modified work capacity.
  
• Maintain positive communication with the employee and the doctor.
  
• If an employee is not recovering according to expectations, address additional underlying causes of the disability.

One of the major mistakes employers make is to hand over too much responsibility to the insurance company in managing injury costs. Insurance companies are neither positioned nor capable of doing this job alone, primarily since their involvement is usually after-the-fact.

Employers are keenly aware that maintaining a safe workplace is the foundation of prevention. However, too many businesses rely entirely on traditional loss-control engineering.

The most effective way to drive down workers' compensation costs over the long term is for employers, medical professionals and employees to make the right decisions and do the right things at the right time. No government entity, insurance company or even the free market system will ever produce more beneficial long-term results.

Les Breedlove is the owner and CEO of Slaton Insurance, West Palm Beach, Fla.