Workers’ Compensation Issues and Costs – My Process to Fix Them
Hey, thanks for clicking on this post regarding workers’ compensation issues and costs.
This is geared to mid-sized firms that are seeing their workers’ comp costs rise. You may be wondering why are my costs going up, and what can I do about it.
What I’m going to do is pull the curtain back on what drives up workers’ comp insurance costs, and what you can do about it, and I’m going to show you my process for overall improvement to reduce costs quickly and over the long term.
This is a detailed plan of attack and I go into a lot of different elements of workers comp that a lot of insurance brokers don’t talk about.
I’m giving you the secret sauce because if you’re feeling pain over cost increases you deserve to learn how to combat it and pay the lowest cost possible.
What I’ll show you are elements of how I’ve fixed issues for new clients and gotten them on the right track to lower costs and greater productivity.
This will be a long post and video than most, but I want to share with you this process which is pretty detailed.
If I don’t entirely answer the questions on your mind relative to this subject, please feel free to reach out to me via phone or email.
Why are premiums rising
Okay so you’re seeing your premium rising and it’s not from just plain payroll growth and you think it has to do with your experience rating modifier sometimes called the mod or some other reason other than just rate increases.
the first thing we need to do is identify where the cost increases are coming from:
Is it a rate increase at the state level?
Is it the experience rating mod like I just mentioned?
Has your insurer bumped up a rating factor known as the loss cost multiplier?
Has a rating credit been removed or has a debit modifier been added to your policy?
Or have the payrolls shot up due to a payroll audit?
These are questions your broker should be able to answer for you, but if you’re watching this video I’m guessing that you’ve already asked them and you’re not satisfied with the answers you’re getting or the answer you got wasn’t detailed and there was no further discussion on how to fix something that may be broken.
Am I Right?
Why your broker isn’t helping
So I want to give you some insight into why your broker may not be able or willing to take some of these steps.
- They don’t know how.
Getting an insurance license isn’t easy, but it’s pretty simple in most states and all you need to be in business is a license. But a license or even being in the business for a long time doesn’t mean you have expertise. And, there’s no library or book to open and find solutions to complex problems you may be facing. Fixing complex workers’ comp problems comes with specialized training and hands-on experience. So, a lot of good brokers just haven’t had to do this type of stuff, so they don’t know where to start.
- They don’t want to help.
That may sound a bit harsh, but for a lot of brokers, this is a transactional business. Put new accounts on the books and keep moving on. Some, not most, don’t want to waste a lot of time servicing clients or digging into issues you may be facing because it’s going to take valuable time away from prospecting and writing new business.
- They don’t have the resources or tools to help.
The process that I’m going to show you often require special resources and tools – risk management libraries, subscriptions, software tools, and more. These are investments I’ve made and maintain that a lot of insurance brokers just don’t want to get involved in. It’s expensive, it’s time-consuming, and again, you need an above-average level of expertise to get these tools and resources to work for the client and the broker.
What I want to show you here is the process of how I go about a deep dive into workers’ compensation problems. The level of detail I push through will be based on the premium size of the policy.
Who is this for?
I’ll be honest and say that if you’re paying under $10,000 a year, it’s hard to justify doing all these steps, but it may not take all these steps to identify the problem and fix it.
What I’m going to describe here is really focused on an industrial type of business that is paying over $100,000 in workers’ compensation premiums.
So, what will we need to help identify the source of the cost increases?
What I want to see in any workers’ compensation analysis are the following documents:
- A copy of the current policy term’s policy
- A copy of the prior policy term’s policy
- A recently valued loss run over the past 5 years. A loss run is your loss history from each insurance company your workers’ compensation has been with for the prior 5 years and it should give you as much detail as possible from these insurers.
- A copy of the experience rating worksheets – also known as the stat cards
- The last insurance company payroll audit
- and any other pertinent documents you may have relative to workers’ compensation.
Yes, it’s a lot of data, but data drives the premium development process. Get one piece wrong and you end up paying the price.
So, let’s start with an analysis of your loss history. What we’re looking for here are several bits of info.
- Are all the claims on this history or loss runs actually your claims?
Do all of the claimants’ names look familiar? Were these people your employees?
Is there a chance that any of these injured workers were actually leased employees who were insured under the leasing company’s insurance policy?
Yes, this does happen.
- I’ve seen situations where a worker is injured and the HR department forgets that the worker was a leased employee and they file the claim with the company’s workers comp insurer rather than filing it with the leasing company’s workers comp insurer.
And as a footnote here, if you do have leased employees you want to make sure that your leasing company is providing you a certificate of insurance naming you as the “Alternate Employer”. That means their policy must have something called the alternate employer endorsement attached to it.
- The next thing you’re going to dig into is each open claim.
An open claim means it’s still an active claim and that it’s not closed out. There may be ongoing medical bills being paid or lost time wages being paid, or there is the possibility of future doctor interventions needed down the road.
Often, loss runs will identify open claims with an O and closed claims with a C, some insurers use a numeric code like zero is open and a one is closed, but somewhere on the loss runs this should be identified.
The reason you’re looking only at open claims at this point is that there’s nothing you can do about closed claims – they are closed, and baked into the record.
But, closed claims will be reviewed a bit later when we analyze root causes and loss trends.
Open claims on the other hand may present opportunities for cost reduction, and the entire experience rating mod process is based on the dollar cost of claims and payrolls, these are the only two factors that determine your modifier.
What you’ll be looking for in open claims are those with sizable reserves.
A reserve is the amount of money the insurance company is setting aside as an estimate for what they think they will ultimately pay out on this particular claim.
In my experience insurance companies over reserve claims – it is easier for a claims adjuster to set aside more money and adjust it downwards when the claim is closed out than be wrong and have to increase the total payout over what they originally estimated.
A lot of this has to do with statutory accounting rules that we don’t need to get into but suffice it to say that I find way more claims over reserved than under reserved and in the long run this costs employers like you a boatload of money.
The ultimate objective with open claims is to get them closed at the lowest amount possible.
Unfortunately, you can’t force this to happen. There are good reasons why some claims need to remain open.
For example, a worker that was injured 2 years ago may still need surgery in the near future depending on how physical therapy works out and the reserve on their claim is there to pay for those potential future costs.
Or an injured worker is still on disability and getting lost wages for chronic pain issues related to his or her injury. And so forth.
Reserves like their name imply money being set aside by the insurer to pay likely future costs.
But, there are situations where the claims handler has neglected to review a file and adjust reserves or to close it out when a claim is settled. These are situations you’re looking for.
What you’ll be looking for are situations like these:
A claim is reserved for $25,000 for a worker who was injured two years ago. They lost no time away from work, and only $700 of medical bills were paid, and the file is still open. You know this worker and there’s no evidence of any future issues.
Why is this still open and why is there a large open reserve?
Here’s another example, a valid claim was made for a workplace injury and the initial prognosis was seriously bad, and there’s a $300,000 reserve.
The injured worker did have some lost time and a relatively simple surgery but didn’t require follow-up care.
Again, the file is open for an extended period of time – more than two years. But there doesn’t appear to be any long-term issue here.
In both examples which I’ve seen many of in my career, I’ll call the claims handler and ask – Can you give me an update on this particular claim?
I’ll hear something like “Hmmm, it looks like the last payment was 18 months ago and that was the last thing in the file. Or I’m not sure what the situation is, this claim happened 3 years ago and I don’t see any payments made other than for first aid.”
Now I may be simplifying things here, but the gist of the situation is that claim reps have hundreds and hundreds of files they are working on.
Often claims are not closed out or inquiries aren’t made to find a reason to close out the file so they just languish on the desk of the claim rep.
Or should I say in their computer – if they were actual paper files like the old days there may be a visual trigger to wondering why all these files are still sitting there?
Your broker should be reviewing your loss runs regularly with you to look for these opportunities to reduce reserves and close out claims. Doing so prior to the calculation of your experience modifier can have a significant impact on your premium.
I mentioned earlier that open claims are potentially an area for savings in the development of the experience modifier. Get those corrected before claim information is communicated to the workers’ comp rating board and the mod should drop.
But what about closed claims?
Well, with regard to the mod, there’s nothing you can do about closed claims, but what we do want to do with closed claims is dig into them to find trends and commonality among those claims.
In my experience, in larger industrial and construction settings I find the same types of claims happening over and over for an employer – this is called a claim trend.
For example claims by action or activity: slip and fall claims or lifting type claims often trend within a company.
Or you may find that similar claims are happening in a particular location of your plant, or during a particular shift, or the same body part is being affected frequently, like hands or fingers being pinched. Or you may find a combination of claim type, location, time, and body part occurring.
What you’re looking to do is identify commonality and trends and corollate these trends to claim dollars spent.
For example, if you’ve identified that there have been 30 slip and fall claims in the past 5 years out of 50 total claims, you know you’ve got to pay attention to slip and falls.
But if you also identify that those 30 slip and fall claims amounted to some huge 7-figure sum, then there is an urgency to fixing that problem quickly, versus identifying 20 cut-to-hand claims which amounted to $10,000 or less in total first aid costs.
So you’re probably asking, okay, I’ve identified that a certain number of claims in a particular trend is average a certain amount of money in claims each year – now what?
The next step is to do something called a root cause analysis, and this is something that will be done moving forward for every worker injury claim your company has, as well as every near miss your company has, which I’ll discuss in a moment.
Root Cause Analysis is a fancy way of saying WHY? Why did this claim happen?
But you’re not going to be satisfied with asking and answering that why once.
You’re going to need to answer that question five or more times to get to the actual root of the problem and in doing so uncover potential strategies for preventing that issue from arising again.
OSHA has a great example of this on its website.
Consider that a worker slips on a puddle of oil on a plant floor and falls.
The traditional accident report will find the cause of the injury to be “oil spilled on the floor” with the remedy limited to cleaning up the spill and telling the injured worker to be more careful.
But, there typically is much more to the story so here are some of the other questions that should be asked in a root cause analysis:
why was the oil on the floor in the first place?
where are there changes in conditions, processes, or the environment?
what is the source of the oil?
what tasks were underway when the oil was spilled?
why did the oil remain on the floor?
why was it not cleaned up?
How long had it been there?
Was the spill reported?
As you can see, when you dig into all the potential “what” “why” and “how” questions you discover the root cause of this particular incident. You have a broader sense of what did happen, what systems broke down, who wasn’t doing their jobs, etc.
All of these questions and answers become your foundation for creating a risk control strategy.
I mentioned this a short while ago, near misses.
A near miss is when an accident almost happened.
Using the oil on the floor scenario – it would be like an employee who did slip on the oil but didn’t fall and injure themselves. This is a near miss.
In most safety-conscious operating environments near misses are reported similarly to actual accidents and injuries.
Well, they’re an opportunity to learn and prevent a situation like a near miss from turning into an injury. In safety cultured environments near misses are digested and investigated, including the root cause analysis.
Another concept that is worth inserting here is that safety-cultured workplaces focus on safety and preventing worker injuries not only to save the organization money.
They primarily do it because these organizations recognize that with every injury there is a human cost. An employee suffers pain and possibly worse, surgery, partial or full disability, loss of use, etc. That injured worker’s family suffers mental pain and worry, etc., and financial distress
The chain of events following a worker’s injury is much greater than the dollar costs suffered by the employer and I think it’s an important part of this conversation to not lose sight of.
Okay, so we’ve analyzed loss runs, we’ve looked deeply at the claims history, we’ve identified trends, and we’ve performed root cause analysis on those claim trends.
Good question, now we start to build the risk control and safety management process.
The goal is to prevent as many claims from occurring in the first place, and second, for those accidents that do occur we’re looking for opportunities to reduce the cost of those claims.
We’re going to pay particular attention to strategies for reducing risks around those problem areas we identified in our loss history analysis.
For example, if slips and falls are a recurring problem we may recommend outfitting workers with non-slip shoes, or making a greater effort in reducing moisture on floors, etc.
If there are ongoing claims of improper lifting then we may focus a lot of our attention on training and ongoing training on safe lifting techniques, or we may try and see if we can reduce the weight of loads that workers need to lift.
What I have found most effective in this whole process is to engage workers at supervisory and managerial levels to brainstorm issues, problems, ideas, and solutions.
Line managers in a manufacturing plant see what goes on, on the production floor every day. Supervisors in a wholesale distributor see how employees work, operate forklifts, and lift loads every day. General Managers on a construction site watch how workers use tools, equipment, and machinery.
These people have seen workplace accidents happen and they see tons of near misses – they are very well suited to help ideate solutions to the specific problems you as the employer bring to them.
Meaning if you’ve identified a handful of trends, and root causes, these supervisory employees will be able to think through the day’s workload and figure out a way to control and reduce risks.
Working together, management and supervisor can crack the code that may have stymied you for years.
I’d also recommend having a third-party risk manager or skilled insurance broker help guide you along the way as well to provide outside input and experience to the process.
Now, one thing that I like to do in these situations that I recommend is setting goals.
Risk control and claim reduction is a business process so like other processes in your company goals make sense. If you don’t measure, you can’t manage.
Depending on circumstances you may want to reduce the number of claims in year one by say 50%.
Is that an aggressive goal? Sure, it is. But ultimately you’re shooting for zero claims and zero lost days to come out of this plan.
That’s what major firms with thousands of employees target and there’s no reason why you shouldn’t either.
Part of this risk reduction planning is an entire claims process which includes record keeping, investigations, and more. It’s pretty complex so I’m not going to go over it here, but suffice it to say that it’s an integral and important part of the deal.
What I do want to go over briefly before I wrap up is safety meetings, especially with regard to achieving your goals in loss reduction.
I recommend that you have a standing safety committee that includes company owners, managers, leaders, certain managers, line operators, and employees.
This all depends on the size of your company but ideally, you’ll have less than 9 people on the committee. Much more than that and it becomes difficult to manage. A must-have at every meeting is a member of the executive staff.
Whether that’s a company owner or c-suite executive – this shows commitment to getting things done.
At least monthly – maybe a little more frequently at the beginning – you’ll have a formal meeting and go over the safety work in progress, the reporting results for the month, and discuss any new ideas or issues that have arisen since the last meeting.
I do recommend that meetings are organized and agenda-driven.
In fact, this is another opportunity for your broker to be involved to provide additional resources and organizational structure to your meetings.
Goal tracking at this monthly meeting is important to know where you are and what needs to be done to adjust processes, increase training and communications, etc. to hit the goal.
Everyone around the table has skin in this game, so don’t let a month go by without meeting.
Okay, I’ve gone over a lot of material in this video and post addressing how to identify drivers in workers’ comp cost increases and how to reduce and control the underlying factors.
There are just two more items to touch on that are outside of the claims and experience mod development that often can have an impact on your costs that should also be checked for accuracy.
- Class codes – as you know the workers’ comp policy and premium development are based on classification codes found in the workers’ compensation rating manual.
An audit is performed at the end of every policy year and the auditor should be verifying that the proper class codes are being deployed. At times they may adjust which employees go into which codes so you want to get a copy of the auditor’s worksheets to look for these changes and if they are correct.
While it’s not common for policies to have incorrect codes, it does happen and I recommend reviewing this each year with your broker, especially if the operations in our company have changed.
Just keep in mind that you can’t just willy-nilly change a class code. there’s a whole process that but I think it makes sense to verify that the codes in use are correct and the accurate level of payroll is going into those codes.
- Speaking of payroll, another area that can get fouled up in workers’ compensation where you can end up paying more is audits.
there are several different payroll rules that govern maximum payroll per executive, limitations of payroll on some workers, construction adjustment payroll programs, and other caps that need to be followed by the premium auditors.
The larger, the more complex your company, the more of a chance there is that some of these issues will get fouled up.
Your broker should be paying close attention to audits to make sure you’re getting every break you’re eligible for and not overpaying.
So, as you can see there are A LOT of moving parts when it comes to workers’ compensation insurance.
Paying the lowest cost is never going to be achieved by going out into the market and getting quotes. Your premiums are highly dependent on YOUR ability to control claims. The lower your claims the lower your premium will be.
There is another cost that I didn’t discuss which I’ll mention here and that is indirect loss costs.
What I mean by that is that when you have a workers comp claim there are costs that are not reimbursed by insurance.
They include lost productivity, damage to brand and reputation, waste, investigation time and costs, potential fines and penalties, and a whole lot more. Indirect loss costs can be a multiple of what your insurer pays out on direct loss costs.
Say a workers comp claim costs your insurer $12,000, it is possible that your indirect loss cost could be as high as 3 or 4 times that or higher.
The worst part is that these indirect costs just leak out of your bottom line.
But by creating effective risk control plans which reduce claim frequency and severity you can reduce your indirect costs significantly, in addition to your premium costs.
Alright, this has been a pretty long post. I hope you got value out of it.
As I mentioned in the beginning each employer has unique circumstances and issues they struggle with when it comes to worker safety and workers comp.
If you’re not getting the attention and help you deserve from your broker, I hope you’d consider discussing your situation with me and see if we might be a good fit.
- Class codes – as you know the workers’ comp policy and premium development are based on classification codes found in the workers’ compensation rating manual.