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Escalating Worker''s Compensation Insurance Rates Can Be Reined In
High insurance rates are affecting everyone, the Enterprise looks at what you can do to lower your costs.
By Carolee Boyles
Date Posted: 6/2/2003
It’s no secret that insurance rates are skyrocketing. Insurance costs of every kind, including worker’s compensation insurance, have climbed out of sight in the last year and a half.
Increases for worker’s compensation insurance have been particularly high, and the trend does not appear likely to change in the near future. Nevertheless, pallet and sawmill companies can take steps to rein in and control these costs.
"Everybody keeps raising their rates," said one Florida pallet manufacturer who asked not to be identified. "It’s forcing me to use more temporary workers so I don’t have to pay the rates. When worker’s comp rates increased last year, I let attrition take its course with some of the people that were on our payroll and started using more temps."
"Rates are going up significantly," noted Nancy Dicus of TOC Management Services, a Pacific Northwest employer association that helps companies deal with employee issues, including regulatory changes, benefit programs, and worker’s compensation insurance. "For instance, here in Washington (state), the rate for sawmills went up 35 percent last year. The rate for wood products manufacturers went up 42 percent."
Those numbers are good news compared to what rate increases could have been. "The rate change had been proposed at 56 percent," explained Nancy, TOC’s manager for western Washington. "Here in Washington, we’re monopolistic. We have only one carrier. They made the decision (to raise rates that much) based on solvency issues and expected losses."
For sawmill workers, Ohio had the highest worker’s compensation insurance premium rate in 2002 at $32.06 per $100 of payroll. Other states with the highest premium rates were Minnesota ($22.46), California ($21.97), Kentucky ($18.60), Florida ($18.34), Rhode Island ($17.66) and Illinois ($17.39). Of the remaining states, 13 had rates ranging from $14.67 to $11.05, and 16 had rates ranging from $10.99 to $9.03. The states with the lowest rate for sawmill workers were Arkansas, South Carolina, Arizona, Wyoming and Michigan.
In the category of logging or lumbering workers, the states with the highest premium rates were Kentucky ($79.97), Hawaii ($78.75) and Utah ($51.34). Twenty-one states ranged from $49.03 to $31.51, and 13 ranged from $27.51 to $20.75. States with the lowest rates included Maine, North Dakota and Wyoming.
Issues Impacting Insurance
The reasons for escalating insurance costs — including worker’s compensation — are myriad, according to Nancy.
"One issue is that there have been poor historical loss ratios," she noted. "That means that the premiums have not been adequate to cover the losses. The margins aren’t as good as they should be." In other words, in the past, worker’s compensation insurance premiums have not been high enough to cover claims and still leave enough money in the pot to keep the insurance companies running. "It’s hard for people to understand inadequate pricing like this," Nancy said. "But I think it’s been such a competitive market that the pricing has stayed down."
Other factors include the events of 9/11 and asbestos claims. "Both of those are creating big cost drivers," Nancy said. "And then there are legislative issues and court decisions, and the state of the stock and bond market. All these things are impacting insurance costs." Another factor is the escalation of health care and prescription drug costs, which obviously has an impact beyond the forest products industry.
But why are all these factors coming together at this time to increase worker’s compensation and other insurance rates so much?
Until now, Nancy observed, there has been a lot of subsidizing of worker’s compensation insurance by investment income. "The result of that has been to keep rates artificially low," she said. "Now, without having that kind of investment income coming in, escalating medical costs and inefficiencies in some state systems, suddenly the contingency funds are going away."
With all of that said, the good news is that there are things you can do to control or reduce premiums for worker’s compensation insurance.
"The first, and most important, is to have upper management commitment to prevention of injuries," Nancy said. A commitment to preventing worker injuries means not just giving lip service to employee safety or putting up some safety posters; it means building a serious, comprehensive safety program that protects company employees on the job.
"Upper management needs to be very visible about the fact that they don’t want their employees hurt," Nancy said. "They need to show that they’re monitoring (the safety programs) and are holding people accountable to their workplace goals."
Making this kind of commitment means making it as much a part of the company’s internal dialogue as talking about production. "Employees need to see that managers are...acknowledging people who are working safely," Nancy said. "And there needs to be some kind of accountability for people who aren’t working safely."
Another step a company can take is to assign management and workers to an in-house safety committee, and to support that committee.
"And, employers need to buy the personal protection equipment that’s appropriate for their employees," Nancy added.
In business terms, all of this means making safety a visible, permanent part of a company’s culture. The issue is not just compliance; it is doing things that prevent people from getting hurt.
Orientation for new workers is a good place to start. "As soon as a new employee comes on board, he needs to understand what the hazards are in the workplace and how to avoid being hurt," Nancy said. "He needs to know what the expectations are about being safe, and what happens if he’s not."
Far too often, a new employee is simply turned over to an existing worker to be trained. When that happens, whatever bad habits the existing employee has will be passed on to the new worker — including bad habits and shortcuts that may compromise safety. A formal orientation process that involves a company safety officer eliminates this problem.
When an injury does occur — and unfortunately, no safety program is going to completely prevent injuries — company officials need to actively manage the claim and create modified transitional jobs for those employees so they can return to work as soon as possible.
"For instance, let’s say someone injures a finger on their left hand but they can still do a job with their right hand only," Nancy said. "Or let’s say that they’re injured in such a way that they have to sit down while they’re working."
The key is to transition the employee so that eventually they can get back to their regular jobs. "What the employer can do is continue to modify the employee’s job until the employee is able to return to the job at injury," Nancy said.
Find another position that the injured employee can do temporarily with the limitations of recovering from the injury, and modify the job regularly so that he is doing the most he can as the injuries heal.
Depending on the state, a company may or may not have a legal obligation to transition an injured employee back to work in this way. "In some states there can be some obligation to temporarily accommodate employees," Nancy said. If an injury is permanent, the case may be impacted by the Americans with Disabilities Act.
The biggest cost driver in a claim, however, is the indemnity or time loss costs — compensation paid to a worker who is out because of an on-the-job injury.
"Being aggressive and consistent in offering modified jobs to people is important," Nancy said. This is true not only for the financial health of the company, but for the mental health of the injured worker as well. "People who are out of work for a long time can end up with what’s called ‘Disability Syndrome’ and feel like they’re not a valued worker any more," Nancy said. "So keeping an injured employee in that cycle of getting up and going to work is important. Having an employee performing one-third of his job is better than not working at all."
Another way to reduce worker’s compensation insurance costs is to have a good relationship with an occupational medical clinic. When a business develops that kind of relationship, clinic staff realizes the employer wants treatment for an injured employee right away. A physician who knows that you offer modified work for injured employees can help you get the employee back into the workplace in a way that is appropriate for the employee’s injuries.
"You should let the medical staff in the clinic take a tour of your facility," Nancy suggested. "This helps them understand your process." When clinic staff members understand a little about what you do and how you do it, they can help get an employee back to modified work and perhaps even make suggestions about what an injured employee can do in the transitional work phase. "When you do this, it becomes a partnership with the medical community," Nancy said.
By contrast, the consequences of not having such a relationship can damage your efforts to get someone back to work, she noted. "If the doctor thinks there’s no caring culture in the company, he may think, ‘This is the company that hurt my patient, and I’m not going to put him back in there so he can get hurt again.’ "
Another strategy for reducing worker’s compensation insurance costs is to have someone actively managing claims. Do not rely completely on the insurance carrier. The insurer may not have your sense of urgency or take into consideration the impact of a lengthy injury on your company or the employee. In other words, the paperwork may hold up getting someone back to work longer than the actual injury does.
A consultant or designated staff person who manages worker’s compensation claims expedites the process. This gets the injured worker the care he needs and through the system as quickly as possible. A designated person does not let paperwork be the holdup to either treatment or getting the employee back to work.
"Having that communication between the employee, the company and the doctor is important, and it’s important to have someone keeping on top of it," Nancy said. "If the claim goes on for very long, then reserves are set on that claim, and that can be very costly." For instance, if an employee is injured and ends up being on time loss, and there are other complicating factors, such as surgery, that mean the claim will be ongoing for a period of time, you may suddenly find yourself with a claim with a $50,000 reserve put on it. That figure will go into the "loss costs" column when an experience rating is done on your company; the costs from that one single claim could affect your worker’s compensation insurance rates for three years.
"You can end up paying 20 to 50 percent more than your competitor," Nancy said. "So it’s just good business to manage your worker’s compensation insurance."
Does having someone manage safety and worker’s compensation insurance claims make a difference in your rates? Study the following example and then decide.
Not too long ago, a small forest industry company in Pacific Northwest had a fatality on the job. "What that fatality did to the community and to the company was devastating," said Nancy. "Upper management knew there had to be a change. They made a complete commitment to change."
TOC Management Services worked with the company as it hired a safety officer and established an effective safety program. The company’s worker’s compensation rate went from an experience modification factor of 1.2, under which it paid 20% more than competitors, to an experience modification factor of 0.7: now it pays 30% less than competitors. The company is benefitting from a low frequency of on-the-job injuries as well as a low severity of worker accidents.
How do you find someone to help you implement a safety program or manage your worker’s compensation claims? If you’re a member of an employer association such as TOC Management Services, your resources may be as close as a telephone call to the association.
"At TOC, we walk employers through the process with an action plan," Nancy said. "We have sample policies, sample safe work practice guides that look at the hazards of each piece of equipment, and training programs. The whole thing about associations is that employers are contributing to fund expertise they can’t have in-house."
If your company does not belong to an employer association, check with OSHA or the state-run occupational safety agency. Ask for their consultation division, find out what kind of services they offer, and ask if you can tap into those services.
"Or, there are safety consultants who can help for a fee," Nancy said. "To find them, look on the Internet or in the Yellow Pages."
Even with these resources, the final responsibility comes back to the employer. "Upper management must monitor everything to make sure that it’s not only implemented but embraced," Nancy said.
Some companies may consider self-insurance. Take a deep breath and step back, Nancy advised: you may be standing on the edge of a precipice you do not want to go over.
"Employers need to be very cautious with self-insurance," Nancy said. "There’s a long tail of liability involved with worker’s compensation claims. They may go on for the life of the worker. And with the excess coverage and surety bonds and letters of credit involved, those costs are going up as well. Self-insurance is not a placebo for the escalating costs in the worker’s compensation market." Self-insurance may be a short-term solution in some instances but in others can devastate your business in the long term.