Workers Compensation Analysis

All firms suffer from the high cost of workers compensation and are better off if the injury and illness rates, as a whole, decline. There are also indirect and hidden costs associated with injuries and illnesses. In the past decade, the average cost of a serious workers compensation injury has risen over 300% for lost wages and over 400% for medical costs. As a nation, businesses are paying billions of dollars for workers compensation related expenses.

How much does it cost in business?

Clearly, the costs of workers compensation have risen steadily through the years both the number of claims and the average costs per claim have increased. Moreover, the costs of both the medical and disability components of workers compensation have increased at rates far greater than inflation.These rapid rates of increase have caused many states to focus on ways of reforming the system, including ways to provide greater incentives for employers to reduce accidents and injuries. A few specific cost drivers affect workers compensation, all of which are addressed in other sections of this book, with recommended methods of countering their upward trend. But it is important to understand early on their contribution to the rising costs of workers compensation and also to understand that they have a synergistic relationship.

Increased wages

As wages increase, workers compensation premium also increases. If wages increase 10%, the premium will increase proportionately. When employees receive lost-wage benefits, they are compensated a percentage of their salary (determined by individual state laws). Therefore, as salaries increase, lost-wage benefits increase.

Longer time off the job

Typically, lost-time benefits are not paid unless an employee misses an established number of days of work due to the injury. Unfortunately, this appeals to some employees as an opportunity to remain off work the appropriate amount of time to qualify for lost-time benefits. Obviously, this involves an individual’s integrity, but it also involves the company’s philosophy and approach to early-return-to-work policies and procedures.

Medical costs

These costs have risen dramatically, and, in somecases, increased diagnostic tests and treatments have been rendered. Medical costs now exceed 40% of all benefits paid (for work-related injuries, all medical costs are paid).

Litigation

Because of the dollars involved and the ambiguities in many areas of the workers compensation laws and regulations, many claims are contested by employees, employers, and insurance companies. The cost of these legal proceedings and the fees paid to attorneys add to the cumulative expense of workers compensation.

Administrative costs

As premiums increase, as workers compensation payments increase, and as litigation increases, administrative costs increase. Also, as premiums increase there exists the probability that the profit realized by the insurance provider will increase.