By Phillip M. Perry
Employers have long been concerned about the cost of workers’ compensation insurance. This year, though, the premium environment seems particularly harsh as the insurance industry changes the way it calculates the “experience rating modification,” or x-mod, that powerful pricing engine gear assigned to each employer. The change is expected to result in higher rates at a time when premiums are already rising quickly in response to escalating medical costs.
As if all that weren’t enough, a growing number of carriers are leaving the market, diminishing the supply of competing policies and putting even more upward pressure on the price of this mandated benefit.
It all boils down to a challenge for employers. “We are currently in an environment of rising workers’ compensation costs,” says Peter Burton, Senior Division Executive for State Relations at the National Council on Compensation Insurance, Boca Raton, Fla. (ncci.com).
The new math
For business owners, the most immediate concern is the change in the x-mod. The portion of each claim that will flow into the experience rating formula at its full primary value will increase to $10,000 from the former level of $5,000. (See sidebar, “Calculating the New X-Mod.”)
The reason for the change, says Burton, is the growing mismatch between the cost of claims and the premiums employers pay. “The split point portion of the experience rating formula has not been updated for 20 years, a period during which the average cost of a claim has tripled,” says Burton. “So our actuaries looked at the program and saw it was out of balance.”
Some industry observers recognize the connection. “The new x-mod calculation is a reflection of medical costs which have gone up exponentially in recent years,” says Daniel C. Free, President and General Counsel of Insurance Audit & Inspection, Indianapolis, IN. (insuranceaudit.com). “The NCCI is really just catching up. The new mod can be seen as a ‘true-up.’”
Be that as it may, employers are sitting up and paying attention to the new math. “The x-mod changes are a big deal for employers,” says Karl Ahlrichs, benefits consultant for Indianapolis based insurance broker Gregory & Appel (gregoryappel.com). Those employers with historically safe workplaces are going to be better off under the new system. Those with more frequent, higher level claims will see their x-mods increase. “The impact will vary based on the number and size of claims the employer has had.”
Carriers leaving the market
A third factor contributes to premium angst: A dwindling supply of carriers serving the market. “We are seeing a growing number of cases where multiline (auto, property, umbrella, general liability) carriers are refusing to renew workers’ comp insurance for an employer whose experience is unfavorable,” says Mike Salazar, Vice President and Manager of Client Services at Gregory & Appel. The reason for carrier’s growing reluctance is clear: “In a low interest rate environment carriers cannot make up workers’ comp losses with profits from property and other insurance products.”
“Employers turned down by the multiline outfits must apply to the single line workers’ comp insurance carriers,” says Salazar. While the premiums at such carriers may not be much higher, there is another problem: Insurance carriers are become more judicious in what they underwrite, due to the rising costs of the workers’ compensation system. “Single line carriers are becoming more prone to accept only employers with strong claims management and risk control engineering,” says Salazar.
Employers with poor histories may have to go to the state pools for coverage. “These are pools you do not want to go swimming in,” says Salazar. “They are expensive. They charge standard premiums, adjusted for the employers’ experience, plus a 20 to 25 percent surcharge. And you do not get the same service. For example, there is no engineer to come in and help you manage your safety program.”
Employers can take a variety of steps to keep workers’ comp costs under control. Right out of the gate, say consultants, vetting potential hires can obviate problems down the road. “Change your hiring practices to reflect your drive to get people who value safety,“ says Ahlrichs. “It’s legitimate, for example, to ask safety related questions that are work related.”
Also look at pre-hire assessments that can predict safety behaviors. It is valid to ask applicants to perform the activities required of a position, for example. “This is called a ‘fit for duty’ assessment,” says Salazar. “Can the applicant do the job safely based on its requirements?”
Finally, conduct pre-employment drug screens. “That’s a good way to avoid hiring people who will file workers’ comp claims,” says Salazar. “People who take drugs are more likely to have accidents, hurting themselves or others.” Drug abusers, too, can suffer from poor health. “Employees who are in poor health when they do have accidents usually end up with more expensive claims.”
However, don’t fall into the trap of discrimination. It is improper, and illegal, to reject older applicants under the belief that they will have more accidents. “Older workers tend to work more safely than younger workers’ because they know the job better,” says Burton.
It’s true that older workers, when they do get injured, often have costlier injuries because they do not heal as quickly as younger ones, notes Burton. However, this is offset by the fact that older workers tend to be higher paid and this correlates to higher premiums being collected in the workers’ compensation system. “In the aggregate older workers do not adversely affect the costs of workers’ comp.”
Install safety programs
Given that the x-mod rating is based on an employer’s accident record, it is wise to put an emphasis on workplace safety, says Burton. “The message to the employers is this: Clean up your act, have a safe workplace and you are likely to reap greater benefits under the revised experience rating system.”
Undertake a program of constant safety vigilance. “Hold a monthly meeting during which you review every single accident and near miss accident,” suggests Salazar. “Investigate every event and develop a corrective strategy so the accident does not happen again to that employee or another worker.” The response might be something as simple as fixing a hole in your parking lot.
Many employers have redesigned their work stations, and introduced stretching and exercise programs to assure good employee health. “Strains and sprains, and slips and falls are the most common claims in workers’ comp industry,” says Salazar. “They can be engineered out of the workplace.”
Wellness program can also play a role. “My sense is that there will emerge a body of data that links effective wellness programs with effective safety programs,” says Ahlrichs. “The combination should produce a great result on workers’ comp costs. Right now it’s difficult to find supporting data, but it makes sense that a company with a focus on safety and well being will gain a competitive advantage.”
Back to work
Another good technique is to have early return to work programs for employees who have been medically restricted by physicians. The trick here is to identify alternative positions for which the injured worker is capable.
“Suppose the worker has a medical restriction such as ‘Can’t lift more that 15 pounds,’” poses Salazar. “See if you have tasks that require lifting less than 15 pounds that you can assign the employee to while recovering.”
There is an advantage to employees who cooperate, since most employers will compensate them at their normal salary, but only provide partial compensation to workers who stay home. And there’s another reason: Adjustors will suspend the workers’ comp claims of employees who refuse temporary positions. “Workers’ comp is there for people who cannot work for medical reasons, not for those who refuse to work,” says Salazar.
Can’t find a temporary position for an injured worker? Then keep open lines of communication with the home bound person. “Once people are hurt really badly they lose their desire to be part of a team,” says Free. “They feel forgotten and alone. Their spouses may be off at work while they are home with a broken leg. So we always tell our clients to visit them. Bring some fruit, talk for a half hour, show the person you care about him and want him back as soon as possible. That really helps. The little things that employers do make all the difference.”
All of these steps together can communicate an attitude of caring. “Adopt policies that send the right message to your workforce,” says Ahlrichs. “Your message should be this: ‘We have a culture of safety. We attempt to control the variables so people do not get hurt. If you do get hurt we will get you back to work quickly.’ When that message gets out, people who are prone to accidents will apply at another business that does not make safety a front burner issue.”
Employers can seek help from consultants who specialize in workplace safety. “Some of these people go through special training,” says Free, who suggests employers look for designations such as “Associate in Loss Control Management” or “Certified Safety Professional.” Such people can teach employees in good workplace practices, including lifting properly and avoiding shoulder injuries.
Consultants can make a big difference, but lay out parameters before the safety guru arrives. “One of the bad raps consultants get is that they make recommendations that are too expensive,” says Free. So emphasize you want suggestions on improvement that are cost neutral. “In such cases these improvements pay for themselves as losses go down.”
A safe workplace can reduce your accident load and thus cap or even reduce your workers’ comp premiums as your x-mod improves. That’s all to the good. The cost of insurance is an integral component in competition, whether you produce a product or service.
Calculating the New X-Mod
Workers’ compensation premiums are rising at a rate of between two and five percent in many states this year. Reason? Several factors. One is the rising cost of medical care, translating into higher costs to return injured workers’ to health. Another is the departure from the market of some multiline insurance carriers, reducing competition for employers.
There’s also a third factor: a change in the calculation for the “experience modification factor,” or x-mod, which is assigned to each employer. A higher x-mod translates into higher workers’ compensation premiums.
The details of the change in the x-mod calculation can be found at the web site of the National Council on Compensation Insurance (ncci.com). Click on “Experience Rating Split Point” at the lower right corner of the screen.
When calculating an employer’s x-mod, the states will look at three years of losses and payrolls. However, the most recent year is excluded. “The reason for that is that when a claim is made no one can predict the cost of the claim and set money aside to pay it,” says Salazar. “The reality is we have to see how the claim settles out.”
Expect more costly x-mod adjustments ahead. “It is significant that the split point will continue to rise,” says Mike Salazar, Vice President and Manager of Client Services at Gregory & Appel. “It will move to $15,000 and adjust for inflation in future years.”
Rising costs in workers’ comp seems to have the greatest effect on those employers without the resources to institute safety programs, or which have especially high costs of labor. “My experience has been that small businesses have a tough time absorbing these cost increases,” says Salazar.
Controlling costs at the state level
Nervous about rising workers’ compensation insurance? State governments are trying to do something about it.
“Medical cost containment is one of the biggest topics this year in state legislatures,” says Peter Burton, Senior Division Executive for State Relations at the National Council on Compensation Insurance, Boca Raton, Fla. (ncci.com). “Medical fee schedules are being examined. States are also considering limiting the ability of physicians to dispense injured workers’ repackaged drugs that can be purchased much more inexpensively at the pharmacy.”
There is also a major initiative by legislative organizations to place constraints on the abuse of prescription drugs, according to Burton. “More individuals die from overdoses of prescription drugs than from cocaine and heroin abuse.”
“Because many injuries qualifying under workers’ compensation are traumatic in nature, drugs for pain relief are often prescribed,” says Burton. “This may be abused over time. Also, the longer workers stay on these drugs the longer it takes the injured workers’ to return to work.”