The Comprehensive Fiscal Impact of Workers’ Compensation Injuries
The U.S. Compliance Wellness Team Purpose: To provide comprehensive wellness solutions to reduce and control ergonomic risks, thereby supporting business leadership to Care for their personnel’s health and productivity at work and at home, Protect their business well-being by minimizing costs related to their most valuable assets, and promote Growth of their business as fiscal stewards.
Understanding the comprehensive fiscal impact of workers’ compensation injuries on a business is critical for understanding the true financial losses when an injury occurs. Personnel well-being and soft impacts (morale, quality of work, etc.) aside, the fiscal implications from injuries can dramatically affect a business’s bottom line, and personnel managing the injury process often do not monitor or track the related costs outside of workers’ compensation dollars. This paper and the associated webinar series will discuss additional metrics that should be tracked and strategies to paint the full picture of the financial impacts of an injury and how to find and track that information.
Workers’ Compensation Impact Overview
The workers’ compensation system serves as a critical control point for both injured workers and employers alike. Benefits are provided to injured workers without regard to fault, and employers are responsible for paying specific benefits in exchange for the elimination of lawsuits for negligence. These benefits typically include medical, disability, vocational, death benefits, and other payments that are reasonable and necessary to cover medical treatments, replace wages, and provide vocational rehabilitation services or death/dependency benefits. Given the broad range in which employers (and the associated insurance providers) cover, it is common for many employers to focus solely on those direct workers’ compensation injury costs and not consider the full fiscal impact of a work-related injury on the business.
Additional fiscal impacts of employee injuries can include the costs related to labor coverage of the injured worker, lost productivity and quality, legal fees, maintenance of cash reserves, disability payments, or other related costs, which can all escalate rapidly. When these additional costs are considered in addition to the direct injury costs, a more detailed picture of the true impact of injuries on the bottom line of the business emerges. With better data, it becomes easier to emphasize developing controls that will reduce potential hazards in the future as well as make the fiscal case for capital expenses faster with a more accurate Return-On-Investment (ROI).
Before further discussion related to the financial aspects of injuries, it is prudent to remember that the most important factor of any injury is the impact on the injured person. Discussing the impacts on an injured employee is a topic in and of itself, with an increasing body of research becoming available. This research discusses not only the physical impact, but also the psychological impacts on the person’s quality of life, the impact on those in their immediate family and social circles, and the financial aspects that emerge when a person is injured both in the short term and when out of work for prolonged periods. Truly, work is therapeutic in its own way, and every effort should be made to not only prevent injuries from occurring but also to get the injured person back to work as soon as their recovery permits.
Medical Costs are the financial costs commonly considered during the injury and recovery process related to medical treatments to return the person to their pre-injury medical status. These costs are all-encompassing, from first aid treatments, diagnostics procedures, therapies, surgeries, follow-up appointments, and other standard medical care. These direct injury costs are commonly known by human resources professionals from their discussions with workers’ compensation insurance adjustors and related paperwork from managing the various claims.
Operations Quality, Productivity, and Other Indirect Costs are much more difficult to track compared to medical costs as the impacts do not yield hard data points that can be specifically tracked but still should be considered when evaluating the total impact of the injury on the business. When a person is injured, especially if the person is experienced or has highly specific skills, ripples are felt across operations when that knowledge and skill set are missing. Less capable personnel must fill those gaps, and it is common for productivity and quality to decrease in proportion, which can be further compounded with potential losses in business. Additionally, consider the impact on the morale of the workforce and the decreased quality of work experience when personnel observe their fellow workers becoming injured. Certainly, quality labor is increasingly more difficult to not just find, but also to keep, and there are likely additional data points that may also be extrapolated related to the costs and replacement of personnel.
Overtime and Temporary Labor Coverage are costs incurred to replace the production of the injured person. Widgets still need to be made while the injured person is out and is still being paid. Because the injured person is still being paid (typically as part of the workers’ compensation reimbursement at 66% of their normal wage), the full cost of the additional labor needs to be added to yield the total cost. Whether it’s a normal employee working overtime at time and half their wage or a replacement through temporary labor, the coverage costs will be significantly higher than the normal wage, which directly impacts the profitability of the business as production and operations estimates are based on standard labor rates.
Disability payments and benefits to injured persons also need to be considered. In a serious event, if the person is not able to return to the pre-incident medical condition in short order, a disability payment is settled. These payments can be temporary, yielding a Total Temporary Disability (TTD) cost, which is commonly used with significant injuries that require a prolonged period of recovery and rehabilitation. Total Permanent Disability (TPD) costs, on the other hand, are incurred after the person reaches full medical improvement and a permanent disability is present. This generally yields a life-long disability rating and payment.
Legal Fees are often incurred following significant injuries and especially if disability payments are involved. Legal guidance is often crucial for the company to ensure the best outcome for both parties, and those costs are passed directly to the business.
Insurance premiums are directly impacted because of cumulative injury information. Obviously, a business with more and/or more serious injuries and associated costs will pay higher premiums compared to a business with fewer injuries. Businesses are issued an Experience Modification Rating (an EMR or MOD rating or factor) based on injury costs from the previous three years. This number is used to price workers’ compensation premiums, with an EMR/MOD of 1.0 indicating a business with standard injury risks/costs. Similarly, a rating higher than one incurs increased risks/costs, while a rating less than one incurs lower risks/costs (safer than most). Insurance Premiums are based on this EMR/MOD rating. For example, an EMR of 1.2 could yield premiums up to 20% higher than the standard, the cost of which is passed directly to the business. For some businesses, aside from the increased costs, high EMR/MOD ratings can affect the ability to bid on some projects and therefore result in fewer business opportunities. Also, loss of coverage can result if the EMR is high and remains in a high-risk range, as an insurance provider can choose not to renew a policy or may raise the premium rates so high as to no longer be competitive.
Insurance Claim Reserves are also required to be maintained for some businesses, especially for those who are self-insured. Essentially, the workers’ compensation insurance provider may require the business to hold significant funds for use with paying costs associated with injuries. Higher-risk businesses will have to hold more to meet their financial and legal obligations to ensure financial stability when a workers’ compensation injury occurs. This is money that cannot be used for other purposes.
How Data is Collected and Who Has It
The EHS Professional within an organization should have access to general injury-related statistics such as the total number of recordable injuries, the number of cases with Days-Away, Restricted, or Transferred (DART), and statistics related to first aid incidents, near misses, and general safety operations. While this data is necessary to track and provides primarily lagging-indicator benchmarks on the EHS program in general, this data alone does not illustrate the fiscal impact on the business related to injuries. To understand the fiscal impact, other stakeholders must be involved.
In most business operations, the key personnel holding fiscal information related to injuries will be Human Resources (HR). Due to the personal medical information and confidentiality that must be maintained related to most injuries requiring medical attention, HR is generally tasked with not only managing injury cases but also managing the costs associated with workers’ compensation and associated insurance carriers. Generally, they will be able to easily obtain information related to medical costs and overtime and temporary labor costs. Often, HR will not regularly observe data beyond medical treatment costs, but because they maintain the relationship with the insurance provider, they can obtain additional information. Workers’ compensation insurance carriers, such as Travelers, Lockton, Zurich, etc., should be leveraged to provide additional fiscal information, including all medical treatment costs, all insurance reserves for open claims, legal fees incurred to resolve claims, all Total Temporary Disability (TTD) payments, all Total Permanent Disability (TPD) payments, and other costs related to permanent disability ratings and payments. Further, due to the costs paid to the insurance carrier by the business, they will hold information related to the insurance premiums, insurance claim reserves, and the EMR/MOD ratings.
Truly, the bulk of injury-related fiscal data can be obtained from the insurance provider by whomever manages that relationship. Personnel attempting to understand the full fiscal impact of injuries simply need to know who maintains the relationship with the insurance carrier and know what information to ask for.
An Example of Total Injury Costs
A U.S. Compliance-supported company was attempting to build a Return-On-Investment (ROI) calculation related to capital improvement projects to aid in the control of developing ergonomic-related injuries. The well-meaning EHS Manager was familiar with the injury numbers and obtained the medical treatment costs from Human Resources but understood that this did not illustrate the full cost and, as a result, the ROI was not as high as expected. With the assistance of the U.S. Compliance Wellness Team, a full picture of the fiscal impacts of injuries related to their process was obtained by speaking with the Human Resources team and obtaining the full fiscal data from the insurance provider. The data provided was comprehensive, so the team was able to easily distill the data.
In 2021 (costs rounded to illustrate the example), the total injury medical costs were $300,000, and a capital improvement project to control the hazards that resulted in the injuries was estimated at $1.2 million, yielding a 4-year payback (ROI). Upon further examination, in addition to the $300,000 in medical costs, the insurance provider was holding $45,000 in medical reserves for the open claims, $125,000 in disability payments, $50,000 in legal fees, and TTD/TPD payments of $25,000. This data yielded a total fiscal impact of $545,000 (not including the operations impacts as discussed above), yielding a more accurate ROI closer to 2.2. Because the company had a two-year ROI requirement for capital projects, the original estimate of a four-year payback was not accepted, but after understanding the true fiscal impact, the ROI dropped to 2.2 and the capital improvement project was approved.
Learning to “Speak Operations”
Understanding the total financial impact on your company’s injured employees will allow personnel to leverage accurate information for capital improvement projects. In addition to total fiscal costs, remaining aware of the operational impacts in all discussions is critical to painting the full picture and building support for improvements. Learning to “speak operations” and use operational language and examples, in addition to data from the true fiscal impacts of information, will yield greater buy-in and support for projects.
Key examples of operational language related to injuries:
- How many pounds or units were lost due to this injury?
- What additional costs have been incurred because this employee was not working?
- What was the temp or overtime coverage costs resulting in hours/days/weeks?
- Has efficiency or quality been impacted since the injury took place?
An Example of Speaking Operations:
In 2022, a facility had several injuries that resulted in 90 days away from work and 200 days of restricted duty. The facility produces 10,000 pounds of product per day.
- 2,900,000 pounds of product were impacted by these lost-time injuries.
- At a profit margin of $0.50 per pound, the injury impacted $1,450,000 in profit.
- 290 Days of overtime and temporary labor coverage were incurred.
- Because TTD/TPD benefits are being paid for the injured workers the entire time, the overtime and temporary expenses are on top of what the insurance carrier was paying.
- The standard hourly rate was $20 per hour, so the overtime rate was $30 per hour.
- 290 days * 8 hours * $30 = $69,600 in overtime costs (above what the insurance carrier was paying for the injured person)
- This does not include the benefits load for the personnel (speak with Human Resources to fully weigh the costs of overtime or temporary labor coverage and the benefits load).
Next Steps and Module 2
Understanding the total fiscal impact of workers’ compensation injuries is critical when examining the true impact on the business, especially when support is needed to provide various controls to prevent further injury. Personnel should begin to collect the data points discussed in this paper, working with Human Resources and insurance providers to provide as much data as possible and complete the Total Fiscal Impact Equation (see chart below). Following data collection, work with the facility leadership team to understand this information and use operational language examples to paint the full picture of costs related to workers’ compensation injuries to build the business cases for improvements and prevent further injuries from occurring.
Reach out to your U.S. Compliance representative for additional assistance or connect directly with the U.S. Compliance Wellness Team (Wellness@USCompliance.com) for comprehensive support and watch for upcoming webinars related to this topic and other methods of controlling ergonomic and other workplace musculoskeletal injuries.