An informed discussion about controlling the costs of worker’s compensation insurance begs a bit of background about the workers’ compensation framework.
How Does Workers’ Compensation Insurance Work?
The workers’ compensation system is a compromise. It is not like most types of “legal” claims, which generally require fault on the part of the defendant, here, the employer. For example, “slip and fall” or auto accident cases require that someone was negligent, thereby creating liability based on a tort theory. Claims between businesses often involve contract disputes, where one party alleges the other is in breach. We also have lawsuits based on statutory violations, for example, wage and hour actions claiming that employers failed to comply with a Labor Code provision (or often several).
In contrast, the workers’ compensation system is based on a no-fault principle. If the accident occurred during the course and scope of the employment, there is usually presumed, automatic coverage for that injury arising as a result. That issue is known in work comp parlance as “AOE/COE” – to be compensable, the injury must have occurred “arising out of employment and in the course of employment.” There are some defenses, such as “horseplay.” But in most cases, an employee’s own negligence is not a bar to recovery.
As a trade off for this no-fault liability, the money that is provided to employees is greatly reduced, compared to what someone might recover in a typical negligence situation. The dollars that are paid to the employee are generally dictated by charts, based on the type of injury, the level of disability, and how much time from work is lost. The system is designed to be accessed directly by employees without the use of lawyers, although attorneys often insert themselves into the process. However, even when they do, the amount they can recover is greatly limited by statute. Unlike civil claims, the recovery by attorneys is dwarfed by the doctors’ bills, which are often the costliest part of the claim.
This no-fault element of work comp sometimes catches newer or smaller employers by surprise. They often feel attacked when an employee makes a work comp claim. That feeling is exacerbated when employees obtain attorneys. But understand – the work comp system is designed to support employees who suffer a work-related injury or illness, period. Employees often obtain representation to help them navigate the system. That in and of itself should not make them adversarial to you. The cost of that attorney, which is generally rather small, comes out of their recovery.
Fraud and Abuse
Of course, the reason employers are sensitive to these claims is because they are fertile fodder for abuse. This is what sparked my programs back in 1992. Part of the problem emanates from the way the workers’ compensation system works in California. California permits categories of claims not seen in many other states, including those for stress and “ continuous trauma.” The system has been revamped several times over the last few decades, presumably making it harder to bring stress claims and post termination claims. Nevertheless, those claims, and the related abuse, persist.
And while attorneys are paid out of the recovery, their involvement often prolongs and exacerbates these claims. Suddenly, new claims are added. Employees see new doctors, recommending more and continued treatment. And the related costs go up exponentially.
So how do employers maneuver through this system? And what control do you have over some of these attendant costs?
Let’s take a deeper dive into understanding how the workers’ compensation system and insurance is structured.
How are Workers’ Compensation Premiums Determined?
Your workers compensation premiums are a factor of three elements: (a) your industry, (b) your payroll, and (c) your past claims history.
First, there may not be much you can do about your industry classification, but you do need to make sure it is correct. From time to time, the Workers Compensation Insurance Ratings Bureau (WCIRB) gets it wrong, and sometimes, trade associations can be helpful when they get it wrong industry wide. You may also have categories of workers that are “misclassified” with the WCIRB. Confirm all of this with your broker.
Next, it is important to understand what goes into the analysis of “payroll.” For example, reimbursement of expenses is not considered payroll. As much as employers balk at having to pay cell phone reimbursements, mileage, or work from home stipends, these extra payments do not increase employers’ payroll. Nor do payments for group insurance or pension plans. Further, traditional tips, or gratuities, are not counted as part of payroll. However, if you pass along service charge income to your employees, that will be considered part of payroll, as well as wages, that increase that regular rate of pay as we have discussed.
Lastly, employers have the most control over their workers’ compensation costs in this last category, which is broadly titled “claims history.” Taking control over your claims history is a multifaceted approach. To fully understand the issue here, we must also understand how the insurance world works. As most people know, insurance is all about numbers.
Experience Modification Analysis
Workers’ compensation premiums are based on an employer’s “ experience modification” rate, otherwise known as “an X-mod.” An X-mod of 1.0 means your claims history is approximately average for the employers in your industry and area. If your X-mod is under 1.0, that means you’re doing a good job, and presumably, your insurance premiums will reflect that. If you have higher claims than an average employer, your X-mod will be higher than 1.0, and your insurance costs will go up.
Get those Claims Closed!
How is this experience modification number determined? Here is the trick most employers do not understand. The experience modification number is not necessarily based off the amount of dollars paid on a claim. It is determined by your ”reserves.” All insurance claims have reserves. That term, “reserves,” reflects the amount of money that the insurance carrier has placed or reserved on that claim in order to meet its future obligations to pay. It is a dollar amount that is assigned to the claim, based on what the insurance company anticipates the claim will cost over the life of that claim, including its internal costs, doctors’ bills, loss of earnings, level of disability, and final settlement payments. But here’s the key – reserves are always higher than the actual costs paid by the carrier. If a claim’s actual costs exceed what has been reserved, there is a problem. So, it is in the best interest of the insurance carrier to reserve a claim higher than the anticipated actual costs it will eventually pay. Of course it is. Individuals can lose their jobs if they reserve these claims too low. It is in their best interest to reserve a claim higher, to be on the safe side. But it is NOT in your best interest.
In the meantime, while the claim is open, your X-mod reflects these reserves. Once the claim is closed and all dollars are paid, the X-mod can be adjusted. But the problem is, nobody is moving these claims along very quickly.
And herein lies the key to the workers’ compensation conundrum. Everyone is working against you, the employer, to get these cases closed. Employees languish on leaves of absence, collecting disability payments. Doctors, especially those working with the work comp employee side (applicant) attorneys, make more money if they continue to treat these employees. The adjusters, who have literally thousands of files on their desks, often take their time moving these claims through the system. Applicant attorneys make more money if the claims stall, because the medical bills and loss of earnings increase. As a result, these open claims grind to a halt, all the while, generating higher reserves and increasing your X-mod.
So how can employers reduce the exposure caused by these open claims?
First, get employees back to work, if possible. One of the largest exposures on these open claims includes loss of earnings. Further, employees who are working and are back with their coworkers often want to put these claims behind them more quickly. Try to accommodate whatever work restrictions the employee may have. This is why savvy adjusters will encourage you to offer light duty whenever possible. While it may mean more work on your management, it can help you reduce these costs.
Next, stay involved with your carrier on the processing of these claims. If you are large enough to warrant a claims review meeting, work with your insurance broker to hold them. Years ago, I worked with a very large employer who held quarterly claims meetings to review the dozens of open claims this employer had. We would review the status of every claim. We would ask if the employee could be brought back to work sooner or if a medical appointment could be moved up. Maybe there was a doctor who could see our employee sooner. If a case was litigated, perhpas a deposition could be scheduled earlier. And maybe, depending on the status of the medical reports or return to work, the reserve could be lowered.
How many of you have regular claims reviews? Check in with your insurance broker to see if this is something you can facilitate. You may not be large enough to warrant a quarterly review like my client years ago, but even an occasional review can help, certainly before your annual insurance renewal.
And whatever can be done to close and settle these claims, get them closed and off your books. Most of you know that these claims and resulting experience modification numbers can haunt employers for years. A closed claim will always cost you less than an open one. And the faster it is closed, the sooner that experience modification will be adjusted down. So be a squeaky wheel. Stay in the ear of your adjuster to move that claim along. And as I said, each of these adjusters literally has thousands of files on their desk. Become their best friend, and make their lives easier, so they have a reason to move your file to the top of their very large pile.
Reducing the Claims at the Source
Also, if you are experiencing a multitude of claims, look to the source. Are you doing enough safety training? Is your workplace ergonomically secure? Are you providing the appropriate safety equipment and requiring the proper shoe wear?
Also, an uptick in workers’ compensation claims can be a signal that something else is wrong. Just like with union activity, an increase in work comp claims can be a cry for help from your workforce. Is there a rogue manager causing undue stress? Are we understaffing and encouraging employee carelessness? Examine any patterns in the types of claims you are seeing. Are they coming from one department, one location? The patterns of these claims can reflect a bigger issue. We always want to blame the employees who make these claims, but there may be several contributing factors. Poke around and ask questions.
Looking Outside for Help
Some employers with crisis experience modification numbers have sought other avenues for relief. One recourse is to work with a staffing or leasing company, whose experience mod may be lower. This can be a good solution for many, so long as you’re working with a reputable and quality staffing company. And make sure to review your written agreements with these agencies, as all of these employee leasing arrangements involve joint employment liability exposure. We can help here.
Also, there are some quality self-insured workers’ compensation programs out there. Make sure to do your research on these, because like staffing agencies, they are not a panacea. But the good ones can help move claims along and address their handling more aggressively.
Other Employer Obligations
I have not addressed the many related issues here, such as leave of absences during worker’s compensation claims, the coordination of benefits, and uninsured claims, such as Serious and Willful or 132(a) discrimination claims. I also could write an entire article about accommodating these injuries. But I will leave those topics for another time. So many issues; so many Monday Morning Briefings.
In the meantime, reach out on any of the above if we can help. There is a lot to unpack here.
