"Doing things right the first time, every time, is the best way to limit costs."
By R.Bruce Wright, CPCU
While leading a discussion of insurance at a recent NRECA/NUTSEA "CLCP Seminar IV" session at the University of Wisconsin’s Fluno Center for Executive Education in Madison, WI, (If you are not familiar with this program, you can navigate to go to an earlier article that explains this program through the "RE-marks Archive" tab above.) I asked the group what happens first when something goes wrong that results in an injury on a job site. Lots of ideas were shouted out, including providing first aid, dialing 911, securing the site, and a variety of others. To each of these suggestions I said “No, before that, what’s the very first thing that happens?” After a few more tries, a bright member of the group gave this answer, “Work stops!” And that’s the right answer. So simple. So obvious. So easily overlooked.
This simple example is just a door opener into the topic of how little insurance actually offers you in your efforts to reduce the ultimate cost of the outcome of errors. Insurance pays only a small portion of these costs. Historically, one basic “rule of thumb” suggested that insurance covered 30-40% of the actual total costs incurred in a claim. Studies of this issue are complicated and are fairly rare. One of the most recent efforts1 was aimed specifically at U.S. occupational injury costs, and it demonstrated some of the difficulties. This work, published in 2000, found 6,371 job-related injury deaths, 13.3 million nonfatal injuries, 60,300 disease deaths, and 1,184,000 illnesses U.S. workplaces in 1992, and estimated that the total direct and indirect costs associated with these injuries and illnesses were $155.5 billion, or nearly 3 percent of that year’s gross domestic product! Direct costs included medical expenses for hospitals, physicians, and drugs, as well as health insurance administration costs, and were estimated to be $51.8 billion. The indirect costs included loss of wages, costs of fringe benefits, and loss of home production (such as the need to hire out things like child care and home repairs), as well as employer retraining and workplace disruption costs, and were estimated to be $103.7 billion. Of interest here are their findings that Workers' Compensation Insurance covered roughly 27 percent of all costs, taxpayers paid approximately 18 percent of these costs through contributions to Medicare, Medicaid, and Social Security, while the remaining costs were borne by injured workers and their families, by all other workers through lower wages, by employers through lower profits, and by consumers through higher prices.
Wow, if just 27% of the costs are covered by insurance, that’s just the tip of the iceberg. With so much of the cost left “underwater” where should we start? Let’s just look a little more closely at that little piece the study called “employer retraining and workplace disruption costs.”
Disruption costs start with our question at the start of this article, “What’s the first thing that happens when something goes wrong?” Work stops, but pay does not! Nor do other paycheck related costs, like benefits or payroll administration. There are a myriad of other indirect costs that follow an error event2 that are not covered by insurance. Examples include the costs of recording and documenting events, sending out people to investigate what happened, analyze what went wrong and why, and communicating the findings throughout the organization. Indirect costs also include the fact that when a worker is not available to work, employers have to shift work around, ask less qualified people to tackle unfamiliar tasks, or hire temps who need even more training and supervision. This takes time from supervisors, leaving them less time for everything else. In addition, the safety committee has to meet, donuts and coffee provided, a report produced, presented and considered, with recommendations to the Board. Meanwhile, don’t forget that the less skilled/less experienced workers are more likely to make errors, some of those errors will lead to further losses and the cycle can accelerate, feeding on itself in a death spiral. In fact, thinking about things this way may make you wonder how any company ever survives! But take heart, it doesn’t have to happen this way.
Let’s think about alternatives. If insurance covers as little as perhaps 27% loss costs, it is obvious that loss prevention is a better way to cut costs than is using your insurance coverage. That’s why we continue to say that doing things right the first time, every time, is the best safety technique and the best way to limit costs. Everything we do in our work with utilities in this program is intended to help support this goal. For more information on how to apply this philosophy check out Quality Is Free: The Art of Making Quality Certain, by Philip Crosby. Or, if you are new to this newsletter (or a long time member who has not visited the archive in some time) feel free to take a look at some past articles such as:
- Fix the problem, not the blame
- Learn from mistakes: It's the process, not the people
- Management gets the workforce it deserves
One final factoid from the survey cited above. The authors note almost in passing that contrary to the reports found in other efforts to compile national loss data, they found that small firms have exceptionally high injury rates. Food for thought.
Notes
1Costs of Occupational Injuries and Illnesses, University of Michigan Press, by Leigh, Markowitz, Fahs, & Landrigan, 2000
2You likely use the work “accident” for this. I don’t, but that’s a story for another day.