By R. Bruce Wright, CPCU

In a perfect world, there would be no employee injuries, but we don’t live in a perfect world, so injuries continue to occur and claims must be paid.

The system we use to pay those claims is the Workers’ Compensation system. Only on-the-job employee injuries are subject to the WC system, and only in rare exceptions do these injured workers have access to the regular tort system where claims that don’t involve employee/employer relations — voltage claims, trespass claims, etc. — are ultimately resolved.  

The WC system in the United States dates back more than 100 years, with the first statewide worker's compensation law passed in Maryland in 1902, and the first law covering federal employees passed in 1906. By 1949, all states had enacted a workers' compensation program. Today, in the United States most employees who are injured on the job are covered under WC and receive medical care, payments to offset lost wages over some threshold, and, in certain cases, payments to compensate for resulting disabilities.

In the vast majority of states, original jurisdiction over worker' compensation disputes has been transferred by statute from the trial courts to special administrative agencies. Within these agencies, disputes are usually handled informally by administrative law judges. This system was established with the intent of creating a quick and simple way to get compensation in the hands of injured employees by removing it from the delays and complexities of the regular legal system. What could go wrong?

Unfortunately, WC is still considered to be a form of insurance even though it is handled differently from all other types of insurance. (Ok, if you are a lawyer, don't write to me about Jones Act or Longshoremen’s and Harbor-workers’ coverage; they are still a “type of WC,” dressed up in seaman’s hats!) Because it is insurance, WC is subject to state control and regulation (Don’t ask, just Google “McCarran-Ferguson Act”) resulting in our having a different set of rules in every state, with no two alike! 

So it sounds very complicated. Usually, when you want to get a grip on a complicated topic, it helps to take it apart and break it down to its simplest common denominator. But sometimes simplicity is difficult to achieve. This is particularly true for WC, where the absence of any single point of control, such as a federal agency, makes it hard to find the common threads, particularly when you are not a full time WC insurance specialist. So let’s try to find and look at just the things that are common to all cases, regardless of the state. These are the components of cost.

No matter what state you do business in, and no matter how large or small your workforce, there are three basic components that contribute to the cost of workers’ compensation claims. These three are frequency, severity and lag time. Yes, rating categories and experience modifications apply on top of them, but overall, these three components control the majority of the costs. Collectively they can be measured to see how effective any employer is at managing workers' compensation costs. Now let's unpack these terms. 

Frequency: The total number of claims that are filed by an employer in a given 12-month period, either calendar year or fiscal year. It affects costs because all things being equal, more claims cost more than fewer claims. (Do you monitor your claims frequency?)

Severity: The total amount spent to cover a particular claim (or the average of all claims) plus the total payment for medical treatment plus the total payment for lost work days. This affects costs because, obviously, more expensive claims are more costly than less expensive ones. Simple, isn’t it? (Do you know your average severity?)

Lag Time: The amount of time, usually measured in calendar days, between the original date of injury and the date of filing the workers' compensation claim. How does this affect costs you may ask? Well, according to industry averages, a single week’s delay in reporting an injury can increase a claim’s cost by 10%. Timely reporting of an injury is critical to controlling the medical side of the claim by ensuring the employee gets appropriate and immediate medical treatment, and to potentially effect a more efficient and productive return to work for an injured employee. (Do you know how long it takes for an incident report to reach your insurer?)

There are some basic steps that you can put into place immediately to control the financial impact of claims reporting and improve your loss history:

1. Establish an effective and efficient claims reporting procedure. You need to report claims quickly to assure that appropriate treatment plans begin as soon as possible, which enables more efficient and productive return to work.
2. Make sure your employees know the company policy for reporting all injuries, no matter how slight, immediately to their supervisor. 
3. Once the supervisor is notified of the injury, they must immediately report the injury to the person who is responsible for managing workers’ compensation claims. 

In addition, there are some ways you can actively manage your claims:

• Conduct a thorough post-incident review (okay, if you insist, accident investigation) immediately following an injury. This provides critical information not only about the injury, itself, but more importantly, it can help you identify the steps needed to prevent similar injuries in the future.
• Communicate with the injured employee early and often. At the time of the injury and regularly thereafter, someone (preferably in the direct chain of command) should stay in touch with an injured employee to ask about progress, needs and problems and to provide visible assurance that he or she is missed. The lack of contact or follow-through with the employee flip a worker’s attitude from motivated and eager to return to unhappy or even malingering. 

Managing your workers’ compensation costs doesn’t need to be any more complex than that. It depends on you paying close attention to the elements that build costs (you should monitor your frequency, severity, and lag time) as well as attending to your internal processes to handle claims (the basic steps above) and practicing active claims management, to prevent recurring claims incidents and to promote an atmosphere that welcomes a worker back as soon as medically possible.