Managing the outcome is a common approach to administering workers’ compensation (WC) insurance expense. The risks in this approach, however, are that without strategic initiatives you will always be held hostage by the insurance marketplace. You can take some guidance from your carrier about loss prevention, but for the most part you’ll hope that rates don’t increase, that your losses will decrease (so you can benefit from policy credits) or that your loss trend will improve (so your balance sheet is not in jeopardy).
If you were to buy a Maserati—which, for the price you pay for your insurance coverage, could probably be purchased many times over—would you manage the performance and ongoing expense of the car by seeking out only the gas stations with the lowest prices? If you did, that approach might manage to keep some of your expenses down; however, you would never maximize the car’s performance or manage maintenance expenses.
A strategic approach to maximizing performance and continuously managing expense involves assessing what drives the expense and then employing measureable solutions. In the Maserati example above, that would include meeting with a professional who is schooled in educating customers on how to drive the car to optimize its performance and on how to employ the best maintenance plan and mechanics available. Such top-notch strategic choices would lead to continuous long-term expense management and performance optimization.
The above example is analogous to WC expense management because insurance professionals, and sometimes consumers, are focused on the mechanism used to pay claims. CFOs and other C-suite executives are presented with large deductible and self-funded programs and other factors such as guaranteed cost and retrospective rating. However, rarely is anyone looking at aligned objectives or continuous expense management.
If your objective is to increase your return on equity or shareholder value, it’s probably out of alignment with the objectives of most insurance companies and agents. Your current agent/carrier may be focused only on price, not total cost. This approach is similar to managing your Maserati expense by going from gas station to gas station to find the cheapest gas. How will that strategy reduce your total cost of risk (TCOR)? If we agree that TCOR is the total of insurance premiums, loss costs (direct and indirect), administrative costs, taxes and fees, then the traditional approach will not work. Why? Because hazard risk is removed from your balance sheet through insurance. That leaves financial, strategic and operational risk unaddressed, all of which are eating up your competitive edge.
The expense management process begins by isolating the amount of profit trapped within your WC program. To start, collect key data that includes factors such as your loss history and audited payroll. Having this information will allow you to determine whether you can have a significant positive impact on your return on equity. When this untapped profit has been ascertained, you need to go about completing the evaluation process.
To optimize your working capital, shareholder value, profit and competitive edge, you must first identify all the expense drivers within your WC program. This is done through a holistic approach to WC expense management, via a careful assessment designed to answer questions such as:
• Are you confident that your employees are getting the right medical treatment?
• Are your injured employees returning to work and achieving full productivity as soon as possible?
Other areas that need to be assessed because they might be siphoning off profit include hiring practices, supervisor training and incident reporting.
Next, create strategic initiatives with measurable outcomes that include post-offer physical, fitness and ability testing, and drug testing to ensure that your potential hire is able to perform the requirements of the job. Doing so will spare you from hiring someone else’s WC claim. An early-return-to-work program must be formal and one that your company is committed to. It must be complete with descriptions that include the physical demands of the jobs and a written platform providing an outline of exactly how injured workers will return to work at the right time. One of the fastest ways to miss optimal risk transfer is by allowing your injured workers to sit at home, receiving disability payments from your WC policy and watching commercials about suing their employer. If this is the case, listen to your P&L scream as your experience modification rating and/or loss trend soars higher. A formal, written program allows your HR executive to work with board-certified occupational medicine doctors or nurse case managers to return an injured employee to work on a light-duty basis as soon as possible.
Injury management, which is often surrendered to an insurance company, is another area to explore. Who is caring for your injured workers? If you broke your leg in a skiing accident, wouldn’t you search for the best orthopedic specialist you could find? We are all aware that there are both very capable and not-so-capable medical professionals out there. Take the time to look for medical providers who are skilled in such areas as occupational medicine, epidemiology and labor-related issues specific to your medical needs.
Once your plan is established, it will always work to protect your balance sheet and P&L. The last thing a CFO wants is to be hit with unplanned expenses. You don’t need to sit with your insurance professional prior to a renewal and be told that your experience mod has increased 20%, 30% or 40% or that the carrier on your large-deductible program is increasing your collateral requirements—all of which are one-time events that can cripple growth and profit.
Follow the advice in this article and you will set in place a program that is working for you every hour that your employees are working. And you will know it is working when, for example, you find that you have reduced one of your key employee’s exposure to strains because you and your insurance professional proactively identified a kink in your supply chain and implemented training on, say, proper lifting techniques. Allowing that employee to remain on the line that is producing a key piece of a final product for your most important client results in on-time delivery, which preserves your reputation, that long-term client relationship and your margins. And is now quantifiable when reviewing your net pre-tax profit dollars.
This seamless system also guarantees proper incident notification so that key details or witness statements are taken immediately upon an employee injury, preventing future claim embellishment. It also establishes a constant line of communication between the injured worker and the supervisor. This prevents that injured worker from feeling that your company doesn’t care about him or her—which is one of the main reasons injured workers get attorneys to represent them in their claims.
Program names such as “loss control” and “early return to work” are bandied about in the world of insurance as panaceas to all WC expense management issues. But the glue that binds a successful WC program comprises communication and coordination—that includes the CFO and CEO, and ideally, the HR director, production and risk managers and the healthcare professionals treating your injured workers. Anything else will cause the program to fail.
Once you begin to view your WC program as an entity that impacts all facets of your business, you have crossed over and worker safety and injury management will serve as a barometer of how the entire business is doing. As stated by Reinhardt Krause’s article in Investors.com – Paul O’Neill, former secretary of the U.S. Treasury and chairman and CEO of Alcoa, led Alcoa to financial success by focusing on worker injuries. Starting with worker safety, O’Neill ratcheted up standards companywide. He also put a shine on the metal giant’s financials, presiding over Alcoa’s greatest growth. O’Neill pushed Alcoa’s annual earnings from 20 cents per share in 1994 to $1.41 in 1999, when he stepped down. He viewed worker safety not as a stand-alone undertaking but as a way to make the greatest impact on his company’s work environment and sustained profitability. He made Alcoa’s goal zero work days lost. “Until I said the target was zero, we didn’t have a problem,” O’Neill said. “Part of the role of leadership is to create a crisis.”