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Cost of Safety Series: Workers Compensation Insurance

The Total Cost of Safety Risk to an enterprise is composed of two major elements: Safety Risk Financing (accidental loss related costs) and Safety Risk Controls (prevention and administration costs). In turn, Safety Risk Financing is composed of the costs of Workers Compensation Insurance premiums and Uninsured Losses retained by the enterprise. This article looks closely at the cost of Worker Compensation Insurance and controlling Worker Compensation Claims. In particular, it responds to rising total medical and indemnity costs despite reductions in overall recordable incident rates in Canada1 and the USA2. Incident severity and fatality rates have been slowly rising in these two countries in recent years and are a large contributing factor. The Quebec3 and Ontario4 pulp and paper safety associations recently identified and expressed deep concern about this problem. So has the Association of Workers Compensation Boards of Canada (awcbc.org)4 to some extent. The article provides an overview of what employers can do to reduce workers compensation costs. Specifically, it examines the role that the following factors play in achieving cost reductions and the order in which they should be addressed:

Basic order of activity involved in claims cost management.

1. Cost Drivers: Workers compensation costs (and premiums) are driven directly by workers compensation claims. Control the claims and you reduce the costs and premiums, both to the individual enterprise and its collective industrial grouping.

2. Prevention: Cost-effective prevention programs reduce the risks of incidents/injuries and the resulting claims. No incidents, no claims.

3. Claims Management: When accidents do occur, claims must be carefully managed, otherwise costs can escalate dramatically. Call this damage control. Top medical treatment and return to work strategies are extremely important.

4. Medical Component: Carefully watch the medical treatment aspects of claims using strategies to review medical invoices, medical case and pharmacy-benefit management to insure they are cost-effective.

5. Data Collection: It is very important to collect and properly analyse the enormous amounts of data that claims generate. This can help companies benchmark their cost containment efforts.

Cost Drivers

Worker compensation legislation is essentially the same in Canada and the USA and is subject to individual state control in the US and each province in Canada. The insurance is no-fault coverage where employees cannot sue their employers and, in exchange, the employees are assured their medical expenses and a portion of their lost wages are paid while they are recovering from work-related injuries/illnesses. One major difference is that the insurers in the US are private companies controlled by state legislation. In Canada, the insurers are public corporations known as Worker Compensation Boards that are controlled by provincial legislation but with limited political and other interference. In the US, employers can choose their insurers where the industry is competitive. In Canada, employers are obliged to insure through the single provincially mandated insurer.

It is essential to understand that workers compensation costs are primarily driven by the cost of workers compensation claims. In the US, and similarly in Canada, the cost of claims, claims administration and risk control represents 91% of the workers compensation dollar. So, if the employer controls the cost of the claims, it controls the cost of workers compensation.

Both US and Canadian employers are grappling with a new problem that has surfaced gradually over the last 15 years. Despite the fact that recordable accident rates have been steadily declining, the severity rates have been increasing along with a recent trend of increased fatality rates per 100,000 population. In lay terms, this means that high frequency but light injuries have been decreasing while lower frequency but more severe injuries are increasing. This phenomenon has been addressed in several Safety Matters articles that appeared in this magazine over the past couple of years (see April 2007).

How do employers deal with this vexing problem?

Prevention

It is said that the least expensive accident is the one that never occurs.

The first thing employers should do is to insure that they have a top incident prevention initiative in place.

Employers have many ways they can prevent injuries/illnesses:

* Training employees about workers compensation;

* Through intelligent hiring and job pre-placement practices (right person for the job);

* Cost-effective safety programs and procedures;

* Above all, the utilisation of sound workplace diagnostics and performance metrics to identify areas where improvements can be made.

The key to effective safety management is to have in place a top-notch hazard management program that involves every single employee. Hazard management relies on effective hazard detection and control practices being applied by all employees, without exception. It must be totally integrated into all daily activity. This is the core activity and the foundation of any successful health and safety management system and must be totally supported and practiced by all levels of management and supervision, as well as line employees.

For example, the Ontario Pulp and Paper Safety Association commented that for the Ontario pulp and paper sector, “from 2000 to 2006 the PPHSA of Ontario experienced:

1. 24% decline in the average lost time injury rate (LTIR) from 1.12 to 0.81, as well as an 18% decline in the total recordable incident rate (TRIR) over five years, nice improvements.

2. Severity rate (days away from work/200000 hrs) which climbed 106%.

3. In addition, total award-year benefit costs paid out by the WSIB climbed 75% for the same insured earnings.

4. Plus, the standard workmen’s compensation insurance premium rate/$100 salary climbed 45%.

5. The PPHSA found that Musculoskeletal Disorders (MSDs) account for approximately 50% of all LTI claims and related costs. With an aging workforce, this is also having an impact on the severity rate the industry is seeing (longer recovery times, cumulative effect, etc.).

Claims Management

Sloppy claims management can cost an employer a lot of money.

So, the next step is to develop and implement a solid claims management system*. While overall workplace injuries have been declining, costs continue to rise. Why? Unfortunately, the declining injury rates have been coupled with a rise in severity. The conclusion is that employers must be much more vigilant about managing workplace compensation claims when they do occur.

Good claims management systems contain the following elements:

* Claim compensability; verify that the claim is valid under the compensation law

* Inappropriate claims; many claims are made for invalid reasons such as economics, simple clerical and human errors, employee misunderstanding of the compensation system, employee resentment, fear of strikes or plant closures causing lost income, and unscrupulous third party providers of various claims services.

* Claims investigations; every claim should be investigated immediately after the fact and the employer should assure that the investigators (in-house or external) are competent. In addition, the employer should seek good claims management legal counsel when building the claims management system and when considering contesting claims.

* Claims duration and Return-to-Work programs; insuring that the injured employee returns to work as early as possible without aggravating the injury through intelligent use of formal, well structured return to work programs. Claims that are not carefully managed tend to get stretc
hed out in duration thus adding to claims costs.

* Many mills in Canada have achieved substantial reductions in overall claims costs and premiums by exploiting the various incentive programs offered by the different provincial WC insurance programs that reward superior safety performance as well as through reducing related indirect costs. In addition, they have implement more on site mill medical services, the use of a mill expert industrial medical consultant(s), superior return to work (light duty) programs, and above all, better accident prevention practices.

[author’s note: *see Workers Compensation Case Management (WCCM)]

Medical Component

Again, the rise in claims severity versus the drop in injury rates in recent years has alarmed employers. In particular, the rise in workers compensation medical costs has them extremely concerned to the point that all involved in effective claims control are determined to understand what is driving these cost increases.

Some of the areas being examined are:

* Medical Costs and Utilization; in the US, workers compensation medical costs are rising faster than the medical consumer price index according to the National Council on Compensation Insurance (NCCI). In Quebec, employers are reporting that they have no control or recourse over billing of medical services including errors or abuse by the provincially operated hospitals and Medicare. The Quebec hospitals have no formal standard rate structure in place to bill worker compensation case medical services. A simple x-ray of the same injury might be billed $12 on one occasion and $200 on another. The Quebec problem must be addressed and may well be a similar problem in other provinces.

* Medical treatment services: in the US it was found that non-hospital medical services often cost more than hospital out-patient services for the same treatment. In Canada, where possible and permitted, and with employee agreement, employers might wish to experiment with non-hospital medical services versus hospital out-patient services and compare rates. In addition, employers with in-patient (in-plant) medical services may be at an additional cost advantage. Care must be taken when benchmarking medical service costs under such conditions.

* Prescription Drugs: US studies (WCRI) suggest that workers compensation payers typically pay more for identical medications than do group health insurance or government programs. Group health insurance programs incorporate cost-reducing methods such as co-pays and mandates for generic drugs — strategies that are not present or allowed in the workers compensation system. In Canada, generic drugs are almost universally available.

* Medical Cost Containment: Areas that should be looked at by an employer include, bill review, appropriateness of medical services (abusive or acceptable), medical service provider choice, pharmacy benefit management, and employee involvement. These areas should be reviewed by the employer using a well-qualified industrial health physician who is an expert with the medical care and worker compensation legislation and systems.

* Employer Activism: employers need to unite and collectively exert pressure to ensure they are getting fair value for a system that they are, in fact, funding.

Data Collection

The workers compensation management system generates volumes of potentially useful data from injury and accident reports, claims adjustments, etc. Accurate and consistent collection and analysis of such data is extremely useful as a foundation for programs that reduce claims frequency and costs.

Data Collection best practices should include:

* Clear Guidelines

* Training and checklists

* Data Review

* Use of an RMIS (Risk Management Information System)

* Data Accuracy

Most mills are reasonably well served in this area so the author has elected not to elaborate further.

Conclusion

Since its inception almost 100 years ago, the various workers compensation systems have provided millions of injured workers with benefits for on-the-job accidents. The systems have also protected many employers from lawsuits. Unfortunately, these systems have become complicated and expensive often placing worker, employer and insurers in conflict. In addition, the costs of funding these systems have been increasing in recent years.

Employers are not powerless in trying to control these costs. Claims cost control is the objective. It can be achieved by starting with a cost-effective prevention program followed by a solid claims management system and attention to the medical component of such claims. Couple all these with a sound information management system and substantial claims cost reductions can be achieved.

John E. Little can be reached at jelittle@videotron.ca

References:

1. Association of Workers Compensation Boards of Canada (www.awcbc.org)

2. Marsh Risk Alert 2007: Vol VI, Issue 1, “Controlling the Costs of Workers Compensation Claims” (http://global.marsh.com/documents/ Workers_Compensation_RA_V6_Iss1.pdf)

3. Association de sant et scurit des ptes et papiers du Qubec ( www.assppq.ca)

4. Pulp and Paper Safety Association -Ontario ( www.pphsa.com)

FPAC

Forest products industry calls for greater scrutiny of forest management practices

Last month, PPC published a statement from the Forest Products Association of Canada (FPAC) which quoted a UN study noting that Canada has a deforestion rate of zero. Along with that release, were a number of interesting statistics.

10 Key Facts about Canada’s Forests August 2007

Canada is a global leader in sustainable forest management:

1. Canada’s rate of deforestation is zero and has been for over two decades (United Nations FAO State of the World’s Forests report issued in March 2007).

2. Canada has world leading forestry practices and regulatory regime — conclusion of an independent third party report conducted by Dr. Benjamin Cashore, Associate Professor of Sustainable Forest Policy, and Chair of the Program on Forest Certification at the Yale School of Forestry and Environmental Studies.

3. Canada is home to 30% of the world’s boreal forest. The remainder is found in other large forestry nations such as Russia (50%) and Scandinavia — Finland, Sweden and Norway — (about 20%).

4. 93% of Canada’s forests are publicly owned and regulated. This provides assurance that companies operating on these lands are bound by: comprehensive legislation and enforcement; 20-25 year forest management plans; rolling 5 year development plans and site specific annual operational plans; and forest management plans subject to public review prior to approval.

5. Canada retains more (91%1) original forest area than any other country in the world.

6. Only one quarter of Canada’s forests are managed for commercial use. The vast majority (70%) of the boreal region remains un-accessed. Of this only .5% (1 million hectares) is harvested annually. By law, all harvested areas must be promptly regenerated.

7. Canada has more protected forest (over 40 million hectares2) than any other country — 28 million hectares of these protected areas occur in the boreal.

8. Canada has the most (134 million hectares3 of certified forest — 75% of which is in the boreal) 3rd party independently certified forests (CSA, FSC, SFI) in the world.

9. Canada is home to over 40% of the world’s certified forests; and its area of certified boreal forest is 3 times larger than a
ny other country’s area of certified total forest.

10. Canada’s forest products industry is a global leader in climate change mitigation. Members of the Forest Products Association of Canada (FPAC) have reduced their greenhouse gas emissions by 44% since 1990 — seven times Canada’s Kyoto targets.

For more information, please contact Isabelle Des Chnes, Director, Communications, at (613) 563-1441 ext: 323 or ideschenes@fpac.ca

1 [Source: World Resources Institute Data Tables, 2000-2001]

2 [Source: A Global Overview of Forest Conservation, WCMC, UNEP, CIFOR, 1997]

3 [Source: Canadian Sustainable Forestry Certification Coalition, June 2007]