SECTION III Service Systems
9.2 What Are the Costs Associated with Ergonomic Mismatches?
Workers’ Compensation Claim Costs
Job related injuries and illnesses can result in either the filing of workers’ compensation (WC) claims or employees and employers seeking redress through the group health insurance program if there is not a clear causal link to the workplace. When there is work-relatedness, the claim is typically filed through the workers’ compensation program. For any claim there are associated direct and indirect costs, often referred to as “insured” and “noninsured” costs respectively.
Direct Claim Costs
Workers’ compensation claim expenses may include immediate and long-term medical expenses resulting from the injury or illness, as well as payment of loss of income benefits if an employee is not able to work. In more serious cases, there may be payments for permanent or partial, full or temporary, disability.
These costs may increase the WC premiums by increasing the experience modification factor. The experience modification factor is calculated and used by insurance carriers to determine a company’s premium based on its own prior 3 years of loss experience. The rising costs of workers’ compensation insurance are often one of the driving forces behind an employer’s desire to implement safety and health program improvements.
Indirect Claim Costs
Indirect costs are not covered by WC insurance. Instead, they come directly off the bottom line profit of the organization. Although real costs have a significant impact on profits and expenses, they are hard to systematically capture and quantify and are therefore frequently ignored. Examples of indirect costs include:
9-4 Occupational Ergonomics: Design and Management of Work Systems
• Time lost by personnel who were not injured but may be called in to assist the injured employee seek medical treatment or investigate the occurrence
• Cost of damaged material that resulted from the accident
• Cost of lower productivity while replacement workers learn new job skills
• Costs to make up lost productivity through increased overtime
Although direct and indirect costs may be used by safety and health professionals to justify an ergonomic initiative, these variables are widely misused and misunderstood. A better understanding of these expense variables, coupled with the expertise to include them in the preparation of a business case, can help the ergonomist build personal credibility in the financial ranks of the organization.
Measuring Claim Cost
A dollar spent today on a workers’ compensation claim will buy more treatment than a dollar spent two years in the future on that same claim. For claims with minor medical expenses and only a few days of lost time, the claim expenses are largely known. Generally once a claim is closed, no additional expenses can be added to the file, assuming the file was closed properly. In more difficult cases such as those associated with cumulative trauma disorders, the claim file is usually open longer, due to the length of disability and the more complex nature of the medical treatment. In these cases, the longer the case is open, the more likely significant expenses will be incurred. In the insurance industry it is said that the longer the claim is active, the longer the “tail” it has, “tail” referring to the billing tail.
To accurately assign value to the “ultimate” expense associated with a workers’ compensation claim, we need to take expense growth into account. Some claims may close quickly with all “incurred” expenses paid out. For others, expenses may continue to be billed for many years. In a recent consulting project, a review of a client’s open claims found one “open” broken toe case from 1957 which had resulted in multiple failed surgical attempts at correction. Needless to say, the 40-year “tail” on this claim was far too long.
The Concept of Fully Developed Losses
Because ergonomically related injuries and illnesses tend to have long claim tails, the ergonomist needs to carefully compute the costs associated with these claims. For instance, suppose we analyze WC expenses for 1991, 1992, 1993, 1994, and 1995, as of some date in 1996 to make a business case for an ergonomic improvement program. It would be erroneous to assume that the total expenses that were incurred (as of our 1996 analysis date) were the ultimate costs of ergonomic losses, particularly if there were any cases still open in those time periods. Claims filed in any of those years may continue to incur expenses for years to come. Therefore, we must review claims from a specific policy year at a common point in time when performing any trending or development analysis. For example, to better estimate what the ultimate expenses might be for these claims, we would want to review them as of one year from the end of the policy period; 1991 claims as of 12/31/1992, 1992 claims as of 12/31/93, 1993 claims as of 12/31/94, and so on. Using this valuation method we would have a more meaningful estimate of what an appropriate trending factor for more recent claims with only a 12-month period of development.
Projecting what the ultimate loss cost could be for the open claims when they are fully developed in the future is what insurance actuaries do. They determine what the appropriate loss development factor is for a given situation. Actual development factors are very complex to compute and are dependent on many variables such as the mix of accident types, the state workers’ compensation laws where the losses occurred, and the cost of medical treatment in that region. It is best to have the workers’ compensation carrier provide this information to the corporate ergonomist for his or her use in performing a cost benefit analysis.
Table 9.1 is an example of estimated development factors that were used to project what the fully developed losses for a given injury period would be when all the claims are closed. These factors are gross estimates.
While this approach will work on workers’ compensation claims, the ergonomist should not forget that some ergonomically related claims may be reported through the group health system. Actuarial development of loss factors may not be applied on the group benefit side of the house or if it is, it may be harder to obtain those development factors from the group insurance carrier, particularly where employers offer flexible options to a host of competing health care providers and health maintenance organizations.
Table 9.2 illustrates the importance of using fully developed losses to assist in financial justifications.
These data represent actual incurred dollars of a manufacturing organization with approximately 1000 employees.
Using the data in Table 9.2, one can clearly see that if the ergonomics consultant does not use estimated, fully developed loss costs, he/she can greatly underestimate the actual anticipated costs of the losses to the organization. If the ergonomist were to simply query the WC data for all incurred expenses for 1991–1995 as of 12/31/96, he/she would get the sum of the diagonal values in Table 9.2 to get a value of
$2,741,381. The earlier years have matured and have values closer to what their expected ultimate should be. The younger accident periods are considered “green” or not near ultimate. When development factors are applied to the data, the expected cost of the losses at ultimate is estimated at $4,169,214. By not considering the development of the more recent injury periods the total expected cost was underestimated by $1,427,833, or nearly 35%!
Salary Continuation Expenses (LTD/STD)
For those injuries and illnesses where workers’ compensation income benefits (in most states this is generally a statutory maximum benefit of 2/3 of the average weekly wage up to a predetermined ceiling) have been paid, it is important to remember to take into account the statutory waiting period and the TABLE 9.2 Total Incurred Loss Development Triangle Data as of 12/31/96 — ABC
Incurred Costs Months After End of Injury Period Projected* Developed Injury Period 12 months 24 months 36 months 48 months 60 months Loss Costs 01/01/91to12/31/91 $208,479 $491,458 $486,729 $610,929 $644,170 $625,437
01/01/92to12/31/92 $372,350 $696,184 $771,243 $898,899 $1,117,050
01/01/93to12/31/93 $341,006 $495,115 $611,806 $1,023,018
01/01/94to12/31/94 $212,734 $331,337 $638,202
01/01/95to12/31/95 $255,169 $765,507
* Note: the above projected developed loss costs were calculated using the costs incurred 12 months after the injury period (column 2 of Table 9.2) multiplied by the corresponding 12 month estimated development factor (column 2 from Table 9.1).
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retroactive period for income benefit payment. These periods, which vary by state, can affect salary continuation payments through employer long-term disability (LTD) or short-term disability (STD) programs under group insurance. A few examples may be helpful to illustrate this consideration.
Connecticut has a 3-day waiting period before an injured employee is eligible to receive income benefit payments and a retroactive period of 7 days. The first 3 days of the absence which is work related are not paid under workers’ compensation but may be covered by other means such as sick time or short- term disability (STD). On the 4th through 6th days the employee would be eligible for WC benefit payments for those 3 days only. If the employee is out 7 days, then all lost time WC income benefits going back to the original date of injury are covered under WC.
Florida has a waiting period of 7 days and a retroactive period of 21 days. For all WC claims with a duration of less than the retroactive period (21 days), the first 7 days of the absence are not eligible for income benefits under WC although they may be compensable under some other plan such as sick time or STD. Again, on the 8th day through the 20th day, the employee would be paid WC wage loss benefits only for those 13 days. Once the claim has a duration greater than 21 days, all lost time after the original date of injury is covered under WC.
Using WC indemnity or income benefit payments as the sole means to quantify expenses associated with a WC case can result in underestimating the total cost to the organization. In the Florida example, for every WC claim with a duration of less than 21 days, WC income benefit is paid for a maximum of 14 days. The remaining 7 days are not covered by the WC insurance but may be paid by other group or benefit funds of the employer. This “group benefit” can become substantial when considering injuries involving permanent partial disability and if the employer does not return the employee to work.
Some companies pay their employees full salary while they are out of work recuperating. In such a case WC payment from the WC insurer may be used to pay back the group policy. For example, if the worker is paid in full out of the group STD plan, the carrier will pay back the group plan the statutory amount (66% in most states) of lost wages. The remaining 34% will be incurred by the group plan.
Depending on the employer’s STD plan, this could continue up to 26 weeks.
Insurance industry studies have consistently shown a direct correlation on claim costs between the date a claim occurs and the date it is actually reported to the carrier. Industry studies have shown that the longer the lag time in claim reporting, the higher the costs of settling those claims, due to the lapse in time in establishing and monitoring appropriate medical treatment. Most ergonomists know that the sooner a worker reports job discomfort from repetitive motion tasks, the greater the chance of treating the job symptoms through early ergonomic intervention rather than waiting until the repeated trauma manifests itself into a more chronic case of RSI.
With a thorough understanding of the impact of ergonomically related injuries and illnesses on group disability and workers’ compensation programs, the ergonomist can be proactive and work with the risk manager to establish policies which minimize the financial impact of the state WC statute on the company.
These revised policies can be a significant benefit to the ergonomics effort in the areas of injury man- agement and return to work.
Lost Workdays/Restricted Workdays
Production suffers when employees are injured and either away from the job or in a restricted duty capacity. For example, an employee working 40 hours/week with two weeks vacation has a maximum
“full potential” for productive work of around 2000 hours/year. Subtracting from this full productive potential time items such as vacation, paid holidays and other paid leave days, nonwork-related illnesses, short- and long-term disability (either group or workers’ compensation), continuing education days, and other planned absences, we find a realistic available productive time of closer to 1500 to 1700 hours productive time/employee/year.
To determine the actual amount of time it takes to make up for 100 hours of lost productive time, the following formula can be used (100 h ÷ realistic productive hrs/maximum potential hours). Using the example of 1700 realistic productive hours and 2000 maximum potential hours, a loss of 100 hours would
intensive work. We have worked with clients who have experienced high turnover rates in particular departments because of recurring back injury and repetitive strain problems. Injured employees may not
“turnover” in the sense that they leave the company, but they may have moved on to other jobs within the same company that are less physically demanding or that could accommodate the physical restrictions resulting from their injuries.
It is important that a company capture the relationship between ergonomic issues and employee turnover. Where a positive correlation is identifiable, ergonomic cost/benefit analysis must consider the cost impact of ergonomic-related turnover. Typically, those costs include higher recruitment costs (adver- tising, interviewing, processing of new employees), higher training costs (basic orientation and job- specific skills training), lower productivity costs (as the new worker progresses up the learning curve), and higher costs due to quality problems, rework, scrap, and equipment misuse. Costs may be less if the turnover can be filled with internal candidates. Quantification of turnover costs is possible over time provided that there are tracking mechanisms in place to measure these costs. Employers may be able to identify ergonomic-related turnover during exit interviews.
Estimating the Probability and Value of Loss
A continual struggle for ergonomists and safety professionals alike is estimating the value of losses that might have occurred had effective loss prevention efforts not been in place. This intangible benefit — less risk of injury — can however be estimated when credible loss data exist from recent history for the organization. With good loss data the ergonomist should be able to determine the frequency of different types of ergonomic losses on a calendar or policy year basis for at least the last 5 years. The values of those fully developed losses (direct claim costs) should be known. If ergonomic-related claims are still open they should be projected to ultimate value. An illustration is helpful. One client put together a table (see Table 9.3). Using historical loss data for a prior 10-year period, it was possible to determine the frequency and probability of a $60,000 back injury occurring (1 in 10 chance per year). By stratifying back injury statistics by severity (i.e., $0–$10,000, $10,001–$20,000, $20,001–$40,000, and over $40,000) and frequency in prior years, the probability factors were determined. For example, if you were looking at the 1994 calendar year, the data would appear as in Table 9.3.
TABLE 9.3 Estimated Probability of Occurrence of Different Valued Claims
Type of Injury Claim Value Est. Indirect Cost Total Claim Value
Claim Severity Range
Probability of Occurrence
Back injury — 1/5/94 $45,675 $15,000 $60,675 over $40,000 1:10
Back injury — 6/3/94 $15,270 $4,000 $19,270 $10,001–$20,000 1:5
Back injury — 7/20/94 $6,508 $2,200 $8,708 $0–$10,000 1:2
Back injury — 9/15/94 $27,300 $10,400 $37,700 $20,001–$40,000 1:7
Back injury — 11/12/94 $19,450 $8,000 $27,450 $20,001–$40,000 1:7
Total $114,203 $41,600 $155,803
Average Value $22,840 $8,320 $31,160
9-8 Occupational Ergonomics: Design and Management of Work Systems
From this type of information you could then make a more reasonable estimate of the benefit of preventing “X” number of back injury claims as a result of a specific ergonomic intervention.
In 1995, David Alexander2 proposed an additional method for predicting future injuries based on historical claim data. He suggested that simple extrapolation of the frequencies of injuries can help establish a likely level of injuries for the upcoming year. Table 9.4 illustrates his concept.