Industry statistics consistently indicate that only 25 – 40% of the total cost of workers compensation claims is transferable to your insurance carrier. The remaining cost still hits your bottom line - and hits it hard – but is completely uninsured. These "indirect workers compensation costs,” or "uninsured costs," are the result of the marginal inefficiencies to your manufacturing or service process as a result of a work-related injury.

As an example, assume that one of your employees is seriously injured on the job (say a lower back injury), must have surgery, and will be off work for eight weeks.  It is relatively easy to measure the workers compensation benefits paid for this injury. In most states your insurance carrier must pay on your behalf all medical bills associated with the injury and disability (wage replacement) payments. Your workers compensation loss runs should give you a good idea of the total “insured cost” of this injury. However, traditional cost accounting has tremendous difficulties in reliably measuring the following additional, “uninsured” costs:

1. The time spend by your supervisor(s) and human resource staff in responding to the injury, taking the injured employee to the clinic or hospital, investigating the injury, and managing the claim throughout the entire process;

2. The additional claim response costs your incur, such as the cost of the ambulance, drug testing, first aid, etc.;

3. The wage differential between benefits received by the injured employee and the salary or wages they are paid by you;

4. The cost you incur in replacing the injured employee while off work. This may take the form of overtime paid to existing employees, hiring a temporary worker, etc.

5. The direct cost of your operation being disrupted. While you may have temporarily replaced the injured employee, in many cases that replacement employee (either an existing employee or a temporary employee) may not be as productive as the injured employee. That injured employee has been trained and is experienced, and that intangible is extremely difficult to replace in the short-term. 

6. The injury itself will be very disruptive to fellow employees. They usually take time to talk about the injury and this affects productivity. In addition, fellow employees may be depending on the injured employee for his or her productivity and, because that has been lost, their productivity now has been affected.

7. Rarely does the injured employee come back to work at 100% capacity. It takes time for them to readjust to their job. This is further accentuated if the employee must be permanently assigned to a new job to accommodate their physical restrictions. The bottom line is that you have, at least for a time, a less than 100% productive employee who has returned to work from a work related injury.

8. Cost of damaged equipment or inventory. While these costs will vary by injury, many times equipment or inventory is damaged as a direct result of the worker injury. This equipment or inventory is now idle and completely incapable of contributing to your production or service delivery. There is also the direct cost of repairing or replacing the equipment or inventory.

9. Additional expenses incurred as a result of the worker injury. While these may vary depending on the injury and your type of business, here are a few examples:

• The cost of hiring a new or temporary employee to replace the injured employee;

• The cost of accommodating the employee’s work environmental and resources to match his or her physical restrictions;

• Legal expenses incurred. Depending on the nature of the injury you may require legal assistance or guidance from an employment attorney, a labor law attorney or your corporate attorney;

• The cost to train the replacement employee;

• Extra cost to meet customer commitments. If the injured employee was manufacturing a rush order, for example, you may incur additional costs in making sure the customer commitments are honored.

Past Studies Calculating Your Indirect Workers Compensation Costs Provide Little Guidance

Unfortunately uninsured costs are rarely taken into account by most business owners and financial mangers because they are not easily identified. The difficulty is in accurately measuring this financial impact, and obtaining reliable information on which business owners and financial managers can deploy scare resources to minimize these costs. However, designing safety and health practices around the credible quantification of your organization’s TOTAL COST of worker injuries is the more effective way of reducing short-term and long-term costs.

There have been past studies that have attempted to measure uninsured costs. Unfortunately, these studies are quite old and are general in nature. As an example, Terrance Miller, in his article “Track The True Cost of Accidents, Safety & Health, November, 1991:

“Uninsured costs are usually calculated from insured costs using a ratio. Fixed, arbitrary ratios such as 1-to-1, 4-to-1 or even 10-to-1 are sometimes used. However, uninsured costs vary so much from one operation to another, the only appropriate ration is one developed for your plant or company.”

The Occupational Safety & Health Administration (OSHA) also refers to these studies on their website, stating:

“Studies show that the ratio of indirect costs to direct costs varies widely, from a 20:1 to a low of 1:1.”

OSHA has attempted to provide a financial model for companies via their free, on-line software called “Safety Pays.” However, the data used for this financial estimation tool is based extremely rough estimates, driven primary as a function of insured claims and does not take into account varying expenses incurred by different company operations.

Using the traditional ratios (such as the above) has the following flaws:

1. They do not apply to your specific operation. Each company has its own set of work related risks. Using general averages or ratios, particularly if they are based upon insured claims, will provide an unrealistic estimate of uninsured costs as a result.

2. They have very little financial credibility. Business owners and financial executives demand financial information that has credibility and relevance to their specific environment. Otherwise they will be making decisions based upon poor financial information.

3. The information lacks flexibility. Each worker injury claim is different. For example, one claim may involve very little time to administer and another claim may involve lengthy litigation. Another example would be where a major piece of equipment is significantly damaged. Yet another example is where a worker injury causes significant disruption to plant production. What is needed is a way to quickly capture relevant data on an individual claim basis so that the financial information is accurate and reflects the realities of the operation.

4. The ratios vary too widely. The ratio of 20:1 to a low of 1:1 speaks directly to this. Picking a number “out of the air” builds into the entire process and uncertainty. Based upon this wide variance a company may either deploy resources in the wrong direction or chose incorrectly or do nothing.

New Internet Technologies Provide Reliable Resources To Quantify And Reduce Your Indirect Workers Compensation Costs With Credibility

Unfortunately, OSHA and NIOSH, as well as the insurance industry have not performed a credible study recently that will generate reliable financial benchmarks to use. Business owners and financial managers are left using the only data that is credible – their insurance premiums or insured claims. And yet they all intuitive know that there are other costs to their bottom line. And, because reliable information is not available, THEY CANNOT FIX WHAT THEY CANNOT SEE.

Now you can quantify your indirect cost of of worker injuries using YOUR OWN FINANCIAL DATA, zero in on your areas of financial waste in your organization using revolutionary new technology – CompEraser. For more information go to www.comperaser.com.