The Hidden Cost of Workers’ Compensation

Workers Comp 101The true cost of workers’ compensation (WC) includes a lot of hidden cost; the actual cost is much higher than the insurance premiums or benefits paid.

An easy way to determine if your risk manager knows his/her job is to ask if they know the indirect costs of the workers’ compensation program.

If the risk manager quotes to you the cost of the workers’ comp insurance premium, or the combined cost of medical benefits and indemnity benefits, it is time to get a new risk manager, as the answer does not reflect the real cost of workers’ comp.

Each and every WC accident incurs additional, indirect hidden cost to the employer having significant and sometimes devastating effect on the employer.

  • Unlike the payment of doctor bills, prescriptions and indemnity benefits (lost wages), the hidden or indirect workers’ comp claim costs are much more difficult to quantify, but are very real.
  • The hidden cost of a workers’ comp claim are not covered by the workers’ compensation insurance, but are absorbed by the employer.

Each workers’ comp accident results in the reduction of profits due to the various hidden costs paid by the employer. These can include:

  1. Time lost and the productivity lost by accident response and providing immediate aid, by both the employee’s supervisor and co-workers.
  2. Time lost by co-workers’ distraction - watching the emergency response and/or standing around discussing the accident after the employee is transported to the medical provider.
  3. Time lost for the remainder of the workday by the injured employee, which is normally paid by the employer.
  4. Reduction in morale as co-workers realize and think about the risk related to the job.
  5. Continuation of the employee’s benefits while the employee is off work due to the accident.
  6. Supervisor’s time, management’s time and co-worker’s (witnesses) lost time in the reporting and paperwork.
  7. Time spent handling the accident investigation and reports.
  8. Time spent handling the workers’ comp claim.
  9. Loss of production from the injured employee.
  10. Expense of rescheduling the work the employee would have performed.
  11. Cost of overtime pay to other employees to do the work the injured employee, or
  12. Cost of hiring and training a temporary or a permanent employee to replace the injured employee.
  13. Lower productivity of the replacement employee until the replacement employee is up to speed or the injured employee returns to work.

The employer, in addition to the cost associated with the loss of production, also incurs additional costs and expenses, including:

  1. An increase in the experience modification factor when calculating the workers’ comp premium.
  2. For publicly traded companies, lower profits which result in lower stock value.
  3. Damage to equipment, tools, machinery or vehicles being used by the employee at the time of the accident.
  4. Spoiled work that has to be replaced.
  5. Occupational Safety and Health Administration (OSHA) or state imposed penalties and/or fines.
  6. Delays in purchasing new equipment or delays in expansion plans due to the lost profits.
  7. Missed delivery dates due to the disruption in the workflow.
  8. Missed sales if the injured employee is a salesperson.
  9. Legal expenses.

According to a study by OSHA, the hidden cost of a WC claim is 4.5 times the direct cost (the medical and indemnity benefits). Other studies place the hidden cost as low as 3 times the direct cost and as high as 10 times the direct cost.

  • If the employee is easily replaced or returns to work shortly after the accident, without a disruption in the business, then the low end of the range [with hidden cost being 3 times the direct cost] would be accurate.
  • If the employee is difficult to replace and the replacement employee then needs extensive training, the high end of the range [with hidden cost being 10 times the direct cost] would be accurate.

While they cannot be eliminated, the hidden cost of a WC claim can be significantly reduced through a safety program.

  • A properly structured safety program reduces the number of work place injuries and all the hidden cost the employer would incur.
  • This results in higher production / productivity for the employer, creating higher profits.

And, remember the mantra:
"Every effective workers’ compensation program rides in tandem with a fully functional safety program."

If you want to reduce the number of workers’ comp claims and all the associated hidden costs absorbed by the employer, look closely at your safety program. If you need assistance to improve your safety program, or in setting up our safety program, please contact us. We will be glad to review your safety program with you and make recommendations for improvement.

Next Topic: Lower Your Experience Modification Factor

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