How to Reduce Workers’ Compensation Costs

Employers have a love-hate relationship with workers' compensation insurance. While the program protects business owners from lawsuits for workplace injuries, the required premiums continue to threaten profits.

"The cost of workers' compensation is a huge concern for most employers," says Ed Priz, president of Advanced Insurance Management. "In some regards, it is more of a widespread problem than health insurance."

Unlike that optional medical benefit, workers' comp is mandated virtually everywhere, except for some states that exempt the smallest of employers.

Errors in Calculating Premiums

The biggest problem with workers' compensation is, of course, the size of the premiums. "Outside of health insurance, workers' comp is the most expensive insurance policy the typical employer buys," says Scott Simmonds, author of a book on the topic.

It may also be the most problem-prone: "Everyone seems to have a horror story either on the premium side or the claims side."

Experts say the most effective way to shave costs is to spot errors in the way premiums are calculated. "The insurance industry makes a lot of mistakes in providing workers' comp insurance," says Priz, whose job it is to spot overcharges in his clients' paperwork. "I find that in one third to one half the time, the client has been overcharged somewhere along the way. That's a significant error percentage."

One of the costliest errors is misclassification of employees. In the workers' comp world, different classes of workers are assessed different premiums, which reflect injury risk. "There are more than 900 classifications for employees and rates are all over the place," Simmonds cautions.

While actual premiums vary widely by state, clerical people have less risk of injury and are thus rated relatively low.

Check Your Records

Your workers' comp premiums are affected by a second factor: your claims history.

The insurance industry compares the number and severity of your workplace injuries with those of similar operations in your industry. The resulting ratio is your "experience modification" or "x-mod" for short.

The lower your x-mod, the lower your premiums. "Many business owners aim for an x-mod of 1.0, a figure which indicates your claims are no higher or lower than the average," says Simmonds.

How can you lower your x-mod? The first way is to tally up your own history of claims and compare the results with those on your official x-mod worksheet. That document outlines the losses you have had, specifies your total payroll and provides the calculations that result in your x-mod. It is prepared by an agency called the National Council on Compensation Insurance (NCCI), which then provides it to your insurance carrier, who in turn forwards copies to your agent and to you.

You can also reduce costs by instituting a safety program that brings down your accident rate.

Obtain feedback from your workers regarding ways of making their jobs accident free, and institute their suggestions.

Using safety programs and other techniques, some employers have lowered their x-mod to 0.8 or even 0.6.

Smaller businesses are often not assigned x-mods. That's because, from an actuarial standpoint, the data available are insufficient to make a meaningful calculation. At what point does a growing business enter x-mod territory? There is no one rule: The trip point varies widely and is affected by the employee classification mix. But Simmonds offers this useful benchmark: "Generally speaking, if you are paying more than $5,000 a year in workers' compensation premiums, then you have most likely been assigned an x-mod."

And just how large might an employer be before reaching that premium level? By way of rough examples, an employer with two or three employees in low risk positions might be paying around $2,000 in premiums; one with 15 to 20 employees might be paying $8,000 or $9,000.

Because workplace injuries affect workers' comp premiums, many employers are tempted to avoid reporting accidents. That's bad. "Failing to report a workplace injury is illegal in virtually every state," warns Ron Peters, a partner in the San Jose office of Littler Mendelson, the nation's largest labor and employment law firm representing management.

There are two reasons for the illegality, explains Peters. First, the states feel that injured workers have a right to receive benefits at a level that may be higher than what employers would provide without legislative mandate. Second, the insurance industry needs to have a realistic way of measuring risk for the purpose of setting adequate premiums.

There is an exception, however: You need not report minor injuries that require only first aid. "If you are in the habit of reporting ‘first aid only' injuries, then you may end up paying higher premiums than necessary," warns Peters. While such over-reporting may seem counterintuitive, the fact is that employers are often tempted to do so out of fear that what appears to be a minor injury may turn into something more serious.

When it comes to workers' compensation insurance, shopping around can make a huge difference in premiums. There's one last weapon in the cost-cutting arsenal: Insurance policies with high deductibles. Not all states allow such policies, however. And even in states that do, not all insurance carriers sell them.

4 Internal Programs for Reducing Premiums

Employers can institute workplace programs that help lower workers' compensation premiums. Here are some ideas from Peters.

Institute a safety program. "Employers should take time to create safety programs that help keep accidents from happening." Peters suggests.

Investigate claims. "A lot of employers just send to the doctor every worker who reports an injury. That can lead to a lot of abuse. Once a culture of abuse gets started, it's difficult to stop." Investigate all claims to see if they are legitimate.

Process claims quickly. Set up procedures for handling injury claims efficiently. "Establish and communicate a policy that accidents must be reported immediately. It is hard to investigate a report that is two days old. And late reports are often red flags for false claims."

Establish "return to work" plans. "The faster people get back to work, the lower your expenses. Get guidance from the doctor on how an injured worker can be accommodated in the workplace. Very often, the individual can perform light duties."