Getting a Grip on Your Workers’ Compensation Costs
Workers’ compensation is a significant cost of doing business, including for independent automobile dealerships, drive-away companies and the service shops that cater to independent automobile dealers.Oftentimes, it’s also a very frustrating part of running an operation as many employers see rising premiums even though their payrolls haven’t increased and their claims history is good. Moreover, there is uncertainty as to whether the Affordable Care Act (Obamacare) will ultimately impact workers’ comp rates as more employees possibly look to claim work-related injuries and illnesses because of the limits imposed by their health plans.
There is a lot you can do to keep your workers’ comp costs in line, including establishing a culture of safety that begins with management’s commitment, the implementation ofsound loss control protocol, ongoing training of all employees, and working with your insurance company to implement a solid return-to-work program. These are effective solutions and take time to see real results. There are also immediate measures you can take to pinpoint whether you are properly being charged for workers’ comp coverage and to vet any anomalies that may be affecting how your business is being rated.
We spoke with Mike Turano of compcheck.net who works with companies across the country to reduce their workers’ compensation premiums. Mike’s background spans years of workers’ comp experience on the insurance carrier side, including investigating fraudulent claims. “The first thing is to understand how workers’ comp premiums are calculated,” explained Mike, “and then to take action to make sure your premium adequately reflects your business, experience, and loss history.”
Calculating Workers’ Comp
Workers’comp rates are calculated using the following formula: “Base Rate xMod x Payroll plus or minus adjustments”. The base rate is unique to each state and industry classification, and in most states is set by the National Council of Compensation Insurance (NCCI). This base rate is multiplied by a factor of payroll ($1 for every $100 of payroll) to come up with an employer’s base premium. The experience modification factor (or X-mod) represents a business’ claims history over a three-year period and its safety record as compared to other businesses in the same industry. A mod factor of more than 1.0 means that an employer’s losses are worse than expected and a surcharge will be added to the premium. A mod factor less than 1.0 means losses are better than expected, resulting in a premium discount.“For example, to calculate the X-mod for 2015, you look at the amount of actual reserves that was set by the insurance company when a workers’ comp claim is presented to them on behalf of an employer,” explains Mike. “You also look at the expected losses, which is based on the three-year average (2011-2012, 2012-2013, 2013-2014). You divide the expected losses into the actual losses. So, if you have $2.00 in Workers’ Comp claims for three years and $1.00 in payroll (expected losses), the X-mod would be 2.00. Conversely, if you had 50 cents of actual losses with a payroll of $1.00, you would be at .50.”
Auditing Insurance Company Reserves Set for Claims
The potential problem with this, according to Mike, isthatreserves are based on an estimation of what the cost of a claim would be. In many cases, these reserves may be set too high resulting in an employer overpaying in premiums as the X-mod is not accurately calculated. “To illustrate this, let’s say the insurance company sets the reserves at $100,000 for each year, which leads to an experience modification worksheet of $300,000 over the three years it’s reported. However, in three years, payments of only $20,000 per yearare made for a total of $60,000. The employer ends up being overcharged, as the X-mod does not reflect what the reserves should be.
“Employers have the right to challenge the reserves with an audit of their open workers’ comp claims within six months after policy renewal to ensure that reserves are correct. This can lower the X-mod and over timesignificantly reduce premiums,” emphasizes Mike.
“We also send out a questionnaire to the adjuster handling every claim on behalf of an employer. This questionnaire includes 34 questions designed for the adjuster to review the carrier’s log notes to justify the reserve setfor a specific claim. Some of these questions include: ‘Please give us a detailed description of how the injury incurred. What is the rationale for putting a reserve of $100,000 for indemnity benefits only (lost pay and earning capacity)? Has the claimant had any prior injuries to this particular body part?’When we receive the answers, we’ll have a medical consultant look at the reserves for any anomalies or to see if a claim is warranted. For example, let’s say you have a worker on the job for six months who’s fileda carpal tunnel claim. Medical guidelines stipulate that carpal tunnel developmentis not possible in less than a year, therefore a pre-existing condition must exist and an investigation should take place. We’ll suggest the adjuster look into this, and request a HIPAA release under the OSHA Act to perform a medical background check. We can then review the prior seven years to see if the employee has had a previous repetitive trauma claim. If so, we contact the previous carrier to join as a co-defendant in the claim. This controls the costs of the claim.”
Additional Avenues to Reduce Costs
Subrogation recoveries – reimbursement fromthe responsible party for a claim the insurer has already paid – significantly affect reserves if not tracked. This occurs most often when employees are injured in motor vehicles on the job – something particularly of interest to independent franchise dealers. If an accident is determined to be a third- party’s fault, the injured worker, in addition to filing a workers’ comp claim, could also file a claim against the other driver’s insurance company. If this occurs, an employer should find out if the workers’ comp insurer is seeking reimbursement from that third party and whether the insurer aggressively pursues second-injury benefits. This could reduce the cost of the claim.
The way in which employees are classified also affects a workers’ compensation policy. For instance, labeling your secretaries as drivers or mechanics, who have a much higher injury rate, will drive up your company’sX-mod rate, and thereby your premiums. To reduce errors, businesses should classify each employee on an individual basis. “It’s critical that classifications be reviewed regularly to ensure accuracy,” explains Mike.
Payroll audits are also important to make sure that payroll estimates are not overinflated, causing unjustly high premiums. Premiums should be based solely on total remuneration consisting mainly of wages or salary, commissions, bonuses, and other similar items. As such, payroll records should be reviewed to ensure that non-remuneration items like tips, gratuities and payments to independent contractors are reported separately.
These are just some of the several ways in which to get a handle on workers’ comp costs. It may seem a bit daunting but it doesn’t have to be. When working with experts like Mike and CompCheck who are experienced in tracking and auditing claims, you’ll be able to pinpoint any problems and look to save premium dollars.
BOLT Insurance Agency works with CompCheck to bring added value to clients to help improve their bottom line. If you are interested in reviewing your workers’ comp policy with us, please contact Brian Lawlor at 860-777-2671 or via email at firstname.lastname@example.org.