How Much Does an Accident Really Cost You?
Workplace accidents have obvious, direct financial ramifications, including medical, hospital, and rehabilitation expenses, lost wages, higher insurance premiums and, in some cases, a total loss of insurability. However, there are many indirect costs that are usually uninsured and can seriously affect a company’s profitability, and can be much greater than the insured loss.
These uninsured indirect workers’ compensation costs result from the marginal inefficiencies to the manufacturing or service process caused by a work-related injury.
Premiums Just a Small Part of Injury Costs
As an example, assume that one of your employees (unfortunately) suffers a serious injury on the job that requires surgery and eight weeks away from his job. 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 an injury of this type.
However, traditional cost accounting typically fails to measure the additional uninsured costs related to these post-injury activities:
• The time spent by your supervisor(s) and human-resource staff responding to the injury, transporting the injured employee to the clinic or hospital, investigating the injury, and managing the claim throughout the entire process;
• Costs associated with the inactivity of manufacturing equipment or inventory as a direct result of the injured worker’s absence, if he is not replaced at least temporarily. This equipment or inventory would be idle and completely incapable of contributing to your production or delivery of services.
• The cost incurred by temporarily replacing the injured employee, which may take the form of overtime paid to existing employees, the hiring of a temporary worker or paying a job-placement firm.
• The direct cost of your operation being disrupted. While you may have temporarily replaced the injured employee, in many cases the replacement employee (either an existing employee or a temp) may not be as productive as the injured employee. The injured employee has been trained and is experienced, which might make them extremely difficult to replace in the short-term.
Rarely does the injured employee come back to work at 100-percent capacity. It takes time for him to become reacclimated to his job. This is further accentuated if the employee must be permanently assigned to a new job to accommodate some physical restrictions. During this readjustment period, you have a less than 100-percent productive employee.
Additional expenses will be 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 accommodating the employee’s work environment and resources to match his physical restrictions;
• The cost to train the replacement employee; and
• Extra cost to meet customer commitments. If the injured employee had been working to complete a rushed order, you may incur additional costs to ensure that customer commitments are honored.
It’s Difficult to Calculate These Indirect Costs
Unfortunately, uninsured costs rarely are accounted for by most business owners and financial managers, because they are not easily identifiable. It’s difficult to accurately measure the financial impact and obtain reliable information to allow business owners and financial managers to appropriately deploy scarce resources and minimize costs. However, designing safety and health practices around the credible quantification of your organization’s total cost of worker injuries is an effective way to reduce short- and long-term costs.
Past studies have been attempted to measure these uninsured costs, but all are quite old and general in nature. For example, Terrance Miller, in his article Track the True Cost of Accidents (Safety & Health magazine, November 1991), wrote:
“Uninsured costs usually are 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.”
Also, the Occupational Safety & Health Administration (OSHA) refers to studies on its website, stating:
OSHA has attempted to provide a financial model for companies via its free online software—Safety Pays. However, the data used for this financial-estimation tool is based on rough estimates, driven primarily as a function of insured claims, and does not account for varying expenses incurred by different company operations.
Using the traditional ratios described by Miller and OSHA has these flaws:
• They do not apply to a company’s specific operation. Each company has its own set of work-related risks, so using general averages or ratios, particularly if they are based on insured claims, will provide an unrealistic estimate of uninsured costs.
• The information lacks flexibility. Each worker-injury claim is different—one claim may involve very little time to administer, while another might involve lengthy litigation. Or, a major piece of equipment might be significantly damaged, or a worker injury might cause 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.
• The ratios vary too widely, from 20:1 to a low of 1:1, which can cause a company to either deploy resources in the wrong direction, or to take no action at all.
Use the Internet to Quantify and Reduce Indirect Costs
From our perspective, manufacturers can follow one of two paths to reduce their uninsured costs with credibility: performing an internal risk audit, or employing available software systems that accurately quantify the total economic impact of your worker injuries. Conducting an internal audit requires extensive data and research to determine each and every possible risk, a time-consuming process that can have a high rate of error, or miscalculations. Typically, indirect risks are difficult to identify, especially when the audit is done internally and could be subjective and unintentionally biased. In addition, some potential risks may be overlooked—viewed as improbable or unlikely to occur.
A better solution is to apply software that quantifies the total economic impact of worker injuries, neither with guesswork nor estimates based on vague industry averages, but by using claim data and specific economic information. This third-party Internet-based product (we use CompEraser) serves as a personal risk-assessment tool that allows a company to evaluate its potential costs and risks. The program calculates all of the possible areas of risk, and evaluates where the strongest threat of liability lies. Companies can then focus on their most imminent areas of risk, reducing overall cost of losses due to work-related injuries.
One of the powerful components of this software is that it allows a company to quickly and reliably calculate insured and uninsured components that make up the true cost of a worker injury. These calculations use specific and actual financial data so that the information is tailored to your financial performance and costs. Armed with this information, management can develop focused and effective strategies for reducing the total cost of risk of worker injuries. MF
See also: Pitcher Insurance Agency, Inc.
Related Enterprise Zones: Safety
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