When filing a Workers’ Compensation (WC) claim, your heart might skip a beat when you see both expected (direct) and unexpected (indirect) costs. That’s why it’s important for you to know the difference between Direct and Indirect Workers’ Compensation costs:
- WC insurance covers Expected Costs, also called direct costs.
- Unexpected Costs are costs that are not covered by the policy, also called indirect costs.
According to OSHA, “In addition to their social costs, workplace injuries and illnesses have a major impact on an employer’s bottom line.” So, it’s easy to see why you as an employer need to clearly understand direct and indirect costs, how to minimize them, and why there’s urgency for you to do so.
Examples of Direct Costs
Your WC Insurance policy covers direct costs and can include:
- Legal fees—These fees include costs associated with a WC claim, settlement costs and Civil Liability expenses.
- Medical payments—These costs refer to the employees medical treatment when injured.
- Employee wage benefits—Costs like these come up when the employee injury prevents them from returning to work or if they can’t do their job completely. This can include permanent total, permanent partial, temporary partial, and temporary total disability.
- Death/dependency benefits—These benefits vary by state and arise from the death of an employee by a work-related injury. The employee’s spouse or dependents are paid the benefits.
- Vocational rehabilitation costs—There are costs for the rehab of an injured employee, like career counseling and training.
Examples of Indirect Costs
Depending on the nature and extent of the injury, these costs will vary. Your WC Insurance policy does not cover indirect costs and these can include:
- HR support expenses—It’s simple… more WC claims mean more work for HR staff and other support personnel.
- Insurance premium expenses—If you report more injuries, you may be considered high-risk. As a result, your XMOD will be impacted which could result in a premium increase.
- Hazard mitigation costs—This one is straightforward. When an employee is injured, you need to mitigate (fix, upgrade, repair) the cause of the injury.
- OSHA fines—Inspections must occur when an employee is injured or killed on the job. These inspections may result in OSHA citations if safety issues are found. The more incidents you have, the greater the possibility of inspections and subsequently the greater the possibility of citations.
- Claim investigation costs—These WC claim costs are typically associated with potential fraud investigations.
- Repair costs—These types of indirect costs could result from property or equipment that was involved in an injury-causing accident.
- Production deadline extensions—Will production suffer if an employee cannot work due to injury? If so, costs will be affected and could also have a bad effect on contractual obligations.
- Workplace culture concerns—If you don’t take safety seriously, employees could view the frequency of incidents as a sign that you don’t care. When morale is weak, production suffers.
- Wage and hour costs—When a workplace injury occurs, the missing employee’s work still needs to be covered by hiring temps or allowing others to work overtime.
- Training expenses—Employees who are filling in for an injured worker need additional training to be able to adequately fill in for the injured worker.
How Can You Minimize Direct and Indirect Costs?
It’s to your advantage to find ways to control direct and indirect costs. To accomplish this goal, you must be proactive. Controlling direct and indirect costs by investing in safety programs will have a positive effect on your business.
Did you know for example that if you have lower direct costs, this can also impact indirect costs? If employees are well-trained in hazard identification, you can likely reduce injury claims. If you reduce injury claims, expenses like wage benefits and medical payments may also decrease. This will, in turn, lower indirect costs.
If you want to successfully manage the quantity of WC claims, it’s vital that you invest in a successful safety program. If reducing the quantity is not possible, you can also reduce your costs by how you manage the claim. This is where proactivity comes into play once again. How? You will need to proactively work with the claims agent as well as the employee to help them get back to work quicker. An added benefit to this proactivity is the enhanced communication between all involved parties.
The efficacy of your return-to-work program can also aid in reducing costs. Providing various work options that fit the employees’ medical restrictions can also stimulate a more rapid return to work, once again reducing direct and indirect costs.
The Data that Supports the Need to Control Direct and Indirect Costs
The criticality of this topic cannot be understated! For a company to maintain profitability, it needs to avoid interruptions that come with WC claims and increased costs, whether they be direct or indirect.
The National Safety Council (NSC) estimates that “the total cost of work injuries in 2019 was $171 billion.” Within this figure, almost $54 billion were wage and productivity losses, almost $36 billion were medical expenses and almost $60 billion were for administrative expenses. Additionally, just over $13 billion in costs were for uninsured employers. And finally, two more elements of this total are motor vehicle damage of $5 billion and almost $4 billion in fire losses.
Other valuable data from the NSC reveals that “the value of goods or services each worker must produce to offset the cost of work injuries” came to $1,100 per worker. When an injured employee required a medical consult, the cost was $42,000 per employee, while the total cost per fatality was over $1.2 million.
The conclusion is quite clear, if you can reduce the number of employee injuries, there will be better morale in the workplace as well as lower expenses related to WC claims. All of this adds up to fewer direct and indirect Workers’ Compensation costs.
Talk to TPG Insurance Services to discuss your Workers’ Compensation needs. Call 909.466.7876 and speak to our knowledgeable experts today. While you call, you can also check out our Workers’ Comp content for more practical information.