Control experience modification factor, before it controls you

One of the most confusing components of an employer’s workers’ compensation policy is the experience modification factor. Employers watch it increase and decrease from year to year without much understanding of how it works and what they can do to manage the experience mod to the absolute minimum. Agents and brokers need to know more about it themselves to better advise them.

Most employers intuitively suspect that if they have injuries, their experience mod will go up and, if they reduce or eliminate injuries, it will go down. At a basic level, their intuition is correct. Higher experience mods generally increase costs and lower experience mods decrease them, but there is much more to it.

Predictive indicator

The designers of the formula that is used to calculate the experience mod squawk at any reference that it is meant to be punitive. Their theory is that it is supposed to operate as a “predictive indicator” of future losses, meaning if a company has had injuries in the past, it is more likely to have them in the future and should pay more.

On that basis, the experience mod causes workers’ compensation policies to behave more like a line of credit than an insurance policy, because for all practical purposes the employer is simply financing injuries, not insuring them. In almost all instances, it is ultimately the employer and not the insurance company who will pay for their injuries. Moreover, not only will the employer pay, but in many cases the employer will pay back more than the cost of the injury because of the impact of the experience mod.

A thorough analysis of an employer’s experience mod best illustrates this by revealing the following:

1. The cost of the injuries by employee name.

2. The number of modification points attributed to each injury.

3. The current year increase in premium cost due to that specific injury.

4. The cumulative increased premium cost over a three-year period, which is how long a claim has an effect on your mod.

Employers perceive, clearly and quantifiably when they see this analysis, that they ultimately pay for employee injuries and the insurance company is just financing them. As a result, driving down injury costs makes the employer more profitable and competitive.

This shift in understanding needs to be driven through the employer’s entire organization. Employers must foster a change in the predominant view of employees that “accidents happen, that’s why we have insurance.” It’s critical that not only management, but also supervisors and front-line staff are aware that it is the employer’s money and not the workers’ compensation carrier that pays for employee injuries.

Why buy workers’ comp?

So if employers ultimately pay for injury costs, why bother with workers’ comp insurance? Employers buy workers’ compensation insurance for two reasons. First, it is usually a state law. Second, it levels out the peaks and valleys of injury costs by financing them over a three-to-four year period.

But to control that “financing,” the employer needs to know how low their experience mods can be. Many employers are amazed that their mod could be as much as 80 points lower than it is and that the gap between costs generated by their current mod and the best possible mod is a controllable cost. This leads to the realization that the experience mod is the key to costs and that it should be the employer’s objective to attain or at least approach the lowest possible experience mod for his or her business.

When this gap in the experience mod is exposed, it becomes apparent that “getting quotes” has little to do with reducing costs. Going out for bids limits the employer’s cost reduction method to what the insurance marketplace and pricing cycle offers them. A reduction in a “rate” from one year to the next may have minimal or no impact on the employer’s total “cost.” For example, the employer’s rate may decline by 15 percent, but cost increases by 30 percent because of an increase in the experience mod.

This is why employers and the producers advising them must move beyond the bidding process and the basic commodity transaction model of “price shopping” for insurance in order to reduce costs. Instead, when comparing workers’ compensation policies employers should insist upon assistance with the implementation of practical and proven methods that reduce the experience mod.

Such practical and proven methods include:

• Effective hiring practices and employee relationships;

• Supervisor training;

• Modified duty and return-to-work programs; and

• Medical clinic relationships.

Reducing costs

When a challenging injury occurs, employers often say, “I should have never hired that person or I should have gotten rid of him when I had the chance.” Dealing with human resource problems inside the workers’ compensation system is usually a costly endeavor. Plus, hiring the right employee that is fit for the job is a major step in reducing costs.

Supervisors are often resistant to bringing injured employees back to work before they are fully recovered. They typically want a “whole person, or no person.” Injury costs rise the longer an injured employee is away from the workplace. You will find that supervisors are far more likely to support an injured employee with frequent communication and modified work if they know the money is coming out of the pocket of their employer as opposed to some faceless insurance company.

In addition, compensation and performance bonuses can be tied to injury costs by departments. Supervisors compensated on production only could actually be operating their unit at a loss due to injury costs.

The right doctor doing the right treatment at the right time is essential to controlling costs. Like most professions, not all doctors are created equal. Careful attention should be taken in selecting medical providers. Otherwise, you may be handing them a blank check.

Conspicuous by its absence among these practices are safety programs. That’s because a focus on safety programs to prevent injuries is the most obvious and over-hyped solution in the reduction of injury costs. Certainly, a safe workplace and safe work practices are essential to reducing injuries, however, safety programs are not significant factors in the reduction of injuries and their related costs.

Employers that shift their thinking and see workers’ compensation insurance for what it is — a financing mechanism — are on their way to reducing a mandatory cost. Agents and brokers need to move their employer clients to take active steps to reduce their experience modification factors. This will set them on the way to making a dramatic difference in their bottom lines.