Compensating For Workers' Comp CostsLisa Driscoll
Every hour, workers at several of HON Industries Inc.'s plants take five-minute exercise breaks. This is no Japanese-style venture to promote factory-floor togetherness. It's a new experiment at holding down the Muscatine (Iowa) furniture maker's surging workers' compensation expenses--now a worrisome 10% of net income. Limber and alert assembly lines, the company figures, mean fewer accidents.
Funding workers' comp--insurance that pays job-injured employees--is turning more nightmarish by the year. According to the National Council on Compensation Insurance, Corporate America's tab for disability coverage continues to spiral with no easing in sight (chart). This year's increase should be double-digit. The culprits are soaring medical costs, high legal expenses, fraud by covered workers, and moves by state regulators to include a growing number of maladies, such as stress, under workers' comp. "The overall trend is pretty scary," says Alan H. Strohmaier, director of unemployment and workers' compensation at General Motors Corp. in Detroit.
Worse, the availability of insurance providers is shrinking. A growing number are looking for the exit in states where regulated rates, despite the big increases, still are too low to cover costs. In December, Liberty Mutual Insurance Co., the nation's largest disability insurer, pulled out of the Rhode Island workers' comp market. USF&G Corp. announced plans last month to stop writing the coverage in Mississippi.
SAFETY FIRST. To contain workers' compensation costs, employers and insurers are developing an array of innovative solutions. "It's getting the attention it should have gotten 10 years ago," says Edward D. Deloughy, risk manager at Union Carbide Corp. in Danbury, Conn.
One method is self-insurance, where a company establishes its own disability fund. A study by the Johnson & Higgins insurance brokerage found that self-insurance for workers' compensation accounted for 71% of all self-insurance growth between 1988 and 1990. Bose Corp. of Framingham, Mass., became self-insured in 1991, after watching a 69% rise in premiums in only three years. Risk Manager Kathryn A. Bowers figures self-insuring saves the stereo equipment company about $200,000 annually off the $1 million it used to pay in premiums.
Other companies are following HON's example by radically overhauling operations to boost safety. Many manufacturers are focusing on minimizing back injuries. Mennen Co., a Morristown (N.J.) toiletries maker, shrank the size of packing boxes, supplied workers with weight-lifting support belts, and installed power-lifting equipment for heavy loads.
FRAUD BUSTERS. To promote more attention to the problem by operating managers, companies are requiring them to include workers' comp costs in their units' budgets. Managers of eateries owned by TPI Restaurants Inc. of Memphis are now sticklers for safety and adroit at getting injured workers back on the job quickly. "Until managers became accountable for their costs, they wouldn't consider putting someone back to work on light duty," says Ann Casper, TPI's director of corporate risk management.
The payoff from these initiatives can be big. The cost of claims last year fell by 90% for Mennen. At TPI's Shoney's restaurants, accidents dropped 30%. And since the new safety plan was put in place in July, mishaps at one of HON's most injury-prone plants decreased by 67%, from an average of almost four work-loss accidents a week.
Small businesses are turning to employee leasing, where workers are rented out from a larger outfit that takes care of their benefits. This was a godsend to Julian D. Wright, whose Belmont (Mass.) moving company used to spend 28.5% of its entire payroll on workers' comp premiums, even though it never had an injury. The cost, he says, "was going nuts."
Insurers are eager to provide safety tips. HON's insurer, Travelers Corp., assigned 12 full-time employees for a year to aid the company in identifying why accidents occur and overhauling manufacturing processes. They redesigned a metal-bending process to reduce workers' chances of slashing their hands.
The toughest challenge is reining in medical claims, which make up almost half of disability costs. Companies are contesting fraud more vigorously. Others, such as snackmaker Frito-Lay Inc., use early-intervention programs to identify injuries such as back strains before they become permanent.
These are productive steps. But the workers' comp monster is still far from tamed. In the meantime, few personnel expenses will be as disabling to companies' bottom lines.