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By PETER ROUSMANIERE, a Vermont-based columnist for Risk & Insurance®

Many employers are trying to drive down workers' compensation costs by financially incenting their operating units to do so. They allocate workers' compensation losses to the budgets of each units.

The Risk & Insurance Management Society Inc. (RIMS) recommends that employers internally allocate losses. In its 2009 benchmark survey, prepared with the assistance of Advisen Ltd., RIMS found that, of 25 "best practice" companies, 23 (or 93 percent) charge back claims costs across all units.

Paul Stasz, risk manager of New York-based Edison Learning, flat out said that loss allocation "is vital."

"Otherwise, the operating unit ignores the cost because it has no effect on the unit, financially or psychologically. The costs then spiral upward. If the unit management believes it can control the cost through improved claims management and RTW, or avoid the cost through good safety and loss control, it will work to do so," he explained.

As for employees, Stasz believes that they will cooperate in these efforts if they see that their earnings or working conditions can be improved by fair claims management and return-to-work and safety programs.

THE HOW-TO

Over his risk management career, Stasz has built four allocation systems. His early models allocated only direct costs--medical and indemnity payments. Later in his career, he added indirect costs, such as fees from third-party administrators, court costs and loss-adjustment expenses. These later models, by incorporating indirect costs, "were the superior models," Stasz judged.

"They portrayed a more accurate cost to the company and to the operating units. Most unit managers appreciated knowing the indirect costs, too, because they then had a gauge for measuring how effective risk management was in managing the WC process," he said.

BJC Healthcare, a large St. Louis-headquartered healthcare system, allocates costs across all 18 of its operational units, including 10 hospitals. Patrick Venditti, director of BJC Corporate Health Services, leads an in-house claims team for the 2009 Teddy Award winner, which the organization earned for excellence in managing its work-injury risk.

Venditti detailed how BJC allocates losses into each unit's annual operating budgets as a separate workers' compensation expense, based upon actuarial analysis of ultimate losses done every September by Milliman, the actuarial firm.

Eighty percent of BJC's allocation of losses are based on the unit's share of loss experience, 20 percent on the unit's share of total payroll.

"So the largest unit with the highest loss experience," Venditti said, "might be allocated 38 percent (of total losses) and the lowest might get an allocation of 0.50 percent."

Dustin Ng, a New York City-based broker and actuary with Integro Insurance Brokers and 2009 Risk & Insurance® Risk Innovator Award winner, often recommends loss allocation to his clients. Ng thinks in terms of what he calls three perspectives that determine the allocation. One perspective is exposure; the second one, loss trends; the third, risk management practices.

This means the company makes three separate allocations. Say that $1 million is to be charged off the operating units. First, $250,000 could be divided up according to each unit's share of total payroll, where a dollar of payroll with higher exposure (more dangerous work) is charged more than payrolls with lower exposure Then, say that $600,000 is divided up according to each unit's share of the total recent loss experience. That leaves $150,000 to be split up by how each unit performs relative to others in meeting endorsed behaviors, such as speedy reporting injuries and the unit's use of modified duty for recovering workers.

This formula incents the units to improve their behaviors and to stem losses, even while their relative exposure may not be easily changed.

Read more at the WORKERSCOMP Forum^TM homepage.

February 4, 2010

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