Going back to basics in workers’ compensation

September 28th, 2004 by

Twenty years ago, as I was founding Lynch Ryan, the nation’s workers’ compensation crisis was beginning to bubble to the surface.
As I interviewed employers, a couple of things amazed me. First, for most of them workers’ compensation represented the biggest insurance check they would write. Second, those same employers knew next to nothing about the subject.
Since then, employers, insurers and legislatures, alike, have devoted much attention to taming the high costs of workers’ compensation.With the exception of a few states that remain very problematic, such as California, Texas, New York and Florida, costs around the nation have abated dramatically. Employer education and training, as well as changes in the various state laws, have caused premium rates to fall precipitously in many cases. In my own home state of Massachusetts, for example, rates have fallen nearly 68% in the last nine years. In addition, medical fee schedules, in some states, have reined in medical costs associated with workplace injuries.
However, lately I have noticed, creeping into the mix, what I choose to call the “Diminishing Attention Principle,” or, the DAP. The DAP states that the attention an employer gives to workers’ compensation is directly proportional to the amount of money the employer pays for workers’ compensation.
To prove the point, let me call your attention to the workers’ compensation experience modification factor.
In the mid to late 1980s, employers admitted that they didn’t know much about experience modification, were mystified about the thinking behind how reserves were established and had never heard of the unit stat report. Gradually, with heavy education, employers saw how important these three very esoteric things were to their bottom lines, how they were inextricably connected. It was not uncommon for me to encounter employers who personally calculated their own mods with their basic, Radio Shack hand held calculators. Why? Because they were paying a fortune for workers’ compensation and they knew that they had to do something about it. Sadly, one doesn’t see that too often, anymore.
Why is that? Perhaps the answer can be found in the normal generational changes that occur in management. Most men and women who are owning and running American companies today were not doing so in the late 1980s and early 1990s and, therefore, were not exposed to the staggering economic problems brought on by the workers’ compensation crisis of those times. Top schools, such as Harvard and Stanford, don’t devote even an hour in their MBA programs to dealing with workers’ compensation and the workplace injuries that drive its costs.
So, over the next few weeks, every once in a while we’re going to go back to basics and offer some of what we consider to be the essential management best practices for dealing with the various components that ultimately determine the amount of that biggest insurance check any employer will ever write.
Our first subject? The curious relationship between experience modification, claim reserves and the unit stastical report. Stay tuned.