Calculating Indirect Costs of an Injury

September 20th, 2011 by Julie Ferguson

The following is a guest post by Frank Pennachio of The WorkComp Advisory Group
In the September 7th edition of the Workers’ Comp Insider, I noticed a reference and link to a tool known as the OSHA $afety Pays Program. I find value with the process of determining how many dollars of revenue is required to pay for an injury, but have serious reservations with the tool’s calculation of indirect costs. Calculating the indirect costs of an injury is far more complex than the OSHA tool would indicate, and reliance on such a tool may erode credibility with an employer.
For example, let’s look at two employees who work for a Franchised Auto Dealer that experience the exact same injury, medical costs, and lost time. One of the employees is a top notch auto technician who frequently outperforms the manufacturers allotted time for warranty work, thus generating significant profits for the dealership. This employee is difficult to replace and each day of lost time is costing the business substantial profits.
The other injured employee is an auto detailer who is much easier to replace and train. Profits are not affected at the same level for the detailer as they are with the loss of a highly productive technician.
So, we have the same injury, medical costs, and lost time, but dramatic differences with indirect costs to the employer. According to the OSHA tool, both would have the same indirect costs.
The best article I have read on this topic, “Accident Costs: Rethinking ratios of indirect to direct costs,” was written by Fred A. Manuele and published in the January, 2011 edition of ASSE’s, Professional Safety Magazine. As Manuele states, “The literature on direct and indirect costs does not present a uniformly accepted computation method. Differences in the various systems are substantial. More importantly, no published ratios are currently valid because the increase in direct costs (indemnity and medical costs resulting from an injury or illness) has exceeded the increase in indirect costs substantially in the past 15 years.”
In addition, Manuele makes a strong case to support his position on the OSHA $afety Pays program: “Data on indirect costs produced using this program is misleading.
We want employers to understand and consider indirect costs. However, if employers suspects the formula to calculate indirect costs lacks credibility, they will likely question and remain skeptical on other more credible assertions and issues.
Indirect costs are real. Reducing them is a critical component of effective risk management and cost control. However, the issue is complex and deserves a conversation that is not reduced to a simple multiplier. Let’s embrace the complexity and lead employers through a conversation that will enlighten and inspire.
Frank Pennachio is co-founder of The WorkComp Advisory Group, a sales training and consulting organization that works with agencies to leverage technical knowledge and sales strategy into successful new business development.