Injury Concerns Rise as Workers Comp Rates Fall

Tue January 29, 2008 - National Edition
Giles Lambertson



The good news is that contractors across the country are enjoying historically low workers compensation insurance rates and relatively little loss of productivity from employee injuries.

The bad news might be following closely behind if people aren’t careful.

According to industry observers, these periods of favorable rates foster inattention to safety training and hiring, which almost invariably causes a spike in accidents and insurance costs.

The message for contractors: Don’t let down your guard now.

“What might happen, and it has happened repeatedly in the 20 years that I have been in the business,” said Frank Pennachio, an insurance agent specializing in workers compensation issues and co-founder of the Institute of WorkComp Professionals, “is that when rates are low, employers get complacent and they don’t pay as much attention to safety and hiring and following up on injuries and pretty soon, rates and claims begin to rise.”

If that isn’t bad enough, insurance companies themselves also fall victim to good times, Pennachio said.

“Insurance companies get crazy. They are making a fortune now on workers comp, paying out much less than a dollar for each dollar taken in. The companies can’t stand such success,” he said.

Driven by the prospect of generating even more business volume, the insurance companies try to undercut one another and drive premium rates down almost to unsustainable levels.

“About this time,” Pennachio continued, “lawyers begin to erode the effectiveness of workers comp reforms by advocating different case law interpretations and when claims begin to climb once more, the insurance companies say, ’Whoa!’ and rates start going up fast.”

But before CEOs and hiring managers feel total despair about this prospect, Pennachio softened his predictions by pointing out the obvious: Companies still can avoid the worst by not becoming complacent.

Pennachio listed nine factors that he believes will affect the insurance rate outcome during 2008. Many of the factors seem beyond the control of employers, including such culture-wide trends as bureaucratic slowness in handling claims, an aging workforce, unhealthy lifestyles and illicit drug use. Yet employers are not without recourse.

“That’s the way many employers feel, that they have no power, that there is nothing they can do to improve the outcomes,” Pennachio said. “But there is a lot more they can do than what they are doing.”

What Influences the Rates?

An overview of workers compensation insurance helps explain the various influences on rates and the options open to companies. Workers comp insurance is required in every state by statute and pays the costs of medical treatment for employees injured on the job in accidents or adverse conditions; it also compensates for lost wages during rehabilitation. In the case of a fatal accident, the insurance provides benefits for beneficiaries.

Laws governing workers comp are set at the state level and differ in degree from state to state. Consequently, rates and procedures that seem better in one state than in another can persuade a business to relocate to the more favorable operating environment. These competitive tensions between states periodically spur legislative reforms in the insurance program, the latest round of which has been sweeping through states since the late 1980s.

Reforms in California and Texas in the last three to four years are seen as especially effective. The reforms coincide with a decline in injuries. According to Bureau of Labor Statistics data, workplace injury rates are lower at this time than at any time during the 30 years the rates have been compiled.

Smart hiring and good management of claims help bring positive outcomes to a company, but safety training still is considered by many to be the crux of the matter.

Craig Shaffer, a safety consultant in Harrisburg, Pa., operating under the company name of Safety Works Inc., believes teaching employees how to stay safe is where it all starts.

“Safety is the big driver in preventing accidents,” Shaffer said. “It is a moral commitment by a company, but, let’s face it, it is good business, too.”

Shaffer is a member of Associated Builders and Contractors’ (ABC) national Safety Committee, which helps guide safety committees at each of ABC’s 79 chapters. The association’s program, called STEP (Safety Training and Evaluation Process), dates back to 1989. Developed by contractors, it offers a systematic way to develop safety and loss prevention programs, to measure safety program progress and to formally recognize safety achievement.

“The STEP literature lists 20 key areas in safety programs and asks companies to rate themselves, to pick out their strengths and, more importantly, their weaknesses. It is a needs and analysis tool,” Shaffer said. “Folks who participate in STEP are experiencing fatality rates and other accident incidents well below the average.”

Shaffer cited the “mod factor” in proving the value of STEP. Mod factor is a shorthand expression for “experience modification factor,” which compares a company’s accident experience over three years with comparable companies’ experience. The base line average is 1.0. A company’s experience places its mod factor on the scale at, above or below 1.0 and its workers compensation insurance rate is multiplied by that number.

“If you have a mod below 1.0, you get what amounts to a credit to workers comp,” Shaffer said. “ABC members in STEP programs have mod factors 15 percent lower than non-STEP members on average. They certainly are saving money.”

Another benefit to a company for participating in STEP is less hassle from the Occupational Safety and Health Administration (OSHA).

Shaffer said that a typical OSHA inspection earns a company three citations. STEP members average one citation per OSHA inspection.

Safety Works

Safety works for companies as a workers comp aid. Just ask American South General Contractors in Sanford, N.C., which has an enviable number of lost-time accidents over the last five years: zero.

“Our safety program is the thing,” said American South President Jeffery T. Myles. “Being proactive and eliminating unsafe conditions are probably the biggest factors.”

The commercial construction company does approximately $50 million in work volume each year and holds weekly safety meetings to help enhance its bottom line.

“Our insurance is always going up some,” Myles said, “but zero lost time helps keep ours down. I don’t know what others are experiencing, but we are always having to negotiate the best price we can.”

Like American South, Carl Bolander and Sons is a company that has been around eight decades. However, unlike its counterpart in North Carolina, the St. Paul, Minn., demolition and site preparation company doesn’t negotiate with insurance companies for workers comp rates: It is self-insured.

Dan Penny, Bolander’s safety officer, credits Minnesota statutes on workers compensation with fostering a generally safe work environment that helps keep accidents from happening. He also believes Minnesota OSHA’s consulting program helps companies and company employees raise the bar on safety. The program makes OSHA a partner with a contractor on a project, which leads to posting of more notices to correct a situation and fewer instances of OSHA actually citing a company.

“They are on a project to help instead of to write citations,” Penny said.

Bolander was the contractor that removed the fallen Interstate 35 bridge from the banks and waters of the Mississippi River after its Aug. 1 collapse in Minneapolis. Penny said that project was the first in which Minnesota OSHA partnered with a company to ensure a work site was safe. The outcome: 32,000 man-hours were worked with no lost time incidents.

Yet Frank Pennachio, the workers comp insurance specialist, is not entirely convinced that safety is the key to keeping rates low. He acknowledged that safety training is the “primary prevention” factor, but he said what happens after an injury occurs is what drives up rates.

Hiring is Important

“Hiring in my view is far more important than safety,” he said. “If you hire the wrong person, you can have the safest place in the world but … ”

Pennachio said he believes the two most important steps an employer can take to mitigate against worker comp problems are to hire wisely and to carefully manage medical care when accidents do occur.

“The first thing an employer can do is hire someone who is fit for the job,” he said. “If you don’t hire someone fit for the job, it is not a matter of if the person is going to get hurt, it is when.”

Employers protest that they can’t ask the kind of questions they would like to ask to screen out unfit candidates for a job, but Pennachio doesn’t buy it.

“They say, ’Well, I am not allowed to ask any questions,’ but that is just not true. There are stages in hiring where you cannot ask those questions, but once you have conditionally offered a job, not only can you go through a series of questions, the EEOC [Equal Employment Opportunity Commission] says you should. It is moral and ethical not to hire someone who is going to get hurt.”

The Bolander hiring process reflects Pennachio’s emphasis. Penny said company executives believe that “selective hiring is a good thing to go along with safety. We do a lot of selective hiring, including drug testing, pre-employment physicals and interviews.

“We go through quite a lengthy process using those tools,” he said. “It’s a little costly, but we are finding it well worth the cost in the long run.”

The second key to an employer managing his workers comp costs, in Pennachio’s view, is managing medical care when claims do occur.

“Only one thing is more costly than a good doctor and that’s a bad doctor. It is important for a company to have a relationship with a medical provider to make sure that the doctor realizes that you support an employee coming back to work when it is medically appropriate. We find that some doctors will send folks on home to rest for weeks on end.”

Pennachio cited the reforms in 2004 and 2005 in California, the key one being the mandate that doctors will treat injuries according to American College of Occupational Medicine treatment guidelines.

“If a doctor doesn’t treat a patient according to the guidelines,” he said, “the doctor doesn’t get paid. The guidelines say: here are the protocols for an injury, here is the best evidence of the best way to treat the injury. The best-evidence rule has brought dramatically positive results to California.”

Reform of workers comp statutes in Texas followed the California example with similar results. Both states are tweaking the reforms but Pennachio said overall the reforms have brought “extraordinary” improvement to the medical care process.

Not all states allow employers to direct employees to a certain medical provider. In Minnesota, for example, they can choose any provider they want. Dan Penny, the safety officer at Bolander and Sons, said the company nevertheless tries to steer employees to certain clinics.

“We try to focus employees on certain groups of medical providers and try to control as much as we can. We try to encourage an employee to seek out the clinics we recommend,” he said. “We are paying for it and these clinic providers are experts in the field.”

Fraud and Exaggeration

The other control agent available to companies is investigation of fraudulent workers comp claims. Some companies invest heavily in uncovering fraud and are successful in doing so. But Pennachio believes genuine fraud is too small a slice of the problem to warrant much investigation.

“You can pick up potential frauds through good hiring practices. There is very little pure out-and-out fraud in the system,” said Pennachio. “The big problem is not from blatant attempts to defraud a company. The problem is exaggerated claims. It happens when a person gets hurt, gets frustrated, is not getting better, no one is talking to him and eventually that good person goes bad.

“I don’t really call that fraud. I call that problem one of exaggerated claims.”

He said that a good employer wants the best care for an injured employee for several reasons.

“We want them to get well. The problems that come to a company from injuries are not driven by bad people. It is good people who go bad once they get inside a system that beats them up. A good person can really make some bad decisions because of they way he is treated.”

Observed Pennachio: “No one has ever been out on workers comp and improved his life as a result.”

The solution is for a company to fully train its supervisors, who Pennachio calls “the most important people in any company.”

If a supervisor who is trusted by those he supervises has been trained to interact correctly with an employee injured on the job, most of the “exaggerated claims” will disappear, Pennachio said. “But no one takes the time to train the supervisors.”

Does one company or state or region seem to be making all the right decisions on workers comp, including the key one at this moment, which is not to become complacent? Undoubtedly, some individual companies are on top of their game in handling workers comp and some state workers comp programs seem to work more efficiently than others.

But Shaffer of Safety Works Inc. believes one region of the country might be leading the way on the issue, at least in terms of promoting a safe workplace — the Gulf Coast region running from Alabama to Texas.

“I think most of the folks on ABC’s Safety Committee would agree that from a safety performance standpoint the Gulf region is impressive, specifically, the petrochemical industry located there. Whether it is building a plant, preventive maintenance, painting, whatever, the companies have parameters you have to meet before you ever work there. If you don’t meet them, you don’t work.”

He said contractors bidding on projects have their OSHA citation records examined, their mod factors examined and, if the numbers are too high, they aren’t considered.

Shaffer believes such attention to safety will continue to benefit a company in the workers comp insurance market that 2008 could bring.

“I continue to believe that companies that are managing their safety are going to have a business advantage. Folks who aren’t are going to have issues. They’re going to have trouble finding insurance they can afford.” CEG