Friday, February 27, 2009

The Cost of Workers' Compensation

How much does workers’ compensation cost the economy?

The greatest cost of work-related injury and illness is paid by workers and their families…period. There is no appropriate way to quantify the human suffering and loss, burden of disease, and opportunities lost to society because of preventable workplace incidents and exposures.

A lesser cost is quantifiable. The dollars and cents that employers (and in some jurisdictions, workers) pay for workers’ compensation coverage provide a relative measure of the cost of preventable injury to the other costs of production. There are two ways to look at these costs. The first is the cost of the workers’ compensation insurance itself. The second is the cost of the actual benefits paid (and the cost of administration for making those payments). The former is reflects current incurred costs while the latter estimates the actual dollars expended in a year.

In a recent report from the National Academy of Social Insurance (NASI.ORG), the total employer cost for workers’ compensation for the year 2006 were pegged at $70.5 billion. In Canada for calendar year 2006, premium and other assessment revenue from employers (including those self insured but administered by the workers’ compensation system) topped $8.5 billion. In Australia, a report estimated workers’ comp premiums in that country were $7.5 billion in 2000-1.

These are not trivial sums. Yet, it would be wrong to stop there in estimating the costs. There are replacement costs employers must pay for workers who are injured, investigation costs, lost productivity of other workers… the list goes on and on. And all these costs begin in almost every case with a preventable injury. We are all worse off because of work-related injury, illness and disease.

How much does workers’ compensation cost the economy? The answer is simple: too much both in dollar terms and, more importantly, in lives and dreams and opportunities for workers, families and society.

Wednesday, February 18, 2009

Administrative Costs 2: How much is reasonable?

If top charities spend about 30% on administration, how much should a workers' compensation system pay? Part of the answer depends on what you include as administrative costs. One way to look at this is to ask a simple question: How much money goes directly to injured workers (or you could include costs for direct services to injured workers for medical bills, prescriptions, diagnostics, and surgery)? Although simplistic, you can assume everything else is an administration cost.

Australia and New Zealand contribute to a combined report that attempts to answer these questions. The Comparative Performance Monitoring 2005-2006, published February 2008, (p. 24) states the following:

“The indicator shows that in 2005–06, compensation paid direct to the worker accounted for just over half of all scheme expenditure Generally the privately underwritten schemes have higher proportional expenditure on administrative costs and lower direct payments. This is due to the profit margins built into the administration costs.”

These results cover only direct payments. If you add back in the payments for medical and rehabilitation services paid on the workers’ behalf, the total administration cost falls to an average of about 26% for Australia (New South Wales and Victoria are a little higher at about 29% and New Zealand with its economies of scope and scale from an overall accident compensation system come in at about 23%). WorkSafeBC is in the same range at between 26 and 27% in recent years. So, these public workers’ comp systems have relatively low costs.

Another interesting way to look at this can be derived from data from the U.S. compiled by the National Academy of Social Insurance (NASI). The US is dominated by private insurance but these data include state funds which have about a quarter of the market. Based on NASI’s publication Workers’ Compensation: Benefits, Coverage and Costs, 2006 [published August 2008], I derived the following:

On average, 38% of employer costs for workers’ compensation insurance are paid out for administration and costs other than payments to workers:

Average employer cost: $1.58 per $100 wages

Average benefits to workers: $0.99 per $100 wages

Average Admin &other costs: $0.57 per $100 wages

Now, there is a mismatch here. The employer costs are current year and the benefits being paid to workers are mostly related to injuries that occurred in previous years. The ratio, however, is fairly consistent.

Using WorkSafeBC data, Administration Costs work out to about $0.33 per $100 of assessable payroll. Note, Assessable Payroll is a similar but not exact match to $100 wages figure used by NASI. The Association of Workers’ Compensation Boards of Canada (AWCBC) uses this measure. Between 2003 and 2007, Canadian workers’ comp systems averaged between $0.35 and $0.31 per $100 assessable payroll for administration.

So, overall, Canadian workers’ compensation systems have relatively low administration costs. On a ‘percentage of total expenditures’ basis, the ratios of administration costs to other expenditures is as low or lower than the administrative costs for many charities and lower than the average for U.S. workers’ compensation

Wednesday, February 11, 2009

Administrative Costs 1: Lower than Charity?

I was asked the other day, why workers' compensation system have such large administrative costs. The questioner added, "Handing out money can't be that expensive". Of course, I thought, even charities have to spend administrative dollars 'give' money away...but the question made me wonder just how much administration costs ought to be for a charity or a workers' compensation system.

Like I said, even charities have costs to do their important work. Those costs may include a lot of items. To administer donations charities need staff; staff need a place to work, equipment to work with and systems to support them. And if you are a charity and have staff, you need to recruit, train, and retain them. And you will need more people to account for the money, develop programs, and manage policies.

The same is true for a workers' compensation system. Whether you are a public exclusive state fund, a self-insured/self-administered firm or a private insurer it costs money to make certain the right injured workers get the right benefits in the right time frame. But what proportion of expenditures ought to go to administration?

When I was asked this the other day, I decided to look at five prominent charities in Canada and see what their costs were. Most of us are familiar with charities like World Vision, Canadian Diabetes Association, Ducks Unlimited, Canadian Cancer Societies and the Heart and Stroke Foundations in various provinces. These are some of the best and they do fabulous work. Together, they spend about three quarters of a billion dollars (2007/2008). I obtained the tax returns for them so could actually begin to figure this out for myself.

What should one count as administration? This is not a simple question. For this exercise, however, I defined administrative costs to include the following:

  • Travel and vehicle,

  • Interest and bank charges

  • Licenses, memberships, and dues

  • Office supplies and expenses

  • Occupancy costs [office rent]

  • Professional and consulting fees, and

  • Salaries, wages, benefits, and honoraria

Everything else, in my view, can be defined and defended as core benefits distributed by the program. This would include advertising, which is focused on changing attitudes, beliefs and ultimately behaviours in favour of or in congruence with the charities goals. The range was from 19% to 49% but the weighted average for these five charities was 30.6% of expenditures going towards administrative costs as defined above.

If roughly 30% of total expenditures is a reasonable administrative load for top charities, how would workers' compensation systems compare? That will be the topic of my next post.