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

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