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.
Friday, February 27, 2009
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.
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.
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.
Thursday, January 22, 2009
Self Insurance and Workers' Compensation
I read the following headline recently: "North Dakota Weighs Letting Firms Self-Insure for Workers' Compensation" (see Insurance Journal, Midwest News, January 20, 2009). The article briefly outlined an initiative that would allow self insurance and alluded to various other states that are monopoly providers of workers' compensation coverage. Unfortunately, the article does not define self insurance or the various forms of workers' comp insurance arrangements.
A self-insured firm in a workers' compensation context, is one that carries the risk of work-related injury, illness and disease to its employees without pooling or sharing that risk with other employers. For individual firms with enough employees and a stable injury rate, the risk can be quantifiable and, over time, the costs can be predictable.
Self insurance can be with or without self administration. Self-administered firms come in a range of 'flavours' along a continuum between the following extremes:
It makes little sense for small or medium sized firms to self insure. Work-related injuries are relatively rare and serious injuries with high costs are thankfully even rarer. Unfortunately, one rare but costly work-related injury could bankrupt a small firm. As with other risks of rare events (fire, flood, third party liability), it makes sense for most firms to be insured. And since administering workers' compensation claims is not the core business of most firms, self insurance is rarely considered even where it is offered.
Allowing self insurance where it does not exist or expanding it can create a lot of additional and unanticipated costs. There are monitoring costs by the insurance regulator, the question of appeals or dispute resolution and the assurance, bond or other security the self-insured firm normally has to post with the state to guarantee payments should the firm be unable to do so. This last point was unthinkable a few years ago but the viability of once blue-chip firms is a painfully real issue in light of the current economic crisis.
Allowing or expanding self insurance has other consequences for the remaining insured parties or the state. On what basis should the costs of workers' compensation research, oversight and appeals be shared by self-insured firms? Removing firms from existing pools will also have an effect on the remaining firms in the pool. Credibility from an actuarial point of view may be lost and wider swings in premium rates are more likely if the largest firms in a rate group are removed to become self insured.
The article also points out that North Dakota is one of only four exclusive state funds in the US. It should be noted that exclusive state funds are the norm in Canada where each province has made its workers' compensation agency the sole provider of workers' compensation insurance. In a sense, the federal government in the US is also an exclusive state fund providing the insurance administration for federal government departments. (And in some sense, the federal government departments are like self-insured firms contracting with the exclusive insurer for administration).
A few years ago, Best Practices LLP produced a report entitled "Excellence in Workers' Compensation Program Administration". It focuses on very large self insured organizations and how they structure the administration of their programs. Interestingly, the costs for administration vary widely in the surveyed population. More importantly, the costs of the best performing firms appear similar to or higher than those of several exclusive state funds in Canada and the US.
Self insurance with Self Administration may make sense particularly for very large multinational firms if there are no other alternatives. That said, many such firms already operate in states, provinces or countries that do not allow self insurance so the insurance arrangement is not a barrier to locating operations in a particular market.
Self insurance without Self Administration has its place but it also has costs and risks. Any jurisdiction considering introducing or expanding the number of self insured firms in its jurisdiction needs to be aware of these.
A self-insured firm in a workers' compensation context, is one that carries the risk of work-related injury, illness and disease to its employees without pooling or sharing that risk with other employers. For individual firms with enough employees and a stable injury rate, the risk can be quantifiable and, over time, the costs can be predictable.
Self insurance can be with or without self administration. Self-administered firms come in a range of 'flavours' along a continuum between the following extremes:
- all aspects of claims management and rehabilitation handled internally for their own employees
- all (or almost all) of the administration contracted out to a third party.
It makes little sense for small or medium sized firms to self insure. Work-related injuries are relatively rare and serious injuries with high costs are thankfully even rarer. Unfortunately, one rare but costly work-related injury could bankrupt a small firm. As with other risks of rare events (fire, flood, third party liability), it makes sense for most firms to be insured. And since administering workers' compensation claims is not the core business of most firms, self insurance is rarely considered even where it is offered.
Allowing self insurance where it does not exist or expanding it can create a lot of additional and unanticipated costs. There are monitoring costs by the insurance regulator, the question of appeals or dispute resolution and the assurance, bond or other security the self-insured firm normally has to post with the state to guarantee payments should the firm be unable to do so. This last point was unthinkable a few years ago but the viability of once blue-chip firms is a painfully real issue in light of the current economic crisis.
Allowing or expanding self insurance has other consequences for the remaining insured parties or the state. On what basis should the costs of workers' compensation research, oversight and appeals be shared by self-insured firms? Removing firms from existing pools will also have an effect on the remaining firms in the pool. Credibility from an actuarial point of view may be lost and wider swings in premium rates are more likely if the largest firms in a rate group are removed to become self insured.
The article also points out that North Dakota is one of only four exclusive state funds in the US. It should be noted that exclusive state funds are the norm in Canada where each province has made its workers' compensation agency the sole provider of workers' compensation insurance. In a sense, the federal government in the US is also an exclusive state fund providing the insurance administration for federal government departments. (And in some sense, the federal government departments are like self-insured firms contracting with the exclusive insurer for administration).
A few years ago, Best Practices LLP produced a report entitled "Excellence in Workers' Compensation Program Administration". It focuses on very large self insured organizations and how they structure the administration of their programs. Interestingly, the costs for administration vary widely in the surveyed population. More importantly, the costs of the best performing firms appear similar to or higher than those of several exclusive state funds in Canada and the US.
Self insurance with Self Administration may make sense particularly for very large multinational firms if there are no other alternatives. That said, many such firms already operate in states, provinces or countries that do not allow self insurance so the insurance arrangement is not a barrier to locating operations in a particular market.
Self insurance without Self Administration has its place but it also has costs and risks. Any jurisdiction considering introducing or expanding the number of self insured firms in its jurisdiction needs to be aware of these.
Thursday, January 15, 2009
How much of the Cancer Burden is Work Related?
Everyone knows someone with cancer. About 4 in every 10 of us will be diagnosed with a cancer in our lifetimes regardless of gender. How much of this has to do with the work we do? Estimates vary. The Health and Safety Executive in Britain quotes 4% (range 2% to 8%). A Queensland publication suggests 11% of cancers in males and 2% in females are work related. Whatever the true level, the recorded number of cases that present as claims for workers' compensation are consistently low and those allowed are much lower.
Since the causes of cancer are many, the attribution of work being the cuase is difficult. On a population basis, statistics and very large sample sizes can attribute much or most of the cause to occupation, materials or agents in the workplace, or some other work-related exposure. Unfortunately, this is much harder to do on an individual basis, yet that is what workers' comp systems are asked to do.
The standard of proof on an individual claim is often very high. Some jurisdictions require work to be 'the predominant cause' while others set the bar lower with work being of 'causitive significance'. And the burden of proof often rests with a worker who may have imperfect information on exposures, have other risk factors for a particular cancer, or may have already succumbed to the disease before a claim is even decided.
To overcome these issues, many workers' compensation jurisdictions create schedules or include provisions in their legislation (often called 'presumptions'). Rather than requiring each worker and adjudicator to labour over a particular set of facts, the existance of a presumption allows the claim to be adjudicated quickly. A diagnosis of Asbesosis and Mesothelioma may be presumed to be work-related if associated with a history of work exposure to asbestos, for example.
As the science around the 'work-relatedness' of a particular cancer develops, authorities like IARC, the International Agency for Research on Cancer, provide guidance that may help prevent future work-related cancers and increase vigilance regarding cancer to those exposed to the cuasative agent. IARC uses a four-level classifcation system regaring carcinogenicity to humans with Group 1 representing those agents that are carcinogenic.
About a year ago, IARC published a mongraph that found the following:
Since the causes of cancer are many, the attribution of work being the cuase is difficult. On a population basis, statistics and very large sample sizes can attribute much or most of the cause to occupation, materials or agents in the workplace, or some other work-related exposure. Unfortunately, this is much harder to do on an individual basis, yet that is what workers' comp systems are asked to do.
The standard of proof on an individual claim is often very high. Some jurisdictions require work to be 'the predominant cause' while others set the bar lower with work being of 'causitive significance'. And the burden of proof often rests with a worker who may have imperfect information on exposures, have other risk factors for a particular cancer, or may have already succumbed to the disease before a claim is even decided.
To overcome these issues, many workers' compensation jurisdictions create schedules or include provisions in their legislation (often called 'presumptions'). Rather than requiring each worker and adjudicator to labour over a particular set of facts, the existance of a presumption allows the claim to be adjudicated quickly. A diagnosis of Asbesosis and Mesothelioma may be presumed to be work-related if associated with a history of work exposure to asbestos, for example.
As the science around the 'work-relatedness' of a particular cancer develops, authorities like IARC, the International Agency for Research on Cancer, provide guidance that may help prevent future work-related cancers and increase vigilance regarding cancer to those exposed to the cuasative agent. IARC uses a four-level classifcation system regaring carcinogenicity to humans with Group 1 representing those agents that are carcinogenic.
About a year ago, IARC published a mongraph that found the following:
- Occupational exposure as a painter is carcinogenic to humans (Group 1)
- Shiftwork that involves circadian disruption is probably carcinogenic to humans (Group 2A).
- Occupational exposure as a firefighter is possibly carcinogenic to humans (Group 2B).
How ought workers' compensation/prevention agencies react to this information? The compenstion side will always be difficult and will ultimately require each case to be determined on its own merits. The designation of exposure to a substance, occupation or other agent as a Group 1 carcinogen may assist in claim decision-making. For all Group 1 and 2 categories, prevention is high priority. Identification of those at risk may be straightforward (as it is in these examples where occupations or shiftwork are identified) but the next task is to reach the workplaces where these carcinogens are present. How to do that is a subject I would like to hear from you about? Feel free to email me or make a post!
Sunday, January 11, 2009
Workers' Compensation and Recession
The current economic situation is having a significant impact on workers' compensation systems as well as the workers and employers they serve. The obvious impacts are straightforward:
In both union and non-union firms, the first to be laid off during an economic contraction are often new workers--workers who tend to be young. We know that injury rates (for males, at least) generally decline with age. Younger workers are more likely to be injured than older workers but older workers are more likely to be off for longer periods of time. This makes sense since older bodies take longer to heal from similar injuries and older individuals often have co-morbidities--conditions (diabetes, obesity, high blood pressure, etc.) that may prolong recovery.
Despite the bad news, it is important to keep focused on the task and mandate of workers' compensation. Even as unemployment rises, the vast majority of those in the labour force are still employed. They continue to need the services of prevention, compensation and rehabilitation organizations.
Economic cycles will ebb and flow; work-related injuries may occur at any point in that cycle and last a lifetime ... or end one. Workers' compensation systems must be vigilant, responsive and committed to their mandate throughout economic booms and recessions.
- fewer people working means fewer injuries and claims
- lower revenue due to lower payrolls and more business failures
- fewer jobs to return to adding pressure to claim duration
In both union and non-union firms, the first to be laid off during an economic contraction are often new workers--workers who tend to be young. We know that injury rates (for males, at least) generally decline with age. Younger workers are more likely to be injured than older workers but older workers are more likely to be off for longer periods of time. This makes sense since older bodies take longer to heal from similar injuries and older individuals often have co-morbidities--conditions (diabetes, obesity, high blood pressure, etc.) that may prolong recovery.
Despite the bad news, it is important to keep focused on the task and mandate of workers' compensation. Even as unemployment rises, the vast majority of those in the labour force are still employed. They continue to need the services of prevention, compensation and rehabilitation organizations.
Economic cycles will ebb and flow; work-related injuries may occur at any point in that cycle and last a lifetime ... or end one. Workers' compensation systems must be vigilant, responsive and committed to their mandate throughout economic booms and recessions.
Thursday, January 8, 2009
Workers' Comp and Canadian 'Medicare' Post 2
One of the key features of the Canadian healthcare system is that it is essentially a single payer system. Insured health services must only be paid by the provincial health plan. Payments by others are not allowed and can result in penalties in the form of decreased transfers to the province where such payments are permitted. As a consequence, firms outside the scope of coverage of workers’ compensation are not permitted to pay for insured health services for their employees (as long as those employees are insured persons under the CHA). As pointed out by the recent Committee of Review report in Saskatchewan, this creates a situation where taxpayers are subsidizing the cost of work-related injuries for those industries and occupations not within the scope of coverage of workers’ compensation. For provinces such as BC where more than 93% of the employed labour force is covered by workers’ compensation, such subsidies are rare and limited primarily to sole proprietors, partners and independent operators.
Given BC’s high coverage ratio, the operational consequence of the legal framework means those with work-related injuries are provided the health services they need without the taxpayer having to bear the cost of subsidizing the industries that gave rise to them
Given BC’s high coverage ratio, the operational consequence of the legal framework means those with work-related injuries are provided the health services they need without the taxpayer having to bear the cost of subsidizing the industries that gave rise to them
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