For most businesses, workers’ compensation represents a significant concern and expenditure. Despite the fact that medical inflation has driven up the cost of claims, many employers have yet to experience these increases in their premiums due to a prolonged soft workers’ compensation market. It appears that is about to change.

For the first three quarters of 2011, the combined ratio for all carriers writing workers’ compensation insurance is over 120 percent. This means that for every $1 of premium paid, the insurance carriers have paid out over $1.20 in claims and expenses. It is not hard to see that this trend cannot continue and that workers’ compensation premiums will rise in the next few years, particularly for those employers with poor claims experience. 

The cost of claims represents approximately 70 percent of every workers’ compensation dollar spent. It stands to reason then, that if your business can control the likelihood of a claim occurring as well as manage the cost of a claim once it has occurred, your business will be able to better control the total cost of your workers’ compensation program. We call it “controlling the controllables” and there are a few basic steps you can take that can have a tremendous impact on your workers’ compensation claims.

Most employers have some kind of safety program in place that is focused on providing employees with a safe work environment; let’s call that Workers’ Compensation 1.0. While this is certainly one important aspect of a comprehensive program, it is not a comprehensive approach and leaves many controllables still uncontrolled. This single approach fails to address pre-existing injuries that are inherited in the hiring process and an aggressive approach to rehabilitation and accelerated return to work.

If executed properly, the hiring process provides your business with its first meaningful opportunity to control claims. You can go a long way towards improving your workers’ compensation program by not hiring your next workers’ compensation claim. Studies suggest more than 90 percent of new hires enter the workforce with some physical impairment and in many cases that impairment prevents them from performing the essential functions of the job.
Further, even if an employee with a pre-existing impairment is able to perform the essential functions of the job it is important to document any pre-existing conditions in the event the employee re-injures that body part while on the job. In most states, you are only required to return an injured employee back to their physical condition before the work related injury occurred. Hence, if an employee had a documented 30 percent functional impairment to their back when you hired them and a future injury results in 40 percent impairment, you would only be responsible for the additional 10 percent impairment. This is what we mean by “controlling the controllables.” If your current plan does not allow you to document pre-existing impairment, you will almost certainly pay for the entire 40 percent impairment. The difference in the cost of this claim could easily be in the tens of thousands of dollars.

Sounds simple doesn’t it? So how do you know if a person is physically able to carry out the functions of the job you are hiring them for?

First, you must define the essential functions and physical demands of the job by conducting a comprehensive Job Site Evaluation. If the job requires an employee to routinely manipulate and lift forty pound metal sheets then you need to know that fact and establish it as a requirement necessary for the job. The reality is that you can best control the likelihood of a claim by knowing precisely what the physical demands of the job require. 

Second, you need to conduct effective pre-hire, post-offer screening that goes beyond the standard physical. Most physicals measure a prospective employees’ blood pressure and heart rate, and require that person to answer a generic medical questionnaire by checking “yes” or “no.” There is no actual testing conducted to determine if your prospective employee can move and manipulate the forty pound metal sheet mentioned above.

Through a proper Functional Capacity Evaluation, you can accurately determine the ability of all new hires to carry out the physical demands of the job. Again, if the job you hope to fill requires your new employee to lift that forty pound metal sheet into and out of a punch press, then they need to be tested lifting a forty pound sheet of metal to a height that represents the height of that press. If that process is repeated four times per hour, then they need to be screened lifting that panel four times per hour before they qualify for the job. The Equal Employment Opportunity Commission (EEOC) states that “An employer is not required to hire or retain an individual who cannot perform the ‘essential functions’ of a job.” EEOC TAM 4.4.

By adding a comprehensive pre-hire, post-offer evaluation process to your existing safety program, you can both lower the risk of injuring your employees and dramatically reduce your workers’ compensation costs. The approach is a win-win for you and your employees and the results are dramatic.

So, does it work? The following graph represents the impact one large Midwest employer had after implementing a functional employment testing program. 

With higher workers’ compensation premiums on the way, now is the time to take your safety and claims management program from 1.0 to 4.0.

Haake Insurance Companies, A Marsh & McLennan Agency, LLC Company is the leader in insurance solutions. Our manufacturing niche practice consists of more than 500 employees whose sole job is to understand and offer meaningful solutions to our clients with manufacturing exposures. John Kerr is the author of this article and part of the manufacturing risk practice. For more information about this article, contact John Kerr by e-mail at John.Kerr@Haakeins.com or at (800) 651-1999.