How to reduce your workers' compensation costs -- and make life better for your employees in the process. One company's experience

You don't need us to tell you workers' compensation expenses are skyrocketing. Employers' costs for these once-benign state programs ratcheted up 75% between 1984 and 1989. More recent official data aren't available, but the anecdotal evidence is plain enough to most company owners: workers' comp is out of control.

That was Janice Oatman's conclusion two years ago. Oatman handles all insurance matters for Frontier Enterprises, a restaurant-chain company in San Antonio, Tex. In 1990 she noticed that although her company's employees were experiencing fewer and less severe injuries, "the cost of the claims for medical expenses and settlements were suddenly going crazy -- sky high."

Frontier's insurance carrier, she concluded, wasn't monitoring injured workers or managing costs closely enough. And Frontier would end up paying for that mismanagement. The company's annual insurance premiums for workers' comp coverage had hovered around $500,000, thanks to Oatman's aggressive shopping among insurers, but the rising costs, she knew, portended giant rate hikes.

Frontier, with revenues of $28.5 million for the fiscal year that ended June 1992, is particularly sensitive to workers' comp claims. With two restaurant chains, its operations are both labor intensive and hazard filled. Most of its 600 full-time and 500 part-time employees work with knives, slicers, grills, broilers, and hot fats. They lift heavy trays and tread floors that are sometimes slick. Despite Frontier's solid safety program, those conditions were all too amply reflected on the company's income statement. Workers' comp costs had crept up to more than 5% of total payroll. That was too much.

Oatman decided on the most radical course of action available to her: to drop out of her state's workers' compensation program. (Opting out of a state program is extreme, and is possible only in Texas, New Jersey, and South Carolina.) It meant that the company would lose the protection of the state workers' compensation board and thus would be vulnerable to employee lawsuits.

But Frontier didn't "go bare" to increase its risk. So it took a fresh look at managing worker safety and medical care in order to reduce both the risks and costs of job-related injuries. Frontier's work-related injury plan has produced magnificent results. Wages and medical expenses related to on-the-job injuries totaled $156,300 last year, 70% below the $522,500 in claims costs during Frontier's last year as an insured company.

Because of state statutes, dropping out, as Frontier did, isn't possible for most companies. But about half the states will allow companies to self-insure -- the next best thing to being entirely on your own. That increasingly popular option means you still have to hew to your state's statutes, but you pay all claims yourself. Companies taking on that kind of risk are similar to Frontier -- they have a huge incentive to manage costs better.

Perhaps the most important step you can make, however, has less to do with whose jurisdiction you fall under than with how attentive you are to your workers' comp program. Any company -- insured, self-insured, or uninsured -- can make many of the changes Frontier instituted and realize notable savings.

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As Oatman recognized, the key to taming workers' comp costs is wresting back control from distant -- and often uninterested -- insurers, hospitals, and doctors. When an employer takes charge of the safety and treatment of its injured workers, two things happen. First, a bone-deep level of accountability begins to pervade its approach. Aside from the employee, no one cares quite as much as an employer whether multiple X rays are taken when one set will do or whether an injured worker's paycheck comes on time.

Employees, too, react very differently when they know that their company, not a faceless insurance company, is opening its wallet in their behalf. Fraudulent claims, which are wreaking havoc on many employers, fall dramatically when an employer gets actively involved in its injured workers' welfare. The bottom line: employer-controlled workers' comp plans make people feel that their company cares about them.

Here, then, based on Frontier's experience, is how you can go about reducing both injuries and workers' comp costs in your company.

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Emphasize Safety
Take a good look at your past workers' comp claims to figure out your most expensive and frequent types of injuries. If you're insured, eliminating frequent, minor injuries first should quickly reduce your carrier's administrative burden -- and your premium. For companies paying medical and payroll expenses out of pocket, such as Frontier, eliminating the most costly accidents is more important than reducing the frequency of all injuries.

At Frontier, slips and falls were the biggest problems because they are a common occurrence and could mean weeks away from work as well as a variety of medical tests and forms of treatment. Next on the list were back strains and cuts. By understanding which accidents it wanted most to prevent, Frontier was able to tailor its safety program accordingly.

Training. All new hires read Frontier's Safety Operations Manual, which includes an outline of the safety-training program, accident-reporting guidelines, and general safety procedures. Since it's easy to ignore a document, Frontier also has a trainer review the manual with each new hire. New workers also watch "A Sense of Safety," a 25-minute video that Frontier produced. Featuring Frontier employees, the film demonstrates proper work procedures such as lifting and knife handling.

The most important safety instruction, however, takes place on the job. Restaurant managers, assistant managers, and fellow employees, all of whom teach new employees how to use equipment, emphasize safe operations. Because slips and falls are Frontier's top priorities, all workers are emphatically instructed to mark spills with "caution" cones and to clean them up immediately. Your training doesn't have to be that elaborate to be effective, but it does have to be taken seriously.

Behavior. One key mistake many companies make in creating a safety program is focusing almost exclusively on the physical plant -- looking to see if there are spills on the floor, for example. Cleaning up spills is important, but changing employees' habits to eliminate spills in the first place will slash accident rates even more.

Changing behavior is hard, of course, but Frontier has found some safety "accessories" that help. It encourages all buspersons and food servers to wear back-support belts. The corsetlike belt does more than support employees' backs; its stays dig uncomfortably into their midsections if they lift by bending over rather than by using their legs. Similarly, food preparers must don protective gloves before using knives or slicers, and waiters and buspersons must wear rubber-soled shoes. For the most part, says Doug Igleheart, former associate manager of one of the restaurants, employees regard the paraphernalia as a help rather than a nuisance. "I've got buspeople who won't start their shift if they don't find their back brace hanging in its regular spot," he says.

Incentives. Both restaurant managers and workers have a financial motive to run a safe operation. Two of the 19 categories in the managers' bonus evaluations relate to safety. A store may also compete against the three or four other stores in its unit to win $500 -- which is divided among store employees -- in every 28-day accounting period. To enter the competition, stores must submit self-inspection, corrective-action, and accident reports. The store with the fewest serious injuries wins. An alternative would be to levy financial penalties -- the most straightforward would be to charge an operating unit for the cost of its workers' comp claims.

To instill safety consciousness throughout the company, get employees involved as leaders of their peer groups. When Oatman redesigned Frontier's prevention program, she had store managers designate safety monitors at each restaurant, but she found they didn't effectively influence the other employees. Now she plans to replace monitors with safety committees comprising employees from each area of the restaurant. To underscore the importance of this activity, Frontier will pay the hourly employees for the additional time they spend on committee affairs.

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Design a Plan
Frontier's substitute for the Texas workers' comp plan is where it lays the groundwork for major cost savings on actual injuries. By design, the plan is both more generous and more restrictive than the state program. For example, Frontier pays 75% of an injured worker's wages and begins paying after three days of missed work. The state mandates payment of between 70% and 75% of wages (it paid even less -- 67% of wages -- when Frontier began its plan) and doesn't start payments until seven days of work have been missed. Both the state and Frontier pay all medical expenses for work-related injuries.

To be covered, however, Frontier workers must agree to certain conditions. Together, three conditions produce huge cost savings: employees agree to report accidents immediately, go to the physician or hospital Frontier specifies, and submit a written accident report within 48 hours. Those requirements enable Frontier to keep track of and communicate with injured employees, as well as to establish a good, ongoing relationship with the medical folk. As simple as those activities sound, they are the foundation for a truly cost-conscious approach to workers' compensation.

Even if you use an insurance company to cover workers' comp, you can institute those provisions to some degree. For example, about half the states will let you steer workers to a medical provider that you choose. If you're in a state that doesn't, you can still strongly suggest that employees go to the doctors you specify. Addtemps, a Houston company that is still insured and therefore part of Texas's state plan, immediately sends all injured workers to one clinic to be treated and assessed. Employees may subsequently go to a doctor of their choice, but in the meantime Addtemps can be satisfied that an employee's medical treatment is appropriate and that the company has protected itself.

Other important provisions in Frontier's plan: the company will not pay out benefits if the injury takes place while a worker is intoxicated, willfully trying to hurt someone, or engaged in horseplay. Those conditions conform to workers' comp state laws nationwide, so any company may impose similar requirements -- though the burden of proving intoxication, say, is on the employer. To prevent workplace injuries from coming back to haunt the company many years down the road, Frontier's plan requires workers who are treated, recovered, and back at work to sign a release of further liability. New employees are asked to sign a statement saying they have received a copy of Frontier's program, have been given a chance to ask questions about it, and have kept a copy for their personal records.

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Respond to Accidents

Here's where you can make a huge dent in excessive claims and fraud. When Frontier workers are hurt, their managers take them off the job and arrange immediate transportation to the Occupational Medical Clinic, a nearby practice with six doctors on staff that Frontier uses for all injuries. Then the manager alerts the San Antonio -- based Augustine & Associates, the company that processes Frontier's claims, which immediately begins planning employees' medical care with the clinic. As long as employees are out of work, their managers stay in touch with them.

The results of these simple steps? First, workers get the message that their employer cares about them. "The biggest source of excess costs is indifferent responses on the part of employers," says Michael Pritula, a principal at McKinsey & Co., a management-consulting firm in New York City. Second, through Augustine, Frontier is able to manage medical costs as they're incurred. Insurance companies rarely provide that kind of case management. The average workers' comp claim doesn't even reach an insurer until between 14 and 21 days after the injury. Finally, Frontier gets the vital feedback it needs to prevent future accidents. "We encourage employees to report all incidents, whether or not those incidents require medical care," Oatman explains. "We want to know about them because we want to know what is causing accidents."

Even as an insured company you can replicate Frontier's alert, take-charge response. In addition to physically taking an employee to your preferred clinic, you can stay in touch with the injured worker -- particularly before and after medical appointments -- and arrange to have your insurer send the employee's paycheck to you so you can hand-deliver it. And you should report the injury to your insurer as soon as possible so there will be no delay in its issuing your worker's paycheck.

Another cost-cutting strategy for insured companies concerns small injuries that require no missed work. Many states will allow you to pay the cost of such injuries out of pocket, without reporting them to either the state or your insurer. The advantage, of course, is that these accidents aren't factored into your "experience modifier," the calculation that determines next year's premiums. A word of warning: even if state law doesn't require it, you should register such injuries with your insurer on a "for reporting purposes only" basis. That way you're protected in case a very large claim from a minor incident pops up several years later.

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Form a Relationship with Your Medical Services
Supplier
Frontier sends all workers hurt during business hours to the Occupational Medical Clinic. Employees injured at work in the evening or over the weekend go to Humana Hospital's emergency room and receive follow-up care from the Occupational Clinic. There are several advantages to directing all injured workers to the same medical facility. For starters, you can often negotiate a discount -- usually around 15%. That's true even for small companies. Also, you can demand -- and get -- an un-usual level of cooperation in meeting your specific needs. For example, Lupe Gomez, an occupational-medicine coordinator at Humana, wears a beeper so she can be alerted when a Frontier employee is on the way to the emergency room. She not only smooths admittance but also follows each in-jured employee's case day by day, arranging transportation to doctors' appointments and checking that the employee shows up for them.

Finally, when you work with the same group of people all the time, it's easier to cut medical costs without compromising care. The simplest way to do that: get injured employees back to work as fast as possible. Of all the costs associated with a workplace injury, the largest is not the medical care or insurance premiums -- it's the wages paid to an absent worker.

Both Humana and the Occupational Clinic work closely with Evelyn Heckard, Frontier's claims adjuster at Augustine, to speed the treatment time whenever possible. They have the clout to get injured Frontier workers in to see an orthopedic specialist within a day or two, for example, instead of their having to wait the usual three to four weeks. If the injury is minor -- say, a fall that results in a small bruise -- the doctor can sign the necessary return-to-work order on the spot.

Other cost savings come from pure common sense. If a Frontier worker arrives at Humana's emergency room with a possible broken finger, the hospital will X-ray his or her hand. To avoid having the Occupational Clinic take its own X rays -- standard practice in the medical community -- Gomez sends over Humana's film.

In addition to their daily vigilance in caring for Frontier workers, the two medical providers prepare regular comprehensive reports for both Augustine and Frontier. Those written communications -- which Humana produces daily -- are vital for spotting patterns that wouldn't be obvious otherwise.

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Work at a Relationship with Your Claims Adjuster
Ideally, your claims handler should be the maestro who makes the state, the doctors, the worker, and its own company (the insurer) move in perfect harmony. Given the difficulty of the task, the only way that can possibly happen is if you work hard at building your relationship with the claims handler.

Small companies in particular need to make themselves heard frequently. Periodically, ask for a "loss run," which will give you a history of claims, reserves (estimates of the total cost of an injury over time), and payments. Talk over and develop an active strategy for handling every open claim. Also, review the reserves with your claims adjuster. Since reserves influence future premiums, rather than actual dollars paid out, you'll want to understand, or possibly challenge, the adjuster's rationale in setting them. If your company's operations cover a wide range of activities, you may want to audit your insurer's record of your job classifications. While he was working for Automated Temporary Service, in Bakersfield, Calif., for example, consultant Joe Ruiz found an incorrect job classification code that netted the company $30,000. If you are self-insured, you can shop for the best of this kind of service, as Frontier's Oatman did. Independent claims adjusters such as Augustine charge between 10% and 15% of annual claims for their services. Some "third-party administrators," as they are also known, will quote you a fee per claim -- such as $100 for each medical-only claim and $500 for a lost-time claim. Because constant communication is a key component of your relationship, it makes sense to look for a local adjuster.

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Provide Light-Duty Work
After an injured employee is away from work for a while, something happens. Some call it "erosion of the work ethic"; others call it laziness. Either way, the incidence of fraud and malingering increases. The single most effective change you can make to slash workers' comp costs is to institute an early-return-to-work program, in which recovering workers go back to work with their job responsibilities temporarily altered to fit their current capability. In Frontier's so-called light-duty program, a cook with a burned arm, for example, could not return to his or her regular job because burns are supposed to be kept away from heat. So Frontier would temporarily place the employee as a cashier or greeter until the arm healed. Getting people back to work early obviously saves on wages, and some experts believe it actually makes people recover faster.

Harry Featherstone, chief executive of Will-Burt, an industrial manufacturer in Orville, Ohio, credits an early-return-to-work program with cutting his workers' comp claims dramatically. In 1985 he persuaded a plant worker who had been declared totally and permanently disabled by a back injury to work for an hour a day on an office project. Featherstone's interest was purely personal -- he just wanted to see the man involved in life again. Gradually, the employee worked his way up to a regular workday, applied for a sales job within the company, and is now, Featherstone says, "one of the best salespeople we've ever had." That experience spawned a decision. Every hurt worker, whether injured at work or at home, would be drawn back into Will-Burt. Featherstone says his workers' comp claims dropped from around $175,000 per year to $20,000 in 1990, and to $7,200 in 1991; the projection for 1992 claims is $3,000.

There are other ways to show your interest as well. Yeoman Services, in Wilsonville, Oreg., is a private company the Associated General Contractors of America has hired to further train or educate member companies' workers who are too badly hurt to return to work immediately. Construction workers from a variety of contracting companies are paid regular wages while they learn about safety, punctuality, workplace attitude, and first aid at Yeoman's day-long classes. "We believe we can almost eliminate all time-loss claims, except the most severe," declares Steve Cooper, Yeoman's president.

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Reevaluate Your Policy
If your revamped safety and injury policies do what they're supposed to, losses will begin to fall. That's when you should begin shopping for a new insurance policy. If you're in the state-assigned risk pool (comprising companies covered by a state-managed insurance plan because private carriers won't take them), your goal is to get into the voluntary market, because you'll have more options there. If you're too small to be insurable, search for groups of small companies that have banded together to self-insure. You can find out about such groups from trade associations, health-care providers, and large carriers.

If you're already in the voluntary market, consider two strategies to reduce premium costs. The first is getting a deductible. Some 20 states now allow carriers to offer plans with deductibles. At first blush those plans make tremendous sense. You save money on the premiums because you're shouldering a portion of the risk. And, in fact, that's exactly how they can work. But probe deeper. Thirteen of those 20 states require insurance carriers to count all the injuries paid for by the company -- even those under the deductible ceiling -- in calculating the company's experience modifier. In those cases, the insurer is essentially penalizing you for claims it didn't have to pay.

The second cost-cutting device to evaluate is a retroactive plan, in which each year's premium is subject to revision once the year's costs are clear. Thus, if your claims come in lower than estimated, you could be due a refund under a retroactive policy. On the other hand, you might owe the carrier money if you had a year full of banana peels. The appeal of this alternative is that it is responsive to a company's actual efforts to reduce workers' injuries.

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Oatman and Augustine's Faye Chapman, former claims adjuster for Frontier, had a bad case of the jitters when the company decided to drop out of the state workers' comp program. "When we went into it, our biggest concern was, What about that claim where the employee takes you to court?" Oatman recalls. "But if you take care of your employees, if you follow your plan documents and are not negligent, you don't have much to worry about." Actually, you may have less to worry about than before. Here are the results of the workers' comp transformation at Frontier.

During 1989-90, its last year as an insured company, Frontier's premiums were $470,000, and its claims totaled $522,500. Based on market trends and Frontier's accident experience, John Augustine, president of Augustine & Associates, estimates that the company's premiums would have been $798,800 for the year that ended June 1992 if it had continued to be insured.

Instead, Frontier's medical and lost-wages costs came to $156,300. It also had other expenses to add in. Augustine's claims-management services came to $24,500 for the year. Frontier also bought a liability policy -- to cover any truly catastrophic injuries -- providing coverage of between $250,000 and $5 million. The premium for that was $89,900. In all, Frontier's new self-pay program came to $270,700 -- about a third of what it would be shelling out as an insured company.

Of course, there's no mystery to Frontier's success. The current workers' comp system robs employers of their natural initiative to provide for their workers while curtailing excessive medical costs. If a company can manage to reintroduce a mind-set of accountability, whether by becoming self-insured, switching to a retroactive policy, instituting a deductible, or mustering sheer determination, it will discover that workers' comp isn't so untamable after all. Frontier's experience, in fact, proves just how meek a beast it can be.