Workers' Compensation Costs Big Concern for Small Businesses

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Sept. 23, 2004--Thanks largely to rising health insurance costs, workers' compensation costs are a growing concern for small businesses.

According to a recent survey by the National Federation of Independent Business, workers' compensation ranks as the third biggest problem facing small firms today, with about a third of the respondents describing it as a critical problem, though 12% said it was "not a problem." It trailed only health insurance and the cost and availability of liability insurance. The last time the NFIB conducted the survey in 2001, workers' compensation ranked seventh when only 21% of those surveyed called it a critical problem.

The issue tends to be localized, because each state governs workers' compensation premiums differently. California is by far the hardest hit state where businesses paid an average of $6.37 per $100 of payroll at the end of 2003, compared to $2.30 in 1999, according to the Workers' Compensation Insurance Rating Bureau of California. Comparatively, the national average was $2.68 in 2003 and the second-highest rate was in Florida, where businesses paid $4.50.

The premiums charged are driven by the number of claims and the average claim size, which reflects the cost of medical treatment for job-related injuries, as well as litigation and administrative costs.

The continued rise in health care costs has in turn helped push workers' compensation costs upward. Since 2000, health insurance premiums have soared by 59%, according to the Kaiser Family Foundation.

Conversely, the number of nonfatal injuries and illnesses requiring days away from work reported to the Labor Department went down each year from 1992 to 2002, the last year with data available.

Matt Quinn contributes to the Wall Street Journal's corporate finance blog. He has also written extensively about banking and corporate finance for publications including Inc., American Banker, and Financial Week. He lives in Brooklyn, New York.