Managing Your Workers’ Compensation Costs

Joe was hardly an ideal worker. He had been laid off five times in four months. Shortly after starting a new warehouse job, he lost control of a forklift and drove it off the loading dock. His boss told him that he’d have to withhold 10% of his wages to pay for $5000 in repairs. “What a relief!” exclaimed Joe. “I’ve finally got job security!”

Unsafe employees can really impact your bottom line through production and equipment losses, retraining, and workers’ compensation costs for injured employees.

In Arizona, workers’ compensation insurance is required for all companies with one or more company employees, whether those workers are part- or full-time, minors, aliens or family members. This insurance is not required for contract workers, casual workers or workers not part of the employer’s usual business. Note: Uninsured employers can be assessed a first-time $1000 penalty for failure to provide insurance for its employees. The amount of the fine can increase over time for repeat offenses.

The insurance is designed to pay for the medical costs and compensation for lost wages due to workplace injuries. According to the Arizona Corporation Commission, “Workers’ Compensation is a ‘no-fault’ system in which you (the injured worker) receive medical and compensation benefits no matter who caused the job-related accident.” There are some exceptions, however. For example, an employee is not entitled to workers’ compensation benefits for injuries that are “purposely self-inflicted.” For more information about these requirements, contract the Arizona Corporation Commission or your insurance carrier.

The cost of workers’ compensation insurance is based on several factors, including the number of employees, payroll, type of work (risk) involved, and a number of other things. The calculations are based on a system of worker classification established by the National Council on Compensation Insurance (NCCI). Almost all states use this system. Note: Mis-calculation of your employees can impact your workers’ compensation costs, so make sure your employees are property classified.

Once your basic insurance rate is established, another factor comes into play. This is the “Experience Modification Factor” or E-Mod. The E-Mod looks at the cost of your workers’ compensation claims over a previous three-year period and compares it to similar industries, as established by NCCI. The average for your industry is 1.0. If your claims have been less than the industry average, your E-Mod will be <1.0. If you have had higher than average claims, your E-Mod will be >1.0.

The E-Mod directly impacts your insurance premium because your basic insurance rate is multiplied by your E-Mod. For example, let’s compare two identical companies. Company A does a good job of reducing injuries and keeping workers’ compensation claims down. Company B has more injuries and higher related costs.

Basic Insurance Rate $100,000 $100,000
Experience Modifier (E-Mod) 0.8 1.2
Modified Premium $80,000 $120,000



As you can see, reducing workers’ compensation claims will reduce your insurance premiums. There are several ways to do this:

  • Early-Return-To-Work (ERTW). There are two basic types of claims, Medical-Only and Indemnity or Lost Time. Medical-only claims are just that — claims involving medical costs without lost time. Indemnity claims are claims in which the injured employee has lost time from work. The insurance company pays the injured employee for a percentage of the time lost. The cost for lost time is usually much more than the medical costs. When the E-Mod is calculated, only 70% of the medical costs are factored in, but 100% of the indemnity costs are included. So minimizing lost time makes good cents.
    • Establish an ERTW program. You can only return an employee to work if the physician on the case allows it, but make sure the doctor knows what the injured employee’s job entails and his or her limitations, then find tasks that the employee is capable of performing. Finding temporary light-duty or alternate work for injured employees is easier than you think. Look at the employee’s regular job. Are there tasks or functions that the employee can still do? Consider cross-training or temporary job-trading to allow the employee to work until fully recovered. I’ve even heard of employers who donated their paid employee’s time to non-profit organizations to get them off the insurance books.
    • Make your ERTW program a part of the written company policy and make sure employees know about it.
  • Active Claims Management.
    • Maintain close contact with the insurance company to ensure that claims are being managed on their end and that your E-Mod and employee classifications are correct. Be sure to find out if overtime should be included in the reported payment (this is not required in some states). Report any business changes to the carrier that might affect your coverage.
    • Require your employees to report injuries as soon as possible, and report the claim immediately. Early reporting can (1) keep costs down, (2) start the management process, (3) prevent litigation, and  (4) return the injured worker to full duty sooner.
    • If you feel a claim should be closed, follow up. Too often communication is not well-maintained, allowing claims to stay open and on the books. Amounts that are still in reserve (unused) on the claim will count as costs until the claim is closed.
    • Direct where the employee goes for initial treatment. This will give you some control over the direction of the claim. However, the injured employee has the right to choose further treatment. Stay in contact with this new physician as well. Directing initial treatment is allowed in Arizona, but not in all states.
    • Keep in touch with the medical provider for each claim to insure that the medical treatment is being followed. If an employee fails to do prescribed therapy or misses appointment, the claim can be contested.
    • Stay in contact with the injured employee. Make sure their recovery is progressing and encourage them to stay on track with therapy and other treatment.
    • Watch for fraudulent claims. Employees may be tempted to get a personal injury covered under workers’ compensation or “extend” their time off for an injury. If you suspect that a claim may not be legitimate, indicate this on the industrial injury reporting form, and let your insurance carrier know.
  • Reduce Injuries. This is really the place to start. Anything you can do to prevent your employees from being injured in the first place will keep your workers’ compensation costs down. This means having an effective safety program. This program needs to include:
    • Written safety policy
    • Management commitment and supervisor accountability
    • Evaluation of your company’s operations and risks
    • Safety training
    • Safety Committee
    • Personal protective equipment
    • Accident investigation, including causes, corrective actions and follow-up
    • Drug and Alcohol policy. The U.S. Government estimates that the cost to businesses each year from drug and alcohol abuse is $100 BILLION! You should have a written policy that is properly worded to include specifics of what is prohibited, types of testing, enforcement and penalties.

How much an one accident cost a company? It’s more than the workers’ compensation insurance cost. You have to factor in things like lost time for other workers and supervision, lost in team efficiency, new worker training, equipment downtime, etc. Consider an accident with a combined cost of $5000 for a company that operates on the 5% profit margin. The company must generate $100,000 in additional sales to cover that cost!

Managing your workers’ compensation program is one step in reducing the cost of injuries. Also, developing an effective safety program will help keep employees like Joe from driving off the deep end, and taking your company with him!

This article was originally published in the August/September 2009 issue of the Journal of Environmental Management-Arizona. Ideas for stores come from a variety of sources, including online news and Richard Hawk of Making Safety Fun.



Basic Insurance Rate



Experience Modifier (E-Mod)



Modified Premium