Exploring Direct & Indirect Costs in Workers’ Compensation

Understanding the complexity of workers’ compensation can be daunting as claims are often associated with various anticipated and unexpected costs. To help protect your organization, we’ve broken down workers’ compensation expenses to help you manage risk effectively.

Direct costs are expenses that are covered by your workers’ compensation insurance. Indirect costs are unexpected costs not compensated by your workers’ compensation policy and vary by the extent of the employee’s injury.

Overview of Direct Workers’ Compensation Costs

Expenses covered by your workers’ compensation insurance include:

• Employee wage benefits paid to an employee who is unable to work. Wage benefits vary but may include temporary total, temporary partial, permanent partial and permanent total disability.
• Medical payments for any eligible medical expense required to treat a work-related injury.
• Vocational rehabilitation costs associated with an employee’s rehabilitation.
• Death/dependent benefits to compensate a spouse and/or dependents of an employee who died directly from a work-related injury.
• Legal fees associated with a workers’ compensation claim, civil liability expenses and settlement costs.
• Claim investigation costs connected with investigating potential workers’ compensation fraud.

Summary of Indirect Workers’ Compensation Costs

Unexpected costs that aren’t compensated by your workers’ compensation policy include:

• Wages from compensation to perform the injured employee’s duties. Includes hiring temporary workers or providing overtime.
• HR support for specialized training and increased HR staff workload to process workers’ compensation claims and related paperwork.
• In-house claim investigations associated with the investigation of workers’ compensation fraud.
• Hazard mitigation is connected with mitigating the hazard(s) that influenced an employee’s injury.
• Production deadline extensions when an injured employee’s absence causes production delays, which influence rising production costs and negatively impact business contracts.
• Training to instruct employees to cover for an injured employee. If it becomes a permanent arrangement, your company may need to cover the costs of employing new workers.
• OSHA fines from safety citations discovered during an employee’s injury or death triggered an inspection. Your organization’s incident rate increases with each employee injury and fatality.
• Insurance premium increases due to a higher risk classification from frequent injuries, impacting experience modification factors.
• Repairs for property or equipment if it was involved in the injury-causing incident.
• Reputational impact from a high rate of workers’ compensation claims. A poor reputation can negatively impact your business’ bottom line and future.

Reducing Workers’ Compensation Costs

Dedicated employers can experience benefits from controlling direct and indirect costs, such as:

• Investing in safety programs is the foundation of reducing workers’ compensation claims. While eliminating claims is the goal, actively engaging employees in hazard identification can reduce injury rates and workers’ compensation costs.
• Expenses can also be reduced by proactively managing claims. Working with the injured employee and claims handler can influence a quicker return to work. Participating in the claims process will improve communication between your business, the injured worker and the insurance company.
• An effective return-to-work program will help reduce workers’ compensation costs. Providing medically appropriate modified-duty work options can encourage quicker recovery times and return to work, while potentially reducing direct and indirect costs.

The Importance of Reducing Direct & Indirect Costs

Recent data from the National Safety Council (NSC) indicates employer work-related injuries cost $167 billion annually, including:

• Administrative costs ($54.4 billion)
• Wage and productivity losses ($50.7 billion)
• Medical expenses ($37.6 billion)
• Employers’ uninsured expenses ($13.9 billion)
• Property and equipment damage ($5 billion)
• Fire-related losses ($3.7 billion)

The NSC estimates these costs average $1,040 per employee. An employee fatality costs an employer $1.2 million per death, while the average injured employee’s medical expenses cost $40,000 per incident.

Reducing employee injuries influences a positive work culture and lower workers’ compensation expenses—minimizing both direct and indirect costs.

We’re Here to Help Your Lower Workers’ Compensation Costs

You do not have to respond to the complicated workers’ compensation landscape alone. We are here to help you navigate and reduce employee injuries to minimize both your direct and indirect costs. For additional resources, risk management guidance or insurance solutions, please connect one of our team members today.