Similar employers, and also similar operating units in large employers, have huge variations in work injury experience. Were insurers to report on these variances, showing in detail where an insured employer stood, many employers would likely hasten to improve their practices. Cost information when clearly stated influences expectations and behaviors of American business executives more, I believe, than injury statistics do.

I asked business executives how they communicate within their organization about workers’ compensation costs. In my latest round of very informal inquiry, I perceived a significant shift in the strategy and methods of sharing cost data internally.

The sharp rise in workers’ compensation costs in the late 1980s, which prompted the introduction of managed care into the field, also appears to have nudged employers toward allocating workers’ compensation costs to units, instead of accounting for them as a corporate headquarters overhead. Actuaries appear to have had a dominant in role in designing the allocation methods. This meant that, on balance, the methods were technically correct, opaque and possibly misleading to the average line manager.  

You can find risk managers who have designed several methods during their career. In its 2009 benchmark survey, prepared with the assistance of Advisen, the Risk and Insurance Management Society found that, of 25 “best practice” companies, 23 charged back claims costs across all units.

Employers are much more inclined today to design cost allocation primarily to motivate unit executives to reduce injuries and curtail disability. The accounting agenda, of accurately assigning the cost of risk for budgeting and product pricing purposes, is now secondary. This shift involves a dramatic simplification of message.

Iron Mountain’s risk manager, Geoffrey Smith, narrated for me how his firm radically redesigned its cost-allocation method.

Before 2010, Iron Mountain distributed workers’ compensation costs “almost like a payroll tax,” per Smith. The charge told the line managers nothing about what was driving costs. 

Smith timed changes well in advance, given that they affected line budgets and executive compensation. Iron Mountain began to educate line managers that the company retained the first $500,000 of every claim. They were charged $4,500 per claim, every claim. “That brought awareness,” Smith said.

“We did that for one year. Then we said, ‘We need to help people appreciate the facts that not all injuries are the same.’” So, medical-only claims were charged at $1,500, lost-time compensable claims at $15,000, and lost-time claims with more than 30 days’ disability at $40,000. “We also introduced a robust return-to-work program.”

Smith is pleased with the strategy, which induced executives to bring down costs.  National Underwriter Magazine gave Iron Mountain an award for managing workers’ compensation.

A large big box retail company applies a similar strategy on a vastly greater scale. It built a profile of a typical store’s total risk exposure, such as customer slips and falls along with worker injuries. “Then,” the risk manager told me, “we sat back to focus on how to incentivize behavior. We were interested in presenting a risk spread, including small and large claims.” The company settled on charging stores $4,000 for every workers’ compensation claim, plus an additional $23,000 for lost-time compensation claims. Store managers’ allocations change monthly, based on their immediate past experience.

“We saw a tremendous decrease in lost-time claims.” It already had in place “pretty good” RTW programs.

James Moore, who runs J & L Risk Consultants in Raleigh, North Carolina, described to me a completely different approach to get line executives off the dime. He creates a synthetic mod rate for an operating unit. The unit’s leader assesses her performance in light of her “peers” in any state she wishes. Moore can adjust the mod calculation to suggest the effect of decisions the executive might take. 

These three approaches point out the financial impact an executive can make in an hour of decision with information delivered because it is useful. The executive sees a simple foreground; in the background, more in-depth information is available. Very clever.