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Calculating (and Improving!) Workers’ Compensation Costs

Originally published by Eastern Alliance.

How is workers’ compensation premium calculated?

  • The type of business, claim history, payroll, and location(s) all impact premium.
  • The basis for workers’ compensation premium is this formula: Class Code Rate x Experience Modification Factor x (Employer’s Payroll/$100)
    • Businesses are categorized by class codes specific to the type of work their employees do. Insurance carriers charge different rates for each class code, because some types of work are riskier than others. Rates and class codes vary by state.
    • Experience modification factors are related to a business’s history of workers’ compensation claims. If a business has a claims history that is better (safer) than average for its type of business, then its modification factor will likely be below 1.00. If a business has a worse claims history than average, its modification factor will likely be above 1.00.
    • State workers’ compensation bureaus calculate this experience modification factor. In some states, smaller employers may alternatively have a merit rating which can also impact their premiums based on their claims history.
    • Insurance carriers use a payroll amount based non an estimate of the employers’ annual payroll.
  • Credits or debits may be applied to the premium, depending on a variety of factors. Charges and state assessments may be added to the premium.
  • After the policy has concluded, a premium audit will likely be performed. The purpose of this audit is to compare the estimated annual payroll used to calculate the premium with the employer’s actual annual payroll. If there is a difference, an adjustment will be made – either the carrier will owe the employer money (because the actual payrolls are less than the estimated payroll), or the employer may owe the carrier additional premiums (because the actual payrolls were higher than the estimated payroll).

 

What can be done to lower premium costs?

  • One of the best things that an employer can do to protect their workers and to ultimately lower their workers’ compensation premium, is to prevent accidents before they occur. Employers can do this through a focus on workplace safety. Many states permit a type of discount or rate credit for certain workplace safety programs. By improving their claims history over time, employers will also benefit from a lower experience modification factor.
  • Some employers may find that loss sensitive products like dividends, deductibles, retrospective rating plans, or alternative insurance options, provide them with greater control over their insurance costs.
  • Directing care, depending on jurisdiction. Some states permit employers to direct medical care through various means – medical provider panels, managed care organizations, etc. The goal of these programs is to help injured workers obtain prompt, appropriate care from providers who use evidence-based, cost-effective treatment.
  • Help injured workers recover faster by using work as a therapeutic tool. Appropriate use of modified duty helps can help injured workers return to work faster, lower claim costs and restore productivity.
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