Case History #2

Discussion

NOTE: Since this article was written, there have been changes in the manner in which reserves are calculated in Ohio. These changes would affect the estimate of the number of dollars saved through utilization of care management. As noted, these formulas do change annually. The basic premise of the article and the value of knowing how to calculate the workers’ compensation premium remain unchanged. – D.L. & B.A.

Introduction

Those companies who enjoy the greatest success are able to make health and safety a part of the business, whether the company is private or public, large or small, a manufacturing or service industry, and, in Ohio, regardless of whether the company chooses to be state- or self-insured for workers’ compensation. Managing work-related illness and injury is an integral part of running a business. Workers’ compensation risk managers are faced with the challenge of authorizing necessary medical care and rehabilitation to optimize the health and work productivity of ill and injured workers while being good stewards of company assets. Unfortunately, decisions are
frequently made without good data on the total costs associated with disability. The authors offer this article to occupational healthcare providers to enable them to better understand the financial consequences of lost work time caused by work injuries, and to communicate this value to client companies.

Workers’ compensation costs are only a fraction of the total expenses associated with work disability. The Workers’ Compensation Guide¹ lists direct and indirect costs as follows: direct-medical expenses, payments for lost time, claims expenses, fees, bonds, and other insurance costs, and fees paid to the workers’ compensation commission; indirect—temporary labor costs and overtime, replacement training, attorney’s fees, investigation costs in litigation, supervisory time related to the injury and lost man hours, reduced unit productivity, costs for accommodation of injury, work spoilage, property damage, increase in resources, parts or inventory, long-term disability costs, lost accounts and lower sales, and public relations problems. The present analysis is limited to a consideration of only the most basic of these direct and indirect costs.

By offering coordinated services that target the timely and effective return-to-health, return-to-function, and return-to-work for injured workers, occupational health centers can achieve better health and work productivity outcomes for their client companies at a substantial cost savings. What follows is one approach to estimating the amount of those savings.

This article attaches financial consequences to workers’ compensation management decisions in the occupational healthcare environment. Simulated case histories of two common work-related health problems under "usual care" and "care management" are presented, along with calculations of some estimated financial consequences to the company.

The examples have been specifically designed to raise several common issues, including the availability of modified duty and the effects of administrative, medical, and return-to-work management delays in the treatment of injured workers. The cost calculations are based on reasonable and conservative estimates of the costs associated with lost work time and workers’ compensation premiums. Salary estimates are based on U.S. Wage Census Data from the Bureau of Labor Statistics for the appropriate year.² Medical expenses have been taken from price lists of Cincinnati area healthcare entities.

The consequences of lost work time, including replacement worker costs, are taken from the results of a financial analysis performed by a client company of a size and type similar to the company described in the scenarios. Equations to calculate the effect of lost work time on workers’ compensation premiums for state-insured private companies are taken from published tables provided for that purpose by the State of Ohio Bureau of Workers’ Compensation.³ Both cases are described as occurring in 1998 to allow calculations of the effect on year 2000 premiums. Financial calculations are provided in sufficient detail to allow the reader to follow along, calculator in hand.

Although the specific equations will vary from state to state, the financial considerations are the same. Cost and benefits calculations have not been adjusted for inflation (estimated 3% per year) or for the value of money⁴ (estimated 5% per year). All monetary results have been rounded to the nearest dollar.

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A 19-year old right-handed assembler for a private, medium-sized electrical appliance manufacturer ("the Company") lacerated her right thumb on a piece of sheet metal shortly after beginning work on the second shift at 5:30 p.m., December 23, 1998. It was a simple laceration, about 2 cm long.

Usual Care Scenario

She was sent to a busy local hospital emergency department where she waited to be seen for 2½ hours. The wound was cleaned and the laceration was sutured and bandaged. She was told she could return to work "tomorrow." The total treatment time was 3½ hours. Discharge instructions and work restrictions included: keep wound clean and dry, change dressings daily, and limited use of the right hand. She was told to see her personal physician in 7 days for suture removal.

The company’s job description for an assembler described all assembly operations as requiring use of both hands. Her employer was unable to accommodate her work restriction. A workers’ compensation claim was filed with the Ohio BWC. She was instructed to return when released to full duty by her personal physician. She had her sutures removed on December 30, 1998, at her doctor’s office, which entailed 1 hour and 10 minutes lost work time and incurred medical costs of $42. She was released to return to full, unrestricted work on January 4, 1999, following the New Year’s holiday weekend. She continued to work without incident.

Care Management Scenario

She was sent to a nearby Occupational Medicine Center (OMC) where her total residence time was 1 hour (15-minute wait plus 45 minute treatment time). The medical care was identical. She was released to return-to-work immediately, with the same discharge instructions. A telephone call to her direct supervisor helped identify a job in her department with the same essential job functions that could be done, temporarily, with one hand. A workers’ compensation claim was filed with the Ohio BWC. She returned to work on December 23, 1998, at 7:30 p.m.

The occupational health nurse, on-site at the company, removed her sutures in one week. This required 20 minutes lost work time and cost $9.85. She continued to work without incident and was released to full, unrestricted duty in one week.

Calculation of the Cost of Work Disability

Table 1 summarizes the costs for overtime work, decreased productivity, decreased quality, and increased workers’ compensation premiums under the usual care and care management scenarios. From the 1998 Census Wage Data,² a representative hourly wage for a production line assembler was $11.33, with a benefit rate of 20%. The Company makes small appliances sold at wholesale to distributors for $40/unit. The company realized a $3 profit per unit, for a 7.5% profit margin after all costs, in 1998. The labor market was very tight. Lost productivity associated with work absence could only be recovered by using overtime hours, at time and one-half. Based on the results of the financial analysis performed by our client company of lost productivity and quality costs associated with overtime work, we projected that our overtime worker assembled 10 fewer units per 8-hour overtime shift than during regularly scheduled work time. At $3 profit per unit, this equated to $3.75/hour lost profit. Work quality associated with the overtime work also suffered somewhat with one more reject, a $40 value, every two 8-hour overtime shifts and one rework per shift at $12 each.

We can calculate the effect of this work-related injury on the company’s workers’ compensation premium payment. The Company is a private company, state-insured for workers’ compensation. The workers’ compensation premium amount is determined by the historical financial risk to the Ohio BWC³ associated with compensation, medical, and reserve costs of similarly sized companies with a similar mix of employee job types. These expected losses (referred to as total limited losses) are then compared to the company’s own workers’ compensation experience for the oldest four of the previous five years.

If the Company’s loss experience is less than the comparable industry standard, they will be merit-rated and receive a reduction from the calculated base premium. If the Company’s loss experience is greater than expected, they will be penalty-rated and will pay more than the base premium. Smaller companies have less opportunity for loss and less certainty (greater variability) in their loss projections than comparable larger companies. Because their projections are less certain, their BWC premium will be proportionately greater than for a large company with greater opportunity for loss and, therefore, greater certainty in loss projections. This is reflected in a lower credibility factor (C%) for small companies.

With this understanding, we can now calculate the effect of a simple thumb laceration on the Company’s cost of doing business, keeping in mind that this single 1998 injury will contribute to the Company’s workers’ compensation exhibit for four years in Ohio. The formulas are subject to change each year, however, and we must estimate the four-year total. The estimates in Table 1 assume that the formulas will stay the same in subsequent years.

All calculations are driven by the estimates of lost work time, which were 9 days, 5.1 hours under usual care, and 1.83 hours under care management, for a difference of 9 days, 3.27 hours. Replacement worker costs, including overtime, decreased productivity, and decreased quality, were $2,187 under usual care and $51 under care management, for a difference of $2,136.

To calculate the effect of this simple thumb laceration on the Company’s workers’ compensation premium, we begin with a calculation of the total modified losses (TML), which include compensation, medical, and reserve costs. In the State of Ohio, the compensation amount for total temporary disability is 72% of the full weekly wage, tax-free for the first 12 weeks. If the total days off work is less than 14 consecutive calendar days, compensation is not paid for the first 7 days.

If the full weekly wage were $326.31, compensation for 4 days would be $186 under the usual care scenario. Under care management, there were no lost workdays and therefore there would be no compensation paid, a medical only claim. Medical costs totaled $625 under the usual care scenario and $316 under care management, a difference of $309. Referencing the year 2000 Ohio BWC Reserve Table⁵ for private companies where the last compensation paid was temporary total, the reserve amount would be four times compensation in year 2000, or $746 (4 x $186.46) under the usual care scenario. Under care management, there was no compensation paid and, therefore, no reserve. Adding compensation, medical and reserve, the total claim costs charged to the experience exhibit related to this thumb laceration for Year 2000 would be $1,557 under usual care and $316 under care management, for a difference of $1,241.

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We will assume that the Company’s claims history exhibit for FY 2000 showed total modified losses (the sum of compensation, medical and reserve payments for the years 1995, 1996, 1997, and 1998) of $310,000 without this laceration. This compared favorably to the industry-based standard of $348,500, resulting in a 7% discount from the base rate. With the addition of the total modified losses of $1,557 related to this claim in Year 2000, the new total would be $311,557. This increase results in an increase in the premium from a 7% discount to a 6% discount.

The equation³ used to determine the total modification (TM%) was as follows:

((TML – TLL)/TLL) x C% x 100 = TM%

For this example:
($311,557 - $348,500)/$348,500) x 0.6 x 100 = -6%.

We can calculate the monetary value of this change. We will assume that the WC premium for the Company would have been $214,000 without this injury. This is a reasonable amount for a manufacturing company with an annual payroll of $5 million. A 1% change would result in a $2,140 increase in our WC premium for FY 2000. The total cost of this claim under the usual care scenario would be $2,187 replacement worker cost plus $8,560 workers’ compensation premiums for 2000, 2001, 2002, and 2003 = $10,747. The total cost of care management would be $50.70 for a difference of $10,696. Under the care management scenario, the worker was returned to modified duty with no lost work time. Thus, this would be a medical only claim valued at $316. This amount would not change the workers’ compensation premium rate, which would remain at a 7% discount.

One further adjustment needs to be made to account for reduced productivity of the injured worker on modified duty. If we assume the worker is only able to work at 75% capacity, we can add 25% replacement worker costs to the cost under the care management scenario. This would add $547 (0.25 x $2,187) to the cost of care management and reduce the cost savings by the same amount, leaving $10,150 estimated savings. This is equivalent to the profit on 3,383 appliances with a wholesale value of $135,320. This is the approximate cost associated with the inability to identify modified work for a worker with an uncomplicated thumb laceration.

Usual Care Scenario

He was sent to see his personal physician. He waited for ½ hour and treatment time was 2 hours and 35 minutes. His evaluation included a physician evaluation and lumbosacral spine x-rays at a nearby hospital, which accounts for his prolonged treatment time. The exam was equivocal for decreased light touch sensation in a 5th lumbar nerve root distribution in the right leg.

The patient was told to stay off work and to follow up in 3 days. He was also given a prescription for a muscle relaxant and pain medication. He was unable to get an appointment until Friday, May 22. He remained at modified bed rest, took his medications, and kept his appointment to see his doctor. His back pain continued, although improved; however, his leg symptoms became worse. Physical findings at that time were compatible with a right 5th lumbar nerve root compression. A workers’ compensation form was completed requesting authorization to perform an MRI scan of the lumbar spine. Authorization was approved on May 27 and an MRI scan was scheduled for Friday, May 29. The interpretation was available on Monday, June 1, and confirmed the clinical suspicion. There was a moderate herniated nucleus pulposus with entrapment of the L5 nerve root in the neural foramina on the right.

A form was completed on June 4, requesting authorization for physical therapy, 3 times weekly for 6 weeks. The request was approved on June 9 and the worker had therapy at a local physical therapy facility beginning on June 15 with passive modalities and progressing to range of motion and muscle strengthening exercises during weeks 4 through 6. He attended a total of 18 sessions. His symptoms resolved completely. He was seen on return visit by his personal physician on July 28 and was released to return to modified duty with a 20 pound lifting restriction for 2 weeks. As no position was available in the warehouse meeting this restriction, he remained off work until returning to full duty on August 17, 1998. He continued to work without problems.

Care Management Scenario

He was sent to a nearby Occupational Medicine Center (OMC). Evaluation and findings were identical to those in the personal physician’s office. He was begun immediately (May 15, 1998), on physical therapy at the OMC combining iced towel applications with stretching and range of motion exercises. The patient was instructed to remain off work until seen back for return visit on May 20. He was given a prescription for a one-week supply of non-steroidal anti-inflammatory medication. His back symptoms continued, although improved. When seen on return visit on May 20, leg symptoms were worse and an MRI scan was ordered. (Prior approval was granted by the MCO as part of the TriHealth Care Management Program.) The scan was completed the next morning and an interpretation was available that same afternoon from the neuroradiologist. Findings were as noted previously with no evidence of spinal cord compression. Physical therapy was continued and a home exercise program was prescribed. He had an additional 10 visits, for a total of 13 physical therapy visits. A functional capacity evaluation was performed in conjunction with a job assessment by an occupational therapist.

Specific functional requirements, when measured, showed the worker’s functional capacity clearly exceeded the functional demands of his job. He was released to return to work on June 12 and returned to full duty on June 15. He continued to work without problems.

Table 2 summarizes the costs of overtime work, decreased productivity, decreased quality, and increased workers’ compensation premium under the usual care and care management scenarios. Under the usual care scenario, the worker was off work for 92 days, while under the care management scenario, he was off work for 30 days. This 62 day difference in lost work time was not associated with any difference in the natural course of recovery from his low back injury. Comparing the two scenarios, the 62 day difference can be attributed to numerous identifiable barriers to return-to-work:

Appointment availability with primary care provider: 4

Authorization for payment for MRI scan and physical therapy: 13

Scheduling delay for MRI scan and physical therapy: 8

Delay in initiating MRI scan and completing physical therapy: 17

Delay in returning to full duty: 20

Total: 62

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A care management program is designed to maximize return to function and return-to-work. Interventions fall into three general categories: 1) administrative improvements, which expedite claim approval and authorization for payment; 2) medical care improvements, which expedite appointment scheduling and maximize utilization of effective diagnostic and therapeutic modalities; and 3) return-to-work case management, which facilitates early, productive and safe return-to-work, at the same job when possible.

In this example, the contribution of care management in each of these three categories can be broken down as follows: administrative improvements–25 days; medical care improvements–17 days; and return-to-work improvements–20 days.

Calculation of Replacement Worker Costs

As in the previous example, we will assume that there was a tight labor market and the Company was at maximum production. Overtime work was the best option available. The employee’s hourly wage was $10.83, with a benefit rate of 18%, and an estimated $5/hour for decreased productivity and quality combined. When calculated as previously, overtime costs were $9,968 under the usual care scenario, and $3,067 under the care management scenario. Lost productivity was estimated at a value of $5/hour related to overtime work. Under usual care, this totaled $2,600. Under care management, the cost of lost productivity was $800. The estimated replacement worker costs totaled $12,568 under the usual care scenario and $3,867 under the care management scenario, for a difference of $8,701.

Calculation of Workers’ Compensation Premium

Workers’ compensation payments were calculated as described in Case History #1. Medical expenses, taken from current local price lists are shown in Table 3. Formulas for reserve calculations are taken from the Ohio BWC Tables⁵ for a state-insured, private company, paying total temporary disability. Again referring to the Company’s claims history exhibit for FY2000, the sum of the total modified losses for the years 1995, 1996, 1997, and 1998 without this injury was $310,000 as compared to an industry-based total limited loss value of $348,500, resulting in a 7% discount. The FY2000 premium without this injury would have been $214,000. With the addition of this injury to our experience exhibit, the Company’s workers’ compensation premium for FY2000 would be $222,560 under the usual care scenario and $218,280 under the care management scenario, a difference of $4,280.

As in the previous example, this injury will contribute to our experience-based premium calculation for the next four years. If we assume that the same formula and annual discounts will apply for purposes of calculating workers’ compensation premiums for the next 3 years, the total increase would amount to $34,240 under usual care and $17,120 under care management, for a difference of $10,700. Savings related to care management of this case would be: $8,701 replacement worker cost, plus $17,120 workers’ compensation premium cost, for a total savings of $25,821. This is equivalent to the profit from 6,467 appliances valued at $258,680 wholesale. The total number of work days saved was 62 days. The value of each additional lost workday was $25,821/62 = $416. The cost of the three categories of delays in return-to-work would be: administrative delays–25 days x $416/day = $10,400, medical care delays–17 days x $416/day = $7,072, and return-to-work delays–20 days x $416/day = $8,320.

Occupational medicine providers work with state-insured employers and managed care organizations in the state of Ohio to ensure timely, safe, productive and enduring return-to-work for employees with work injuries. Using data from a number of sources, the authors have constructed realistic case histories of common work injuries and estimated the employer costs of work disability under two different scenarios: usual care and care management. Calculated costs include the cost of medical care, replacement worker costs, costs of decreased productivity and quality, and projected workers’ compensation premium costs. This exercise demonstrates the enormous estimated financial benefits available to employers who work with their managed care organizations (or third party administrators) and their healthcare providers to provide aggressive medical care and return-to-work programs.

Medical costs are only a fraction of the total cost of work disability. In case scenario #1, medical costs under usual care ($625) were 5.8% of the total cost of work disability ($10,747). In case scenario #2, medical costs under usual care ($3,442) and care management ($3,473) were 8.5% and 16.5% of the total costs of work disability ($40,388 and $20,987), respectively. It is clear that cost savings from minimizing days off work far outweigh cost savings from case management (as opposed to care management) programs that target reductions in medical expenditures.

One must be cautious in placing undue importance on these contrived (though reasonable) case histories. In case scenario #2, for example, is usual care really that bad? Can care management really make that much of a difference? Fortunately, there are some data that can be used to benchmark these numbers. Milliman and Robertson⁶ establish a well-managed benchmark of 63 days for return to level 3 work activity (e.g., manual material handling) for low back pain, herniated disc, no surgery, ICD-9 codes 722.10 and 722.73. This is a target for return to work assuming optimal case-management through an MCO. Ninety-two days is within the range of the loosely managed benchmark, an expected outcome in the absence of case management.

Although a 30 day return-to-work time is 206% better than the well-managed benchmark, it is close to the average outcome for TriHealth Care Management Program for injured workers with a variety of injuries during a one-year pilot program that combined case management functions of a major Ohio MCO with care management functions of TriHealth Occupational Medicine.⁷ It is both clinically realistic and achievable, if one eliminates delays in care and return to work.

The calculations differ for public employers, self-insured employers, and for employers from other states. They also vary according to the type of compensation paid, e.g., total temporary vs. living maintenance. The same general principles, however, continue to apply. Employers can work with their healthcare providers and workers’ compensation administrators to modify the calculations used in this article to fit their specific circumstances. If data are not immediately available regarding projected replacement worker costs, these can be estimated. Choosing a range of values that likely includes the true value is one reasonable approach.

As one considers the employer costs of work disability together with the fact that most employers eventually cover the costs for medical care for their employees, whether their health conditions are work-related or not, one is struck by the clear financial incentive to front-end-load the healthcare delivery system. The objectives would be:

1. To improve the anatomical and physiological specificity of diagnoses to allow more specific and, therefore, more effective medical and rehabilitative care.

2. To reduce and, where possible, eliminate administrative delays to diagnosis, treatment and the return-to-work process.

3. To develop alternative or modified duty assignments and work transition programs to manage lost work time associated with illnesses and injuries.

4. To carefully review the work injury and claims records with client companies to identify opportunities for prevention through ergonomics and other programs which reduce or eliminate work injuries altogether. 

Acknowledgements: The authors wish to thank the following individuals for their thoughtful review and recommendations: Carol Bradford, RN; Jeffrey Davin, MD; Linda Ford, RN; Miriam Nightingale, RN; Susan Ryan, MBA; and Pam Shannon, RN.

Footnotes:

1. Solheim J. Workers’ Compensation Guide: Managing Workers’ Compensation Claims and Costs. http://www.hr-esource.com/hresources/samplechapters/wcg sample chapter.html.

2. O*NET, The Occupational Information Network, OASYS for Windows NT/95, Version 1.10, Bellevue, WA, Vertex 1998.

3. Year 2000 Ohio BWC State Insurance Fund Manual. Ohio Bureau of Workers’ Compensation, Columbus, Ohio.

4. Krahn M, Gatri A. "Discounting in the Economic Evaluation of Healthcare Interventions," Med Care 1983; 31: 405–418.

5. Year 2000 Ohio BWC Reserve Tables. Actuarial Department, Ohio BWC, Columbus, Ohio.

6. "Workers’ Compensation," Health Management Guidelines. Vol 7. Schibanoff J (ed), 1998. Milliman & Robertson, Inc., 2.44.

7. Linz D, Ford L, Nightingale M, et al. "Care Management of Work Injuries: Results of a One-Year Pilot Outcome Assurance Program," J Occup Environ Med 2001; 43: 959–968.

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Barbara a. alvarado, mba, is President and owner of The Hastings Group, Inc., a management consulting firm specializing in workers’ compensation and managed healthcare. As an insurance industry professional for the past 12 years, Ms. Alvarado has worked with a large corporate clientele to improve workers’ compensation programs and reduce premiums. She earned her MBA degree from Cleveland State University and holds two undergraduate degrees from the University of Akron. She may be reached via e-mail: Hastings05@aol.com.