Workers' Compensation - Benchmarking Analysis

A Benchmarking Analysis is one of the most beneficial tools for evaluating operational efficiencies, yet it is significantly underutilized. Wikipedia has a nice formal definition of benchmarking, but here is the gist:

“(Benchmarking) is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice companies' processes, usually within a peer group defined for the purposes of comparison. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their practices.”

When a Benchmarking Analysis is completed for a company’s Workers’ Compensation program, there are three primary areas of focus: Accident, Post-Injury Cost Management, and Organizational Procedures. Each of these three components can have numerous ratios and statistics that can be used for comparison. Which ratios are used typically depends on the industry and the type of work being performed. Below is an outline of the most common statistics used in each component of a Benchmark Analysis with a brief description.

The Accident Component

Frequency Rate – is a measure of the number of claims (anything >$0 paid) divided by a predetermined measure.  Insurance companies most commonly express this as (non-$0 claims/payroll per $1M).  From the Bureau of Labor and Statistics (BLS) it is expressed as (OSHA recordable cases/total work hours per 200,000).  If you’re curious, 200,000 represents the BLS estimate for the number of hours worked in a year by 100 employees.  Many companies are interested in variations of the frequency rate that include Loss Time Rate, Litigation Rate, and Disability Day Rate.  Each of these can be expressed as a function of payroll or work hours.

Loss Rate – is a measure of the total incurred value of claims per $100 payroll.  This can be important for budgeting purposes especially for companies that have chosen to be self-insured or taken a deductible or retrospective policy.  Follow the links to find out more about how these policies work.

Average Cost per Claim – is a measure of the total incurred value of claims divided by all non-$0 claims.  This statistic has numerous variations depending on need.  Most commonly, companies are interested in average cost of all claims, litigated and non-litigated claims, lost-time and no lost-time claims, and average cost by loss source (i.e. slip and fall vs auto accidents).

Loss Source Analysis – is a categorization of all claims into their primary cause.  Once this is completed it’s important to understand at least the top 5 loss sources that are driving the highest percentage of claim count and the highest percentage of claim costs.  In addition to causes it may be important to review and compare other variables like accident time of day, day of week, or month of year.  

Post-Injury Cost Management Component

Claim cost management is the component that most people overlook, yet can represent a significant amount savings or leakage of real dollars. It’s usually overlooked because companies have to rely on their insurance carrier or TPA to track and produce the data in a usable format. And, if they do have the data, it can be difficult to find someone else (companies, industries, or markets) with data in the same format with which to compare. However, if you break rates and costs down to their simplest format, comparisons can be made. Here are areas that should be considered for Benchmarking:

PPO Penetration Rate– is the percentage of medical claims that are being handled within a PPO network. Depending on the network, PPO savings can be 5-10% off the cost of the medical portion of a claim.

Duplicate/Core/Professional Savings Rate – is the percentage of a claims cost that has been saved simply by implementing things like usual & customary charges, fee schedules, utilization and clinical review, negotiations, and justified denials.

If you’re looking for additional factors to evaluate expense management, dig deeper into the “Professional Charges” that insurance companies charge for savings on a claim. Carriers will vary on their expense charges for things like Medical Bill Review, Nurse Case Managers, Medical Advisors, Medicare Eligibility Verification, and Medicare Set Asides.

Operations Component

Lag Time – is the measure of the amount of time it takes for a company to make the first report of injury to the insurance company/TPA.

Reporting Method – will identify the percentage of time claims are filed via internet, phone, or fax.

Claims by Tenure – could be considered an accident component, but since it’s reflective of effective recruiting/pre-screening, orientation, and safety training, it fits well within the Operations Component.

Obtaining Data for Comparison

It’s fantastic to have the understanding of what needs comparing and why, but nothing is either good or bad, except by comparison. So, from where should companies obtain all this data? Well, here are a few options:

• The company’s own historical data – If there is enough consistent data for a long enough period, then comparing a company’s current experience to historical results is a good place to start. Special consideration should be given to changes in operations and jurisdictions as well as time value of money and medical inflation. Data may need to be indexed or developed.
• Friendly competitor peer group – Creating a data exchange practice with other companies in the same industry can be valuable for establishing good benchmarks for which to compare. The more companies and data included, the more credible the results.
• Bureau of Labor and Statistics – This government bureau gathers and organizes tons of data every year and provides statistics that can be sorted by ownership, industry (NAICS code), and by state. Here is a quick link to their Incidence Rate Calculator and Comparison Tool.
• Insurance company database(s) – Carrier databases can be the best source for information comparison, and any good national carrier should be able to slice and dice and report their own data. For Benchmarking purposes, it may not matter if you have just one database or several to use for comparison as long as the carrier has sufficient experience with other companies in the same industry and jurisdictions. When comparing current Post-Injury Cost Management, it’s a good idea to use an insurance carrier OTHER than the current carrier/TPA otherwise you can’t compare fee schedules and expense charges.

Interpreting the Data

It’s important to remember that the Benchmarking Analysis is just a strategic guide for improvement. As results are laid side by side, or graphed out on charts, take note of the following:

• Is the company above/below the benchmark and by how much?
• If the results are significantly outside the mean, is the data credible, or is there an identifiable reason for the deviation?
• Is there data you’d like to track but can’t obtain? Is it an internal company deficiency, an agent/broker deficiency or an insurance carrier deficiency?
• Once deviations from the benchmarks are established, determine the next course of action. Prioritize objectives, set goals for improvement, determine responsibilities, and execute!

A Benchmarking Analysis should be an annual project for all companies. For companies without enough claims to make the report valid, there is still value in understanding the experience of companies in the same industry. Some companies fall into the rut of simply using the Worker’s Comp Experience Mod as a tool to compare Worker’s Comp experience. While it can be telling if it also is analyzed in detail, it isn’t a tool to help drive changes in behavior and results. For that, companies should rely on a full Benchmarking Analysis.

_{John Keller is a Risk Management Consultant with Praxiom Risk Managementin Tampa, FL. Praxiom is a full service outsourced Risk Management consulting firm specializing in Technology, Architect/Engineering, PEO and Loss Sensitive Workers Compensation, and is comprised of veterans of the risk management and financial services industry. Comments and questions are welcome at jkeller@praxiom-rm.com. Click here for a full bio.}