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    Workers Compensation Insurance In Indianapolis, IN And Denver, CO

    Is Paying Small Work Comp Claims Out of Pocket Ever a Good Idea?

    As a small business owner, you understand how critical workers compensation insurance in Indianapolis, IN, and Denver, CO, is to the continued success of your company. One of the worst scenarios you can find yourself in is to have an employee get hurt on the job and you don’t have the proper insurance. You can be responsible for the aftermath. The steep monetary cost can lead to major problems, including losing your business. To prevent these types of scenarios, it’s important to understand what workers comp insurance covers and your best options.

    What Workers Compensation Covers

    Workers compensation covers events like work accidents and injuries. If your employee slips and falls at work, workers compensation insurance in Indianapolis, IN, and Denver, CO, will cover some of their lost wages and cover medical expenses. Occupational illness is also covered. These are health conditions caused by the type of work, especially workers who work in factories or around dangerous chemicals. If the illness is directly connected to the job, then the insurance will cover a percentage of lost wages and medical expenses. Repetitive stress injuries like carpal tunnel syndrome is another common use of the insurance. Physical therapy or rehab is often covered under the insurance. Employees disabled as a result of a work-related accident can have some of their lost wages and medical bills covered.

    Choosing the Right Policy

    When choosing the right policy, your workers compensation in Indianapolis, IN, and Denver, CO, should cover your employees’ medical expenses related to workplace-related injuries and illnesses. Policies should also cover workplace violence, PTSD, rehab and retraining services and death benefits for the dependents of employees. If you have a few employees, expect to pay between $2,000 and $3,000 annually. It’s important to know your state’s regulations for the right policy, so reach out to our firm for expert guidance.

    Key Factors to Keep in Mind

    Before examining the scenarios to determine whether self-payment saves or costs the employer, keep the following in mind:

    • Self-payment of small claims is not legal in all states, and may be subject to fines or penalties. Specific rules are determined by state workers’ compensation statutes. For example, the Missouri Department of Insurance specifically suggests that employers take advantage of the state’s Employers Paid Medical Program to reduce the cost of their workers’ compensation average. It’s important to know the rules in your state.
    • Self-payment of claims also has implications at the federal level if injured employees are eligible for Medicare.
    • Employer access to state or “reasonable and customary” fee schedules is an important consideration in the cost of self-paid claims.
    • Employers paying small claims out of pocket may risk liability if those claims develop into something more costly.

    Scenario 1: ERA States

    To analyze a scenario where the use of ERA is approved, imagine Mike’s Machine Shop, a relatively small business operating in Missouri and Indiana (both ERA states). Here’s some background information on Mike’s Machine Shop:

    • Effective date of mod is 1/1/2014
    • Approximately $1.7 million to $1.8 million in payroll each year in codes 3632 and 8810, generating a minimum mod of 0.73
    • Three itemized losses, all type 5: $8,000, $12,000 and $45,000
    • The assumption that the shop had only one $1,000 med-only claim per month in 2012, for a total of $12,000 in type 6 losses
    ERA States – Year 1
    For type 6 losses in a state where ERA is approved No Losses Less Than $1,000 Reported One $1,000 Loss per Month Reported in 2012 Potential Savings of Reporting
    Mod Effective 1/1/2014      
    Mod factor 0.95 0.98 -0.03
    Estimated premium due (Mod x 50,000 manual premium) 47,500.00 49,000.00 * -1,500.00
    *The $1,500 cost in premium impact of 2012 reported losses will also apply to the 2015 and 2016 mods.
    Self-paid claims cost (one $1,000 loss per month) 12,000.00 0.00 12,000.00
    Year 1 total cost of risk 59,500.00 49,000.00 10,500.00

    In 2014, Mike will save three points on his mod and $1,500 on his premium if he doesn’t report those small claims. And, because those claims are not affecting his mod for two more years, he will save about $1,500 in 2015 and 2016, too. The bad news is that the self-paid claims costs add considerably—in this case, $12,000—to Mike’s Year 1 total cost of risk.

    In Year 2 of this scenario, imagine that Mike has instituted some safety improvements and the shop had just one small claim per quarter in 2013, for a total of $4,000 in type 6 losses. Also imagine that payroll and other itemized losses have stayed exactly the same, as well as rating values.

    If Mike is not reporting small losses, his mod and premium are the same as in 2014 (0.95 and $47,500). If he is reporting the small claims, then the new claims in 2013 drive his mod to 0.99— one more point than the 2014 mod. Cumulatively, the 2012 and 2013 small reported claims are responsible for four points, or approximately $2,000 in premiums.

    Because Mike’s self-paid claims costs are considerably lower in Year 2 ($4,000), the Year 2 total cost of risk differs only by $2,000 between reporting and not reporting losses. Still, Mike has a financial advantage to report claims, especially when considered over the cumulative two-year total cost of risk.

    ERA States – Year 2
    For type 6 losses in a state where ERA is approved No Losses Less Than $1,000 Reported One $1,000 Loss per Quarter Reported in 2013 Potential Savings of Reporting
    Mod Effective 1/1/2015      
    Mod factor 0.95 0.99 -0.04
    Estimated premium due (Mod x 50,000 manual premium) 47,500.00 49,500.00 * – 2,000.00
    *The $2,000 cost in premium impact includes $1,500 for the 2012 losses and $500 for the 2013 losses. The $500 for the 2013 reported losses will also apply to the 2016 and 2017 mods.
    Self-paid claims cost (one $1,000 loss per quarter) 4,000.00 0.00 4,000.00
    Year 2 total cost of risk 51,500.00 49,500.00 2,000.00
     
    Cumulative two-year total cost of risk 111,000.00 98,500.00 12,500.00
    Scenario 2: Non-ERA States

    If Mike were operating in a state that has not approved the ERA reduction, then the impact on the mod of small medical-only claims is certainly more significant, and it’s easier to see how the scales could tip in favor of not reporting.

    However, in this scenario, using all the same assumptions as before, the overall cumulative cost savings still favors reporting of claims.

    Non-ERA States – Year 1
    For type 6 losses in a state where ERA NOT is approved No Losses Less Than $1,000 Reported One $1,000 Loss per month Reported in 2012 Potential Savings of Reporting
    Mod Effective 1/1/2014      
    Mod factor 0.95 1.04 -0.09
    Estimated premium due (Mod x 50,000 manual premium) 47,500.00 52,500.00 * – 4,500.00
    *The $4,500 cost in premium impact of 2012 reported losses will also apply to the 2015 and 2016 mods
    Self-paid claims cost (one $1,000 loss per month) 12,000.00 0.00 12,000.00
    Year 1 total cost of risk 59,500.00 52,000.00 7,500.00

    In states that have not implemented the ERA reduction, the total cost impact of paying workers’ compensation claims out of pocket requires especially close analysis.

    Non ERA States – Year 2
    For type 6 losses in a state where ERA NOT approved No Losses Less Than $1,000 Reported One $1,000 Loss per Quarter Reported in 2013 Potential Savings of Reporting
    Mod Effective 1/1/2015      
    Mod factor 0.95 1.06 -0.11
    Estimated premium due (Mod x 50,000 manual premium) 47,500.00 53,000.00 * – 5,500.00
    *The $5,500 cost in premium impact includes $4,500 for the 2012 losses and $1,000 for the 2013 losses. The $1,000 cost for the 2013 reported losses will also apply to the 2016 and 2017 mods.
    Self-paid claims cost (one $1,000 loss per quarter) 4,000.00 0.00 4,000.00
    Year 2 total cost of risk 51,500.00 53,000.00 -1,500.00
     
    Cumulative two-year total cost of risk 111,000.00 105,000.00 6,000.00
    Analyze Your Choices

    There are a myriad of reasons that ultimate costs could vary other than these two scenarios. However, in most scenarios, paying small claims out of pocket demands a detailed analysis that accounts for all associated costs, such as any fines and applicable medical fee schedules. In all cases, knowing your state rules is imperative. Refer to your state’s Department of Insurance or to the NCCI’s Unit Statistical Reporting Guidebook for more information. Claiming all losses results in better data—not just for the bureaus or insurance carriers, but also for you as an employer. And better data leads to more meaningful analysis opportunities.

    Work with your broker at Thompson Group to analyze and act on your mod data. Getting the complete picture reveals all trends and will help you drive the most appropriate operational initiatives towards improvement.

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