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Uncovering the hidden costs of long-term disability.

MARK HAS WORKED FOR the same computer firm for 24 years. Six months ago, Mark's long-time supervisor was transferred. His new supervisor, although quite competent, was based 300 miles away and had a laissez-faire management style. Mark mistakenly interpreted these new circumstances as meaning the supervisor was displeased with his work. In due course, his asthma, which had been under control for years, suddenly became aggravated. Mark was admitted to the hospital in critical condition where he filed a long-term disability claim. Doctors told him he probably would never work again.

Pearl, a 20-year veteran of a large hospitality firm, was employed as a cook until a bottle of cleaning solution accidentally spilled on her head, causing temporary, partial baldness over small areas of her scalp. Four weeks later, Pearl had not returned to work. Friends noticed that her usually gregarious demeanor had become sullen. Not many more days passed before Pearl filed a claim, supported by her doctor, stating she was permanently disabled.

Luckily both stories have happy endings. When Mark sufficiently recovered, his supervisor assured him his performance was not in question. Pearl's case was different. It was not until a year later when a medical expert determined that the woman had undergone psychotic depression following the accident. Pearl's partial baldness did not really trigger her illness. More significant was the fact that her father died about the same time the incident occurred, and her supervisor, whom she revered like her father, neglected to ask how she was feeling after the accident. Pearl's ensuing treatment cost her company $78,000 during that "lost" year. Indeed, loss of productivity, medical, legal and administrative costs, and loss of future earnings can be as high as $130,000 or more for a disability case.

But cases like Mark's and Pearl's are just two of the 31 million cases involving Americans affected with some type of disability. The annual loss from pain-related disability is $160 billion a year, according to the Washington Business Group on Health. Although that loss is taken from many pockets, the cost to the employer is higher than the company can or should be willing to stand, especially when most of the cost can be avoided. It is important to remember that the total cost of disability includes the period of time before the employee actually leaves the workplace as well as the period following the claim. The "before" or work disorder stage, which typically lasts between six months and 18 months, gives risk managers enough time to intervene, if they know what to seek.

Workers have a 30 percent chance of being disabled by injury or illness once for at least 90 consecutive days during their career. A 40-year-old man has a 47 percent chance of becoming disabled within the next 15 years. Actuarial studies show that an executive is six times more likely to become disabled than to die before age 65. According to the Menninger Return-to-Work Center in Topeka, Kansas, if disability occurs before the worker is 55, there is a 67 percent chance he or she will return to work. After that age, the chance drops to 24 percent. Injuries are more likely to occur off the job than at the work-site, according to the National Safety Council. Still, there were 1.8 million disabling injuries at work during 1988, with one out of three happening to workers within their first year of employment.

The Bottom Line

DuPont calculated that, based on an industry average of 27 disabling injuries per 1,000 workers annually, at an average cost of $18,000 per injured worker, a company with a 4.5 percent profit margin needs an additional $11.3 million in sales for every 1,000 workers to offset the cost of disabling injuries.

At one time, medical costs were about 33 percent of workers' compensation costs, with indemnity payments comprising the rest. The ratio is now moving toward the 50-50 mark, with medical costs growing 8 percent faster than payroll, according to the National Council on Compensation Insurance. Injuries that become long-term disabilities can devastate an employer's experience modification factor and raise future premium costs.

The impact of claim frequency is even more pronounced on long-term disability insurance than on workers' compensation. Because of the large reserves that must be set aside, having one claim instead of two during a policy period can mean the difference between a zero percent and 100 percent increase. For example, a $45,000 initial claim on a large group policy with a $56,000 premium would have no effect on premium; the 80 percent loss ratio would hold firm. But two such claims in one policy period would double the premium.

Hidden Costs

Even when the cost impact on workers' compensation and long-term disability insurance is calculated, the hidden costs can be even greater. Absenteeism, low morale, lost sales opportunities because of work force shortages and increased overtime to compensate for such shortages contribute to the cost, along with the threat of litigation, additional recruiting and training expense, payroll taxes on replacement workers, accident investigation, potential for injury to a new worker as well as injury reoccurrence to a disabled worker returning to work.

The changing demographics of the work force can also increase both known and hidden costs dramatically Americans are getting older, and older workers' injuries last longer. Also, the work force shows an unprecedented predilection for difficult-to-challenge stress claims, which now comprise 22 percent of workers' compensation claims.

The current physical condition of the work force also masks emerging illnesses whose magnitudes are impossible to gauge. They include electromagnetic field exposure, repetitive motion injuries and blood-borne diseases. The Centers for Disease Control contends there is a sizable population--now at work or looking for work--in which chronic disabilities will be manifested in a few years.

The Disability Process

To successfully combat the stifling cost of disability claims, an employer must overcome one condition that allows disability to grow--it is not a recognized "process." The disability process begins with an impairment, long before a claim is filed, which, in turn, leads to workplace disruptions and loss of productivity. At some point, the employee usually leaves the workplace and the disability continues. If that worker has not returned to the job within two years, there is only a 15 percent chance he or she will ever come back, according to the Menninger Center.

In addition, risk managers must recognize that, along with medical factors, the disability process is affected by workplace and personality factors including poor communication, lack of a proper grievance process and supervisor involvement after the injury, and other claim and economic problems. Personality factors that weigh on the disability process may be a high sense of entitlement, dependency, stress, dissatisfaction and control by someone or something away from the job. It is the unfortunate confluence of these factors in volatile patterns that defines a high-risk company

The work culture also must be objectively scrutinized. For instance, what is the company policy regarding disability and work disorders? What access do employees have to management? What is the supervisory environment? How good is the loss control program?

The results of an extensive examination should be correlated with a survey of the work force to gauge attitudes about fairness, working conditions and other important factors. Combining these two studies can help the employer identify specific risk factors in the employee population and management's style.

More importantly, this risk examination can help the employer intervene before the disability process reaches the point where serious work disorders occur such as fights, alcohol or drug abuse, and the resulting loss of productivity, and the employee actually leaves the work force because the process has become irreversible.

Caring for Employees

One of the most important factors in disability prevention is the employee's perception of his or her importance to the company. If there is a perception of fairness, access to management and a sense that the company cares about the employee, then there is less chance of disability. Simply put, a phone call or visit can save thousands of dollars. Unfortunately, many companies do not embrace this simple solution. Research shows that injured workers hire attorneys in workers' compensation cases three months after the injury, which means employers were given enough time to act if they wanted.

Many employers now have employee assistance programs aimed at short-term crisis management for workers with emotional or addictive problems. These programs can often refer employees to off-site counselors. Ideally, an employer should take the extra step with an advocacy program primarily for employees to have an "ear" on the company and to be assured their views are being addressed. At the same time, the company should have a representative to make suggestions to an employee regarding light duty work available during the recovery period. The company can provide the program to those who have filed workers' compensation or disability claims, employees who are in the work disorder stage or any employee who asks to participate.

If an employer chooses not to take advantage of such a complete program, there at least should be a program for tracking workers' compensation and long-term disability cases to bring a healthy employee back to work as soon as possible. Many third-party administrators and insurers say they do this, but it is rarely done effectively, despite excellent service providers available for all phases of the disability management process.

Published Cases

There are several published examples of savings that companies have experienced through rehabilitation techniques, light duty programs and disability case management. Federal Express, for example, saves $1 million annually on back injury cases, and Alcoa saves $57 annually per employee through a disability management program. Steelcase saved $287,000 during the first year of its "transitional" jobs program.

Controlling lost worktime accidents is largely within the employer's control. A study by the Upjohn Institute for Employment Research found that in 29 industries in Michigan, there was a 10-1 ratio between employers with the worst and those with the best loss experience. Upjohn found three factors that characterize the best employers: They have well-supported safety programs, encourage employees to participate in making decisions and solving problems, and express their concern for employee well-being through wellness programs and uniform procedures for returning injured employees to work.

Risk managers who build a database encompassing the factors involved in disabilities are not only getting to know workers better, but also are building the framework for intervention that will prevent similar disabilities. Intervention and case management can prevent the loss of valued employees and protect the productivity and well-being of the entire organization for years to come.

William Henry Jr. is director of communication and James W. Rodgers is president and chief operating officer for The CIMA Cos. Inc. in Alexandria, VA. Bruce M. Smoller, M.D., is a psychiatrist at the Center for Work Health in Bethesda, MD.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Henry, William, Jr.; Smoller, Bruce M.; Rodgers, James W.
Publication:Risk Management
Date:Dec 1, 1991
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