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How to zap your workers' comp costs.

If your workers' compensation expenses are soaring, take a lesson from Sky Chefs, which uses total-quality principles to keep its costs down to earth.

In 1990, Sky Chefs, an airline caterer, found that its workers' comp costs were taking off faster than its dinners. In fact, the reported-injury frequency among Sky Chefs' workers was two to three times the national Occupational Safety and Health Administration rate for the restaurant industry. Just three years later, Sky Chefs is back on course again.

How did we do it? We harnessed the techniques of our total-quality leadership program and identified critical work-process improvements. Now we've dramatically reduced the frequency, severity and costs of work-related illnesses and injuries.

In many companies, workers' compensation costs are threatening budgets, profit margins and sometimes the organization's survival. But you can keep this expense under control. By managing your costs properly, you can lower production costsand generate additional funds for wages and other benefits. And you can increase your profits. To achieve these aims, you must develop a strategy that incorporates cross-functional responsibilities. Also, you need to link your analysis of workers' compensation expenses to the work environment. The result? An efficient, integrated system of claims, medical and disability management. We introduced our quality program in March 1990. In mid-1990, a cross-functional team began expanding a safety policy drafted by workers at our Nashville kitchen, one of our newer and more innovative units. The team developed a safety-process manual, including suggestions for improving safety awareness, safety-management structure and on-the-ground work-process safety.

Based on the team's initial success, we rolled out a safety leadership program company-wide in March 1991. The goal was to reduce the frequency of OSHA-recordable injuries by 50 percent in three years. We achieved that in just 18 months.

By mid-1991, we were making good progress in reducing the frequency of workers' compensation injuries. As time passed, however, we decided to redefine the safety leadership goal. Originally, the program focused on injury prevention. But we began to recognize that reducing workers' compensation costs and severity was equally important and set a goal of cutting costs by 50 percent in threeyears. We knew several of our competitors had already made notable gains in both efficiency and market share by using quality improvement techniques and tools. NO MORE PIECEMEAL PROGRAMS

In the past, Sky Chefs, like many other companies, had assigned the tasks of preventing and managing work-related illnesses and injuries to several unrelated departments. The financial department's tax and treasury group purchased workers' compensation insurance and tracked the financial consequences of comp cases. Line operating departments were responsible for developing and managing safe work processes and conditions, while safety coordinators at several locations were responsible for keeping track of injured workers. Finally, ourinsurer's claims department, along with Sky Chefs' operations staff, handled the claims-management function, including wage replacement, contact with injured workers, claims investigation and medical care management. The net effect was a fractured approach that contributed to dramatic increases in the cost of our program.

We began turning things around by expanding our project focus to include all aspects of managing occupational illness and injury: risk financing, loss prevention, claims and medical management, employee involvement and communication, and process management. We organized a steering committee to manage the project. It included our president, safety director, tax director, vice president of human resources, director of benefits, director of total quality leadership, several division heads and the controller. The committee also included outside specialists in quality improvement techniques, occupational medicine, claims, general management, benefits, communications, actuarial issues, loss control, statistical analysis, risk-management information systems and risk financing.

The steering committee then selected the project's kitchen sites. We have kitchens or catering operations at 36 locations, but the committee decided to concentrate on the Dallas-Fort Worth and Los Angeles kitchens. Together, these two facilities employed one-third of the entire work force and accounted for more than 50 percent of the costs. While the two kitchens differed in ethnic makeup, management style, and state laws and regulations, they faced strikingly similar problems. After selecting the sites, we formed six task teams to address risk-financing, data, loss-control, claims, communications and medical issues. The task teams collected data on the actual and estimated future losses, loss sources and medical treatment patterns that influenced cost and lost time. They also examined several outside audits from previous periods, focusing on our carrier's claims-adjustment operations and physical loss-control practices.

Medical and claims-management specialists audited the carrier's claims function, too, analyzing the claims-management process and time frames. Our outside occupational-health professionals developed a complete portrait of medical treatment patterns by auditing primary-care provider records. We also gathered qualitative data on employee and management attitudes and beliefs; the physical environment; the current system for assuring safe environment and work practices; and current policies, roles and processes. The teams studied the work climate, with a specific eye toward Sky Chefs' prevention and management processes. Communications and loss-control specialists held focus groups, surveying employees and managers for their impressions of management'sconcern with safety, as well as their knowledge of and attitudes toward workers' compensation. The teams asked the employees if they had ever been hurt on the job and, if so, whether they were satisfied with management's response and the workers' compensation process.


Other key qualitative data included detailed mapping of the medical-care processes, as well as injured-worker information and personnel management. By reviewing these "maps" against the role descriptions, policies and procedures, the teams identified information and communication gaps, role ambiguity and process inefficiencies. Roles and processes were especially important, because they established a context for viewing the prevention and management of occupational injury and illness as a series of related processes. This integrated analysis made the many reasons for cost increases and the equally numerous opportunities for improvement startlingly clear.

The teams presented their findings to our president at a day-long meeting in March 1992, less than three months after we redefined our project goals. They reported that creating a coherent data base from more than eight separate data sources was difficult because many data points were missing. Data definitions varied by source, and claims tapes lacked information on medical diagnoses and treatments. Data capture and integration emerged as key issues, as did the need for usable management reporting.

The second major issue was the insurance carrier's claims-management practices. Two recent outside audits had given these practices clean bills of health, but they were still riddled with problems. For example, the teams found that the process for managing injured workers was rife with role ambiguities and inconsistencies. This was especially true of data collection and analysis, medical practice patterns and disability management, which was almost nonexistent.

Also, the carrier's claims administrators had only limited contact with injured workers or Sky Chefs' management. Claims remained open for extended periods of time with practically no activity management. Plus, referral time frames for independent medical opinions and rehabilitation far exceeded standard industry recovery times. In the absence of any guidelines, no standard operating procedures or audit tools were in place. Vendor integration was another significant problem.

The teams pronounced existing medical and disability-management practices reactive and more characteristic of a casualty-insurance than a managed-care environment. This approach also affected management's philosophy. With casualty insurance, you generally wait for the case to define itself before "adjusting" or negotiating compensatory payment. While this is a perfectly reasonable response in that situation, it fails to reflect the realities of workers' compensation cases.

Specifically, the inconsistencies in our medical and personnel practices created widely varying costs with little relationship to the actual injury, disease or disability. To assure quality and value, medical treatment must be managed like any operating process. Retroactive, hands-off management is no longer the most effective approach.

The risk-financing picture also was clouded. Conventional insurance-industry logic says a single risk-financing program conveys economies and lowers costs. In this case, we recognized that individual state approaches would substantially reduce costs in certain states. We used regional carriers in California and NewYork and substituted a voluntary Employee Retirement Income Security Act (ERISA) plan for the state workers' compensation plan in Texas. This latter decision provided the freedom to manage medical care and disabilities while providing comparable value but far fewer administrative restrictions than the state workers' compensation system.

Management relations, communications and loss-control findings covered several areas. Employees and managers believed the company had failed to effectively demonstrate concern for worker safety. This impression was at least partly fueled by management's difficulties in obtaining funding for some process changes. And the responsibility for safety management at the line level had not translated into effective systems assuring work processes designed for safety.

In general, we needed more and better training. Although the participants in the TQL project and the safety and workers' compensation coordinators thought theproject was successful, we hadn't successfully communicated with or involved our line workers.

The teams recommended that we manage work-related injuries and illnesses much more proactively. In fact, just changing the program's name from "workers' compensation" to "work-related injury management" conveyed an important shift in attitude and priority and suggested we were becoming more involved.


A team of consultants and managers from the Dallas-Fort Worth units developed key quality characteristics and criteria for managing claims, medical and legal issues. These served as guidelines for internal improvements and vendor selection:

* Incorporate safe work practices into standard work processes;

* Involve line workers in all aspects of process improvement, particularly safe work practices;

* Integrate and continuously improve post-injury management processes;

* Communicate concern for employees;

* Create a unified data base that could deliver timely, useful information to line managers;

* Review vendors objectively and thoroughly, based on the best work-related injury-management process, and integrate them into that process;

* Institute criteria- and time-based medical care and disability management;

* Implement a comprehensive modified duty program;

* Create a single managerial focus for loss prevention and work-related injury management.

We also developed the workers' compensation and safety director role, a general-management position with broad administrative responsibilities. After appointing someone to the position, we centralized all loss-prevention and management functions under his stewardship and created parallel roles in key operating units. Additionally, we hired an experienced claims manager and a training manager.

Sky Chefs created the Concern, Awareness, Responsibility and Excellence program to engage line employees in work-process safety improvements. C.A.R.E. is a safety-communications program that involves and rewards line employees for safe acts. It uses some nonverbal communication techniques and multiple languages -- important features for our multicultural, multilingual work force. Additionally, in a marked shift from more traditional safety programs, C.A.R.E. uses positive reinforcement and clearly conveys management's concern for employees. It has focused on documenting and understanding work processes and training and has achieved some outstanding results. For instance, we've achieved a 30 percent to 60 percent reduction in injury frequency at test sites. PLUMMETING INJURIES

After mapping the post-injury management process and developing key quality characteristics and vendor specifications, we withdrew from the Texas workers' compensation system. We substituted an ERISA plan providing comparable benefits but allowing real-time medical and disability management. Applying the new specifications to this plan, we selected vendors through a competitive process, and the severity of our workers' compensation injuries plummeted.

Closing old claims was another key area. These mainly inactive files were tying up a large amount of the company's potential credit and were perpetuating additional absences and medical treatment even when the original injury had healed.

Unifying the information system is an ongoing process, as is vendor integration, both for process and information. Developing an effective management reporting system will be a direct out-growth of the new information system. However, line management is already benefiting from simple conventional metrics, such as severity and frequency reports.

In trying to implement the best post-injury management process possible, we've been stalled by the lack of medical providers willing to follow practice guidelines, to document diagnoses and treatment and to become involved in quality improvement. Until these resources become more widely available, we cannot realize our full potential for improving medical management, and inconsistencies will remain, seriously compromising the quality of care.

However, the news overall is excellent. We revised the original 1992 loss projections, which had been prepared one year earlier, downward by 19.5 percent in February 1992, because of the changes in risk-financing mechanisms and our decision not to subscribe to the state workers' compensation system in Texas: In June 1992, we revised downward again, this time by another 3.9 percent. In absolute dollar terms, the original forecast called for $19.6 million in losses, reduced to $15.3 million in February 1992 and to $14.7 million four months later.

In fact, since November 1992, we have cut our estimated 1992 workers' compensation liabilities by 42 percent from earlier projections. Employee feedback about the C.A.R.E. program has been enthusiastic in Dallas-Fort Worth and Los Angeles. As of October 1992, actual losses dropped, compared with the original budget, by 60 percent in Dallas-Fort Worth, 30 percent in Los Angeles, and 20 percent in the three New York-area kitchens. Clearly, we've improved our control of the prevention process.

Management support and guidance are essential, especially in a cross-functional environment. Our COO set timelines, established criteria for deliverables, delegated responsibilities and reassigned staff to manage workers' compensation. The degree of managerial involvement clearly reflects an organization's commitment and ultimately its culture and climate. Assigning responsibility and accountability is top management's job. Plus, as the Sky Chefs' caseillustrates, companies need to train their supervisors more thoroughly. This is, alas, an old human-resources development message that companies still widely ignore. But it's to your advantage to start paying attention to the way you manage your workers' compensation costs, because the stakes are only getting higher.

Mr. Kay is president and chief operating officer of Sky Chefs in Arlington, Tex. Mr. Murphy is director of risk management at Sky Chefs, and Mr. Harris is principal and western regional practice leader of Alexander & Alexander Consulting Group's Health Strategies Group.
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Article Details
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Title Annotation:Risk Management; compensation
Author:Harris, Jeffrey S.
Publication:Financial Executive
Date:Jan 1, 1994
Previous Article:Profile of an annual report.
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