Is a Hybrid Approach to Workers’ Compensation Right for Your Company?
Posted in: Commercial Insurance
When it comes to workers’ compensation insurance, most companies purchase a policy from an insurance company and opt to be “fully insured.” If your company is fully insured, but you are looking to reduce your costs, your organization could be a candidate for a hybrid solution. Read on for an overview of how it works.
Traditional workers’ compensation
Traditional workers’ compensation insurance covers lost wages, medical costs, and rehabilitation expenses for workers who are injured or contract an occupational disease on the job. The coverage is provided in two parts: statutory state benefits (SSB) and employers liability.
- Statutory state benefits include loss of wages, medical expenses, and rehabilitation costs, but the limits and extent of coverage may vary, depending on state regulations.
- Employers liability insurance protects companies from loss due to fatality, disease, or injury in the workplace caused by its own gross negligence (e.g., unsafe workplace conditions or practices).
If employees get hurt, they can only file a claim under one of the above mentioned categories, which is most often the SSB.
Disadvantages of traditional coverage
Traditional workers’ comp plans do come with some noted advantages, including access to the insurance company’s resources to help you control losses, resolve claims in a timely and smooth manner to manage costs, and expedite the recovery and return to work of an injured employee. Additionally, the workers’ comp rate is fixed for the year so you can more accurately project your costs.
But downsides arise for companies that are subject to seasonal swings in business (which may affect their ability to make installment payments during limited cash flow months); do work that varies by contract (which may require changing types of work or locations); or offer potentially hazardous services (since not all insurance companies are willing to insure high-risk operations).
Other drawbacks of traditional workers’ comp insurance:
- Workers’ comp rates for businesses may increase due to the combined loss ratios of participating insurance companies on the market.
- Claim frequencies have been rising as a result of more law firms encouraging claims-filings.
- Increasingly, courts issue decisions in favor of the employee, the claimant.
- The implementation of the Patient Protection and Affordable Care Act (PPACA) makes it difficult for an insurance company to investigate a claim for an injured worker due to its privacy protections, which can prolong the claims process and can increase the compensation paid to the injured employee.
- Poor claims adjudication, which negatively affects workers’ comp premiums, is chronic in all states.
The co-employment or “hybrid” alternative
An alternative to traditional (fully insured) workers’ compensation is being self-insured, an option generally only available only to the largest firms. Some companies that cannot qualify for self-insurance due to size, might be prime candidates for a co-employment program, a hybrid between being fully-insured and self-insured that provides a number of different benefits not available in a traditional insurance program.
When using a co-employment insurance provider, your company’s losses are pooled with other companies, but your company is not exposed to any loss costs but its own. In most cases, this option provides decreased combined payroll cost and the workers’ compensation premium is nearly always less than a traditional workers’ compensation premium alone.
Additional benefits include:
- Supplementary HR and loss control benefits and services
- The co–employment provider becomes responsible for processing payroll, withholding and filing of payroll taxes, providing self-insured workers’ compensation coverage, and managing of workers’ compensation claims including various other administrative functions related to assigned employees.
- The co–employment program provider assists you in processing regulatory paperwork and guidance with compliance issues.
- You still maintain custody, and control of business operations and day-to-day supervision of the staff.
Payroll processing is beneficial in a number of ways.
- It offers essentially a “pay as you go” plan.
- The classifications you set up for employees will include a rate that accurately factors the workers’ compensation cost (instead of inflated rate that most traditional workers’ comp plans have), payroll processing, and the normal employer payroll taxes.
- You eliminate the installments and streamline the audit process, and employment taxes are accounted for and reported by your plan.
- You also have the flexibility of choosing more beneficial classifications and more control over the claim process, have no surprises at audit, and have free access to human resources consultants to help with many of your needs as an employer.
An approach worth exploring?
The co–employment approach may not be for all companies since each business and circumstance has different needs. It is a relatively unexplored option, which many brokers do not discuss with their clients. However, because non–traditional options can deliver significant direct cost savings as well as the indirect expense reductions inherent with supplementing your various HR functions with the co-employer’s services, it could pay to consider alternative risk management options.
The effect of using this approach can be dramatic. For example, one company that switched to become co–employment self-insured was quoted over $400,000 a year on fixed installments by their traditional workers’ compensation insurer. This premium was subject to audits that could result in even higher additional premiums at year-end. This cost was mainly due to hazards of the operation and losses from two prior years.
With the co–employment option PSA recommended, this client was able to obtain the same benefits of traditional insurance, eliminate the experience modification that is inherent in traditional workers’ comp programs, adjust employees into lower rate classes, cut their company’s costs by more than 60 percent, and gain the human resources support to help them grow their business.
With potential results like these, every employer should explore the opportunity to make an informed decision concerning a co–employment option to traditional workers’ compensation insurance solutions.
Weighing options and determining the best plan for your company isn’t easy. If you have questions or would like to learn more, contact me today at bmarx@psafinancial.com.
