Is a Hybrid Approach to Workers’ Compensation Right for Your Company?
Posted in: Commercial Insurance
When it comes to workers’ compensation insurance, many companies typically acquire a policy from an insurance provider and choose to go the “fully insured” route. However, if your company is fully insured and you are seeking ways to reduce your expenses, you might be an ideal candidate for a hybrid solution. In this article, we will provide an overview of how this hybrid approach works.
Traditional Workers’ Compensation
Traditional workers’ compensation insurance is designed to cover lost wages, medical expenses, and rehabilitation costs for employees who sustain injuries or contract occupational diseases while on the job. This coverage comprises two main components: statutory state benefits (SSB) and employers’ liability.
Statutory state benefits encompass compensation for lost wages, medical bills, and rehabilitation expenses, but the extent and limitations of this coverage can vary depending on state regulations.
Employers’ liability insurance shields companies from losses resulting from employee fatalities, illnesses, or injuries in the workplace that are caused by the company’s own gross negligence, such as unsafe working conditions or practices.
In the event of employee injuries, they can typically file a claim under one of these categories, with statutory state benefits (SSB) being the more common choice.
Drawbacks of Traditional Coverage
Traditional workers’ compensation plans offer several advantages, including access to the resources of the insurance company to help manage costs, expedite claims resolution, and facilitate the recovery and return to work of injured employees. Additionally, the workers’ compensation rate is fixed for the year, enabling more accurate cost projections.
However, challenges arise for companies subject to seasonal business fluctuations, those involved in contract-based work that may require changing job types or locations, or those engaged in potentially hazardous services that not all insurance providers are willing to cover.
Additional drawbacks of traditional workers’ comp insurance include:
- Increasing workers’ comp rates due to the combined loss ratios of participating insurers in the market.
- A rise in claim frequency, partly due to increased encouragement of claims filings by law firms.
- Courts increasingly favoring employees or claimants in their decisions.
- Challenges arising from the implementation of the Patient Protection and Affordable Care Act (PPACA), making it harder for insurance companies to investigate claims due to privacy protections, potentially prolonging the claims process and increasing compensation to injured employees.
- Ongoing issues with claims adjudication, which adversely affect workers’ comp premiums across all states.
The Co-Employment or “Hybrid” Alternative
An alternative to traditional fully insured workers’ compensation is self-insurance, an option typically available only to large corporations. For smaller companies that don’t qualify for self-insurance due to size, a co-employment program may present an appealing middle ground—a hybrid solution offering various benefits not found in traditional insurance programs.
In a co-employment insurance arrangement, your company’s losses are pooled with those of other businesses, but your company is only responsible for its own loss costs. In most cases, this option results in reduced overall payroll costs, with the workers’ compensation premium typically lower than that of a traditional workers’ compensation policy alone.
Additional benefits of this approach include:
- Supplementary HR and loss control benefits and services.
- Responsibility for payroll processing, payroll tax withholding and filing, self-insured workers’ compensation coverage, and management of workers’ compensation claims, among other administrative functions related to assigned employees, shifts to the co-employment provider.
- Assistance with regulatory paperwork processing and guidance on compliance issues.
- Retention of control over day-to-day business operations and staff supervision.
The payroll processing aspect of this approach offers several advantages:
- Adopts a “pay as you go” approach.
- Classifies employees with rates that accurately reflect workers’ compensation costs, rather than the inflated rates often found in traditional workers’ comp plans.
- Eliminates installments, streamlines the audit process, and handles employment taxes within the plan.
- Provides flexibility in choosing classifications and greater control over the claims process, eliminates audit surprises, and offers access to HR consultants for various employer needs.
An Approach Worth Considering?
It’s important to note that the co-employment approach may not be suitable for all companies, as each business has unique needs and circumstances. Additionally, it’s a relatively lesser-known option, often not discussed by brokers with their clients. However, because non-traditional options can yield significant direct cost savings and indirect expense reductions through the augmentation of various HR functions with the co-employer’s services, it’s worthwhile to explore alternative risk management strategies.
The impact of adopting this approach can be substantial. For instance, a company that transitioned to a co-employment self-insured model was initially quoted over $400,000 annually in fixed installments by their traditional workers’ compensation insurer. This premium was subject to audits that could result in even higher year-end costs, primarily due to operational hazards and losses from previous years.
With the co-employment option recommended by PSA, this client achieved the same benefits as traditional insurance, eliminated the experience modification inherent in traditional workers’ comp programs, reclassified employees into lower rate classes, reduced their company’s costs by more than 60%, and gained valuable human resources support to support business growth.
Given the potential for such significant results, every employer should explore the opportunity to make an informed decision regarding a co-employment option as an alternative to traditional workers’ compensation insurance solutions.
Weighing these options and determining the best plan for your company can be challenging. If you have questions or would like to learn more, please don’t hesitate to contact me at bmarx@psafinancial.com.
