Amidst the turbulent waters of organizational risk management lurks the necessary, yet often challenging, expanse of workers' compensation.

In some states, a government-run bureau of workers' compensation is the insurance agency through which all workplace injuries are processed. These states are referred to as "monopolistic." In the majority of states across the country, however, employers shop the insurance market for rates and service.

Whether the insurance agency is state-governed or run through private insurance, one of the primary functions is to process workers' claims of on-the-job injuries, while acting in tandem with the injured workers' employer. Few employers interface directly with the insurer or state bureau; rather, the vast majority of organizations choose to have a third party administrator (TPA) act as a liaison in handling the broad spectrum of activities and programs involved when workers' compensation issues arise.

Risk Profiling

Assessing a company's risk profile is a process performed by the insurer or bureau of workers' compensation. It is a process that involves mathematical science blended with a bit of subjective art. Through complex actuarial formulas, risk factors are determined by considering job classifications, worker age, gender, geography, unique industry hazards, pre-existing conditions of the worker, workplace safety and many more characteristics of risk. Once a rate is determined for each employee, an overall rate for the company is set, and subsequently, coverage in compliance with that particular risk profile is established.


A workers' compensation policy is created to cover all claims that are a result of an injury sustained by an employee while working in the zone of employment and during his/her scheduled time. Costs arising from such an incident cannot be claimed under any other policy carried by the employer or any other type of insurance policy for that matter. A worker is not compensated by any other source aside from the insurer or bureau of workers' compensation-or in some cases, the company directly. Of course, it may be appropriate at any given time to affect a settlement with an injured worker, which would bring that particular claim to a close. At times, this becomes a viable strategy for effectively managing workers' compensation costs in the long term.

Claims Approval

At the first onset of treatment and for every cost associated with the injury, claims must be approved by the insurer or bureau of workers' compensation. An employer's TPA should make every effort to ensure that costs don't skyrocket by scrutinizing every test and doctor's appointment, the scope and nature of therapy, clinic or hospital procedures, legitimacy of time off from work and every other issue associated with the claim. Time off from work or lost time claims affect a company's reserves the hardest. Therefore, it is critical that employers engage their TPA to manage the exposure that a lost time claim can bring.

Employing the services of an Independent Medical Examiner (IME) is an effective way to get an unbiased assessment of the worker's ability or inability to return to work. Once a worker is on the road to recovery, back-to-work programs and job re-assignments are ways for a worker to reenter the workforce without causing the employer to hire additional staff. This, too, is why it is important to establish a good working relationship with a reputable occupational health provider. Where disputes may arise, an independent or state appointed arbiter may hear arguments. If these arguments are appealed a number of times, the case may be referred to the Court of Common Pleas.

Managing Costs

Workers' compensation costs, if not managed correctly, can jeopardize a company's bottom line quite dramatically. These costs have been known to cause many employers to lay off workers, avoid taking on additional work, cease added benefits or worst of all, shut their doors completely and relocate to another state. The insurer or bureau of workers' compensation certainly does not want employers to bear an unreasonable expense. In fact, it is quite the contrary. The insurer or bureau of workers' compensation and the TPA are willing to furnish companies with critical information needed to maintain proper coverage and to take advantage of discount programs wherever possible.

Preemptive measures can be taken by exploring several prevention programs, such as structured recruitment and retention strategies; worker and workplace policies; manuals, procedures and employee handbooks; pre-employment screening and background checking; spot checks; ongoing assessments of costs and more.



Companies must have their claims experiences audited regularly to make certain that their costs are in line with their loss experiences. A good TPA will perform these audits any time there are claim activities. The TPA should work side-by-side with the organization on a real time basis to avoid losing any opportunity to mitigate costs. The employer must have knowledgeable and competent counsel attending hearings to defend against an employee who has acquired the services of an attorney who is ready to take full advantage of a company and/or their TPA who may not have such representation. Unfortunately, some TPAS are brought into the picture only after the "horse is out of the barn." Forward thinking, not crisis driven action, is a key component of risk and workers' compensation management.


How does an employer know if the company is set up for the best preventive measures available? If safety awareness and drug-free workplace programs have not been implemented by the company, then certain "bad risks" could walk through the door armed with the knowledge of how to "play the system" and fabricate situations, with the ultimate goal of avoiding return-to-duty and still collecting two-thirds of their pay. It behooves every business to weed out bad risk by eliminating areas of vulnerability. Pre-employment screening, strict but fair policies and employee handbooks set the tone and demonstrate that the company has performed its due diligence so that a workers' compensation "repeat offender" may not get past the system of checks.

By adopting certain safeguards, the frequency and severity of workers' compensation incidents and their associated costs have been trending downward for the last several years nationwide. It is anticipated that this trend will continue as most businesses must now, more than ever, operate in the most economically efficient manner as possible and seek the assistance of knowledgeable and experienced TPAs, attorneys and other professional consultants and resources.

Communication is Key

One way to know if a TPA is working in the company's best interest is if he/she stays in constant communication. Topping the list of complaints leveled by companies against their TPA is that the TPA was either not proactive or was late, if not remiss, in dealing with a workplace injury issue. A good TPA will also work closely with the company's managed care organization (MCO) to get a worker the treatment he/she needs, and put him/her on the road to recovery, resuming job duties as they were before the incident. To that end, it is in the company's best interest to have a TPA and an MCO with different ownerships. Otherwise, a true approach at discretion could be compromised. This type of arrangement would not be in the best interest of the organization's bottom line. An effective TPA/MCO team will verify the legitimacy of every claim and every expense associated with that claim, but they must be objective with one another.

Discount Programs

A good TPA will assist the company in mitigating costs if and when a legitimate injury (or death) places the claims experience at a level that prevents the company from participating in the industry's greatest discount-group rating. If a company is group rating eligible-fantastic! The organization should find a TPA that provides real service along with the group discount. 


If a company is not eligible for the group discount, then it needs a TPA that will spring into action and adjudicate claim(s) to keep reserves as low as possible. One way of approaching this loss control is to review each claim for its handicap potential.

Handicapping is a defensive approach that protects a company's reserves while allowing the employee to get the treatment he/she needs.  It should not be the responsibility of the company, however, to treat a condition that existed prior to the injury. A classic example of this would be a back injury of an employee who is of the age where most of the general population has some degree of arthritis in that region of the body. The employee should receive the therapy he/she needs, but the company should not be charged for treating the arthritis that further aggravates the injury. A percentage is applied to the claim, which takes some of the financial burden off of the claims experience for the employer in their profile with the insurer or bureau of workers' compensation. This percentage can sometimes be as high as 90 percent. A handicap reimbursement offsets the company's costs and is attempted on the company's behalf. A handicap reimbursement can also be attempted later in the claim process; however, it makes the most financial sense when done sooner rather than later. Handicapping is just one tool used in an employer's best interest amongst many offered by the insurer or bureau of workers' compensation and acted upon by a TPA with competent and effective representation.

A good TPA working in conjunction with qualified legal representation can fight back against what can be a costly litigious legal system. In addition, many states have instituted programs where employers can receive discounts by implementing certain programs. For instance, the design and deployment of a policy/program establishing a substance free working environment can bring to the organization added discounts off workers' compensation premiums. States differ in their structure and incentive regarding these programs. In a state-run bureau of workers' compensation structure, the bureau may approve varied levels of discounts based upon the level of program participation. In non-monopolistic states, a government-led chamber of commerce may institute a program that must be honored by the independent insurer. In addition to direct premium discounts, a drug-free workplace can help decrease accident occurrences, reduce high medical claims, increase productivity and more.

Setting a Course

All in all, workers' compensation is full of twists and turns, mines and pitfalls. What works for one company in a given situation may not be the best answer for another.  While variables abound, one constant remains-in order for employers to effectively captain their ships through the tempestuous waters of workers' compensation, it is best to set a clear course in advance, have a good first mate in TPA, and to borrow words from William Shakespeare's Hamlet, "to take arms against a sea of troubles, and by opposing end them." Being armed with the knowledge of how best to deal with workers' compensation and who to turn to for guidance and support is the first step in effective risk management.

Construction Business Owner, August 2007