GUEST COLUMN
Power in the numbers: Tracking disability costs
Cost model offers simple way to estimate costs
By Richard Bolmen
Workers’ Compensation and Disability Consultant
MBR Group, Oakland, CA
Hospitals have begun to realize that the cost of disabilities and the resulting toll on productivity is staggering. To combat that potential financial drain, they must increase their focus on the effective management of human capital and the impact of employee disability and absence on the bottom line. After all, while employees are your most valuable assets, they also represent one of your most significant operational and financial liabilities.
Just how much is employee disability and absence costing you? That question is a difficult one. Most managers are hard-pressed to justify the internal and external resources needed to develop a full-fledged absence and disability management program. Yet at the same time, senior financial officers are requesting their human resources (HR) and benefits managers to document and substantiate those costs — and to find ways to stem the financial hemorrhage.
To know your costs, you need reliable data, benchmarks, and a metric for conducting the necessary calculations. This particularly is the case as it relates to nonoccupational absence and disability costs. The task of collecting and quantifying disability-related costs may seem insurmountable. Regardless of the obstacles, there are fundamental steps that can be taken to establish a methodology for collecting the data, developing cost models and saving opportunities, and ensuring efficacy of the measurement tools.
What will you measure?
Data efficacy is critical. Before developing a quantitative assessment of disability or absence-related costs, you first need to identify and categorize the various components of the cost model.
What exactly are you trying to measure? Are you collecting data to measure absence, disability costs, medical costs, lost productivity, or other related costs? Are you concerned about total costs of disability, which would include nonwork-related injuries and illnesses? The answer will determine what data you need for your cost calculations.
For example, if you want to quantify absences resulting from nonoccupational related injuries, you must establish those data sets. To determine the cost of nonoccupational absence, your data sources would include short-term disability, long-term disability, employee absence data, and lost workdays by diagnostic category. You would need to collect data from both internal and external sources, such as the insurer, broker, short-term and long-term disability carrier, and health plan data.
Once you have established the potential sources of data, you need a collection methodology to ensure consistent collection of data across the organization and data reproducibility. This is particularly important for organizations with multiple locations and different HR and benefits processes. You also will determine the accuracy, availability, reliability and relative importance of each data set.
What do we mean by "total cost of disability"? In its simplest iteration, a total cost of disability model consists of the following three components: direct costs, hidden or indirect costs, and disability management costs. Direct costs are those costs paid directly by the employer and should be relatively easy to quantify. The hidden and indirect costs include much less tangible data relative to productivity and profitability losses associated with absence and disability.
Here are examples of total cost of disability cost factors:
• Direct costs: Workers’ compensation, short-term and long-term disability premiums, sick leave, disability-related medical costs, overtime, salary continuation, FICA, and lost workday benefit costs.
• Hidden costs: Training and hiring, productivity losses, absenteeism, morale, increased supervision, overstaffing, underutilization of human capital, and lost business opportunities.
• Disability management costs: Wellness programs, employee assistance programs, health and safety programs, claims administration, return-to-work programs, and disability management staffing costs.
This is not an all-inclusive list. Therefore, the first step in developing our total cost model is agreeing upon and defining each of the components, which make up the qualitative model. This sounds much easier than it truly is, particularly when one considers the different languages and terminology spoken by risk management, workers’ compensation, and employee benefits. You also need to reach a consensus regarding the definitions of each of the terms listed.
Once you establish your data collection and define what you are measuring, you have the fundamental building blocks for a quantitative model.
Step I: The UNUM model
You can start with a broad brush look at your total cost of disability, based on a model developed by UNUM, a major disability insurer, in conjunction with economists from Rutgers University in New Brunswick, NJ. The March 1998 UNUM study on the total cost of disability included 26 diverse employers, $10.8 billion of covered payroll, and 298,000 employees. The data and metrics collected in the UNUM study are designed to provide a "quick and dirty" total cost of disability calculation. Although these numbers don’t relate specifically to health care, they provide a general framework. With higher-than-average occupational illness and injury rates, hospitals may actually have higher total disability costs.
UNUM’s 1998 study determined that, for their study group, the total cost of disability averaged 8.6% of payroll. As a percentage of payroll, direct costs accounted for 4.5%, hidden costs were 3%, and disability management costs were 1.1%. As a percentage of the total disability dollar, direct costs account for 52%, hidden costs for 35%, and disability management costs for 13%. The UNUM study also measured total disability costs on the basis of total cost per employee. The average costs from the study were as follows:
- Direct costs: $1,537 per employee.
- Hidden costs: $971 per employee.
- Disability management costs: $352 per employee.
- Total cost of disability: $2,860 per employee.
With this information, the total cost of disability for any given year can be easily estimated by obtaining the total number of employees (full-time equivalents) and the total payroll for those employees and applying the UNUM cost factors listed above. This can be collected for an entire corporation or compared on a division basis. This is the first step toward quantifying your total cost of disability. However, this is also the least accurate of the models relative to quantifying your company’s total cost of disability.
Your next step involves quantifying all of the cost components within each cost category (direct, hidden, and disability management) with actual data from your hospital. However, as you will find during the development of your model, some data may take more time to develop and collect, in the short term, than the data are worth. For those items, estimates should suffice.
The development of the ultimate total cost of disability model, in which all of the metrics are representative of an organization’s specific data, can be a long and arduous process. You may choose to begin with data that are easier to obtain, such as workers’ compensation, sick leave, and medical claims.
While documenting and quantifying the costs are important, this is only a starting point. Actual cost savings result from developing and implementing programs that proactively manage the occupational and nonoccupational injury process for your employees. This not only minimizes disabilities and absence resulting from these injuries, it also provides a mechanism to preserve the assets of the corporation and of that employee’s primary financial interest — the family. Without this process, the metrics are meaningless.
[Editor’s note: More information on UNUM is available on the Web site: www.unum.com. Richard Bolmen can be reached at (510) 531-7211 or [email protected].]
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