Q & A: Experience Modification Factor

While insurance companies now have more tools to determine the pricing of a workers’ comp policy, the Experience Modification Factor (mod) remains a core factor in the pricing determination. The lower the mod, the lower the premium. Perhaps, most importantly, employers can control their mod and manage their costs by improving workplace safety, reducing injuries, and properly managing those that occur.

The actual process of calculating the mod is complex, but, in essence, its purpose is to compare your company’s claims experience to other employers of similar size operating in the same type of business. Here are some common Q & A’s about the mod:

1. Q. My company had no injuries this past year, but my mod went up. How can that happen?
   A. In experience rating, the actual payroll and loss data is analyzed over a period of time, usually, a three-year period, not including your most recent completed policy year. For example, a mod effective Jan. 1, 2017 would use policy data from the years 2013, 2014, and 2015. The data from 2016 would not enter the picture until the 2018 mod when the data from 2013 dropped off.

If the expected loss ratio (ELR) goes down, the mod could go up, this occurs if the payroll in the new year added to the policy was lower than the payroll for the year that fell off the mod and/or if the ELR for the industry changed.

2. Q. What is the “controllable” mod?
   A.  Every company has a unique minimum mod that is based on its payroll, the industry risk, and no losses for the entire rating period. The minimum mod will differ from a competitor’s and it may change somewhat from year to year. But it is an important number to know because it enables a company to determine the “controllable” mod. The “controllable” mod is the difference between your actual mod and the minimum mod. So, if the actual mod is 1.0 and the minimum mod is 0.75, the “controllable” mod is 0.25. This is a direct result of the losses that occurred during the rating period and is the piece of the mod that can be changed by a robust loss control program.

3. Q. Is a mod of 1.0 good?
   A. A mod of 1.0 is average; it means your company’s losses have met   It’s like getting a “c” in school. If your company performs above average, the mod will be less than 1.0 and if you are below average there is a surcharge above 1.0.

4. Q. What is the most important date of your workers’ comp coverage (hint: it is not the renewal date)?
   A. The most critical date impacting the premium determination is the valuation date or the unit start date, which occurs six months after policy inception. While most employers are not thinking about insurance at the mid-year point, it’s when they should be highly focused on it because it is when the insurance company sends the loss information to the rating bureau to use in the promulgation of the mod. Ensuring the data is correct is paramount. Once the data reaches the rating bureau, it’s close to etched in stone.

It’s important that the insurance company has an up-to-date understanding of the status and strategy for closure of each open claim since it will be setting claims reserves, the set aside for what the future cost will be. If an employee recently returned to work or a claim is progressing better than expected, the claims adjustor needs to know before the data is submitted.

5. Q. Can a company negotiate to minimize the impact of a large, unexpected claim?
   A. While each claim needs to be evaluated individually and mitigating circumstances considered, it’s important to remember that workers’ comp is “no fault” insurance, paying even when it is not your fault. According to work comp guru, David Leng, “the only time underwriters will truly and fully dismiss an injury is when the cause of the injury was eliminated or engineered away.” As an example, if the company was using an older production machine where the guarding was not up to standards and an employee was injured and then replaced it with new state of the art automated machinery. This would impact the underwriter’s perception of risk.

6.  Q. My company had a number of minor losses one year. Since the losses were so small, why did they adversely affect the mod?
   A. Both frequency and severity factor in the determination of the mod. While given the increasing severity of claims, the NCCI made experience rating more sensitive to severity beginning in 2013, the frequency of a company’s losses still is heavily leveraged in the calculation. It’s felt that frequent losses are a better predictor of future claims than severity (cost of claim) and these are the types of injuries that can be controlled by employers through their safety programs.

7. Q. What is an Experience Rating Adjustment (ERA)?
   A. In many states, (.doc) although not all, there is a special rule in the mod calculation called the ERA. This gives a company a 70% credit for each loss in the mod that has a “medical-only” status, which means that no loss wages (indemnity) were incurred. Even if a very small amount of indemnity incurs, the full amount of the loss will count against the mod. The wage waiting period varies by state (usually 3-7 days) and employers should manage return-to-work and lost-time claims with that in mind.

8. Q. My company’s mod is 1.2, why have we been disqualified from bidding on several projects?
   A. Today, many contractors, property owners, and customers use the mod as a measure of how safely a company operates and will disqualify companies from bidding on work if their modifier is higher than 1.0. Since an independent third party sets the mod, it is considered more reliable than OSHA frequency rates or DART rates, which can be manipulated by the company.

OSHA’s top 10 most cited violations for FY 2016

While year after year OSHA’s top ten most frequently cited standards remain relatively unchanged, they provide important insight into OSHA’s focus on certain hazards, as well as areas that employers struggle to comply with consistently. The preliminary results were released at the 2016 National Safety Congress and are comprised of all violations taken into account through Sept. 30, 2016. A definitive list will be available closer to year-end 2016. It behooves employers to look at their compliance in these areas and how carefully they are covered in new employee orientations and ongoing training.

Here are the top 10:

 #1  Fall Protection

Standard: 1926.501 – Construction

Number of violations: 6,929

Problem: 39.9 percent of deaths in construction are fall-related, yet this continues to top the violation list. Roofing, framing and single family contractors were the most cited employers.

Solutions: evaluate the work being done in light of the OSHA requirements and ensure proper fall protection is provided; continual training, enforcement and monitoring; OSHA’s fall protection campaign.

#2  Hazard Communications

Standard: 1910.1200 – General Industry

Number of violations: 5,677

Problem: No written program, failure to maintain the up-to-date inventory of chemicals, lack of updated data sheets, inadequate training on how to handle hazardous chemicals, failure to understand the joint responsibility of staffing agency and the host employer.

Solutions: Employers struggling with large inventories and unwieldy paper-based systems can benefit from online and electronic systems; proper training and retraining; understand OSHA’s definition and expectations of “joint employers.”

#3   Scaffolding 

Standard: 1926.451 – Construction

Number of violations: 3,906

Problem: Framing, roofing, siding and masonry contractors were among the most commonly cited employers for this violation. Improper assembly, lack of fall protection, and access to scaffolding are common violations.

Solutions: adequate platform construction is critical, adequate points of access for the scaffold platforms, such as a portable ladder, hook-on ladder, direct access from another scaffold, and permissible forms of fall protection. A key is to have a “competent person.”

#4   Respiratory Protection

Standard: 1910.134 – General Industry

Number of violations: 3,585

Problem: Companies were cited after employees wore respirators but were not medically evaluated, were put in situations with overexposure to contaminants or were not properly fit-tested for respiratory protection.

Solutions: Have an industrial hygiene assessment, to help determine the level of exposures and what appropriate respiratory protection is needed. Medically test employees to determine if they are capable of wearing the equipment. Fit test to ensure each individual employee’s respirator is the correct size is comfortable and is effective.

#5   Lockout/Tagout

Standard: 1910.147 – General Industry

Number of violations: 3,414

Problem: The top three instances where companies were given citations for improper lockout/tagout were:

• Employees are not trained in proper lockout/tagout procedures.
• Lockout/tagout procedures were nonexistent.
• Employers did not perform periodic inspections of lockout/tagout procedures

Solutions: develop a written energy control program, specific to the equipment; understand the levels of training required and implement a comprehensive training program; conduct periodic inspections that must include an observation of the procedure and a review between the inspector and each authorized employee who uses the procedure.

#6   Powered Industrial Trucks

Standard: 1910.178 – General Industry

Number of violations: 2,860

Problem: Operators lacking certification, failure to train on the hazards associated with the facility, and workers not maintaining safe use when operating the vehicle.

Solutions: understand the types of equipment that fall under this standard, including forklifts, powered pallet jacks, stand-up rider lift trucks, order pickers, and so on. Train specifically for each type of equipment, inspect equipment daily and conduct refresher training.

#7   Ladders

Standard: 1926.153 – Construction

Number of violations: 2,639

Problem: Improper use of portable ladders, using the top rung as a step, and ladders with structural defects, lack of training on proper ladder use.

Solutions: Take defective ladders out of service and clearly label “Do Not Use”; inspect prior to use; train on the standard and the proper use of different types of ladders.

#8   Machine Guarding

Standard: 1910.212 – General Industry

Number of violations: 2,451

Problem: Lack of proper machine guarding, machinery not anchored/fixed, as it should be, using inappropriate tools to operate machinery

Solutions: There has been more emphasis on this standard since OSHA updated its nine-year-old National Emphasis Program on Amputations in June 2015 and changed its reporting requirements in January 2015. Employers should recognize this is a “catch-all” standard and compliance officers are directed to evaluate employee exposures during regular operation of machines, setup for regular operations, clearing jams, making adjustments while the machine is operating, and cleaning and maintaining machines.

#9   Electrical Wiring

Standard: 1910.305 – General Industry

Number of violations: 1,940

Problem: Unsafe substitutes for permanent wiring and incorrect use of extension cords

Solutions: Most electrical accidents result from unsafe equipment, unsafe environments, or unsafe work practices. Do not use extension cords for permanent wiring, do not daisy chain, do not overload the power capacity, and inspect daily for fraying and damage.

#10   Electrical, General Requirements

Standard: 1910.303 – General Industry

Number of violations: 1,704

Problem: Electric equipment not installed properly or used in accordance with recommended uses. Obstructed working space around electrical equipment.

Solutions: must install and maintain equipment according to the manufacturer’s instructions; carefully label all panels; regularly inspect electrical boxes; adequate access and clearance around electrical equipment.

Holiday parties: proceed with caution

As the season for holiday office parties approaches, it’s important for employers planning parties to take steps to minimize liabilities, including workers’ compensation, discrimination, harassment, and third party injuries. While we’ve given some of these tips before, it’s a timely reminder to help ensure that cheer does not turn into a legal nightmare:

1. Be sure workers understand that attendance is voluntary. This should be clearly stated in the invitation, whether it is an email or a flyer posted in the workplace. It’s very important to disassociate the holiday function from the employee’s job.
2. Hold after work hours and off site, reducing the likelihood the party will be perceived as work related.
3. Don’t encourage attendance by either implying attendance will help the employee advance or that failure to attend sends the message the worker isn’t a team player.
4. Avoid presentation of awards, bonuses or other recognition that suggest employees are there for business reasons.
5. Recognize that employees designated to plan and run the event may be considered in the scope of employment.
6. Be cautious about inviting vendors, clients or others with whom you have a business relationship.
7. Invite spouses and significant others. Although it is more costly, it helps to control behavior and establish the social nature of the event.
8. Remind employees that normal workplace standards of conduct are to be respected. Parties, particularly when alcohol is served, can be lead to sexual harassment or discrimination claims. Treat any discrimination or harassment claims seriously and conduct appropriate investigations.
9. Limit or do not serve alcohol. Do not have an open bar. Close the bar at least one hour before the end of the party. Be sure that alcohol is served by a professional bartender or at a licensed establishment that knows when to stop serving an individual. Serve plenty of food. Arrange for no-cost transportation for any employee who should not drive home.
10. Confirm that the venue is properly licensed.
11. Don’t allow employees to post company party images/comments on social media outlets without having a policy in place.
12. Be careful of language and decorations – don’t call it a Christmas party or invite “husbands and wives.”
13. Discuss your exposure with your insurance agent.

Looking ahead to 2017 in Workers’ Compensation

It’s been a very healthy workers’ comp market for employers in most states. Those with favorable loss and exposure profiles are renewing with flat or reduced rates. A notable exception is Florida, which may be facing double-digit increases.

While this is good news for employers, changes in the legislative and regulatory landscape, a transforming workforce, a shortage of workers in key industries, technological advances, medical inflation, and the growing demand for data are challenges for employers. Here are four legislative and regulatory matters that employers should follow in 2017:

1. Shifting legislative and regulatory policies under the Trump administration

Although states determine workers’ comp laws, a Trump presidency is expected to have a significant effect on the federal regulations that impact workers’ safety as well as employers’ regulatory compliance. One common theme through most of Mr. Trump’s campaign was reducing the federal influence in the workplace; many pundits are anticipating seismic shifts in OSHA and DOL regulations. Some regulations to watch include the new electronic recordkeeping and anti-retaliation law, the hospitalization and amputation reporting law, and the Silica rule. Many are also anticipating changes to the automatic cost of living adjustments for fines. A scale back in fine increases may also be on the table, but the penalty change was a statute and it’s not easily rolled back. Expect a shift in the ‘burden of proof’ back to the whistleblower in such cases, which, under the Obama administration, has focused on the secretary of labor finding there is “reasonable cause to believe that retaliation has occurred.”

Several other areas of OSHA enforcement are considered to be in Trump’s crosshairs, including the Joint Employer Doctrine, repeat violations, the Severe Violators Enforcement Program (SVEP), and non-company personnel participation (such as union representatives) in inspections. The Fair Pay and Safe Workplaces Executive Order requiring prospective federal contractors to disclose labor law violations and give agencies guidance on how to consider labor violations when awarding federal contracts are expected to be repealed.

Overall, a Trump administration is expected to shift the Obama focus on enforcement to one of compliance assistance, similar to that of President George W. Bush.

Another key area to expect changes is immigration reform, which Trump made the centerpiece of his winning campaign. While it’s difficult to predict exactly what changes will be made, there is likely to be an impact on undocumented workers, as well as temporary work visa programs (such as H-1Bs), which allow employers to bring on highly skilled foreign workers. Furthermore, if Trump can persuade industries to bring back jobs that were exported overseas and return jobs to the coal mining industry, there will be implications for workers’ comp.

2. Expanding legalization of marijuana

Election results also saw the expansion of legalization of both medical and recreational marijuana. California, Massachusetts, and Nevada joined Alaska, Colorado, Oregon, Washington, and the District of Columbia in legalizing the drug for recreational purposes, while Arkansas, Florida, Montana and North Dakota joined 24 other states in legalizing medical marijuana. So medical marijuana is now legal in 28 states, and an additional 16 states have laws that allow for limited medical use of the drug.

In most cases, these limited-medical-use laws mean that only a specific type of cannabis extract can be used. For a summary of the laws.  http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx.

At the federal level, marijuana remains classified as a Schedule I substance under the Controlled Substances Act, where Schedule I substances are considered to have a high potential for dependency and no accepted medical use, making the distribution of marijuana a federal offense. This status prohibits assigning a National Drug Code (NDC), which presents difficulties in processing medical marijuana transactions.

While there is limited legal precedent surrounding marijuana and workers’ comp, for the most part, the courts have favored employers. However, in two recent and separate decisions, the Appellate Division of Maine’s Workers’ Compensation Board affirmed two ALJs’ decisions requiring employers to reimburse injured workers for the costs associated with the reasonable and proper use of medical marijuana authorized under the Maine Medical Use of Marijuana Act (MMUMA). It’s important to note that in both cases, the injured workers had tried multiple pain management regimes without success. New Mexico requires employers to reimburse employees for medical marijuana, but many other states have passed legislation with provisions that either implicitly or explicitly exempt insurers or employers from responsibility for reimbursement for medical marijuana.

When workers are injured and suspected to be under the influence of marijuana, the intoxication defense is more difficult than with alcohol. Drug tests can show whether marijuana is present in someone’s system, but there’s no test to show whether that person is impaired as a result. Traces of the drug can stay in a person’s body up to a month, making it more difficult for employers and insurers to pinpoint when the person smoked or ingested the drug.

Some employers are abandoning pre-hire drug testing because too many applicants fail. Moreover, no tolerance drug policies are being put to test. Courts have upheld the termination of injured workers who test positive for medical marijuana under drug-free workplace policies, even though many employers struggle with policies to accommodate its use. It’s prudent for employers to establish a clear policy and communicate it effectively to employees.

This is a fluid area and employers should understand the laws in each of the states where they do business, work with insurance and legal counsel to determine responsibilities related to medical marijuana treatment, and update employee handbooks to clarify company policies related to marijuana, as well as stay abreast of all relevant legal decisions.

3. Focus on opioids and rising prescription costs

The rising costs of legacy claims for opioid-dependent injured workers are a concern to all parties involved in workers’ comp. Addicted workers are less likely to return to work, costs for opioid addiction treatment are rising, and comp insurers and employers pay benefits to injured workers for longer periods of time, up to and including death benefits to surviving family members if a worker dies from an overdose — as is mandated in several states.

Opioid control measures have helped reduce utilization among newer claims, but costs overall are up — a sign that older claims tend to be driving the utilization. Opioid addiction also comes with a host of side effects, which add to the costs of treatment.

Employers should expect more action from the states on controlling this trend. For example, on October 31, the New York State Workers’ Compensation Board announced a new process for hearings addressing opioid issues relating to the treatment of injured employees. Insurers can request a hearing to consider whether an injured worker should continue to be treated or weaned off opioids.

Employers should work with their insurance company and advisors to identify claims where there could be opioid abuse. Moreover, to help contain rising medical costs, employers should work to identify the best available physicians in their area to provide care for employees who have suffered work-related injuries and illnesses and avoid physicians who dispense drugs.

4. State actions

In 2016, state legislative activity related to workers’ compensation was fairly moderate across the country according to the 2016 Workers’ Compensation Issues Report: Fall Edition  https://www.ncci.com/Articles/Pages/II_IssuesReport.aspx  by the National Council on Compensation Insurance, Inc. (NCCI). While more than 700 bills addressing workers’ compensation were introduced, only about 10% were enacted and “none of the enacted laws made significant systems changes.” A common thread was increased activity around the gig economy, with several states introducing legislation dealing with “qualified market contractors.” As more and more work is being performed by workers outside of the traditional employer-employee relationship, regulations aimed at improving the safety and benefits of such workers becomes a focal point.

Here is a snapshot of some states to watch based on current activity. Please note that the regulatory and legislative landscape changes rapidly, so it is a good idea to stay abreast of proposed changes.

• Florida – The Associated Industries of Florida and the Florida Chamber of Commerce created task forces to seek legislative action in response to recent Florida Supreme Court rulings and significant rate increases. A circuit court judge has recently blocked the hike in rates because of violations of Florida’s Sunshine Law. The Florida Office of Insurance Regulation filed a notice of appeal on November 28 and the rate hike is scheduled to go into effect while on appeal.
• Illinois – Governor Rauner is continuing to include workers’ compensation reforms with budget negotiations.
• North Carolina – A state audit of the Industrial Commission has determined that while the agency has improved its oversight of workers’ compensation claims, it still is not meeting identification and investigative targets. Among the key findings in the latest audit are:
  • The commission continues to struggle to identify all noncompliant employers, including those not having a system to detect noncompliance.
  • The commission is not completing its investigative process in a timely fashion, “making recovery of medical costs and lost wages more difficult for injured workers.”
  • Inadequate oversight of investigation and penalty cancellation process “increases opportunity for noncompliance.”
• Oklahoma – Proponents of the opt-out law have vowed to fight the Supreme Court’s ruling finding the law unconstitutional. In the meantime, the Supreme Court is developing steps to mandate employers to be compliant with its ruling.
• Rhode Island – The Department of Labor and Training is developing a proposed rule to add massage therapy guidelines and compound drug reimbursement to its medical fee schedule.
• Texas – The Division of Workers’ Compensation is proposing an increase in claimant’s attorney fees for the first time in 25 years.