Magazine article Risk Management

Uncovering the Hidden Costs of Long-Term Disability

Magazine article Risk Management

Uncovering the Hidden Costs of Long-Term Disability

Article excerpt

MARK HAS WORKED FOR the same computer firm for 24 years. Six months ago, Mark's long-time supervisor was transferred. His new supervisor, although quite competent, was based 300 miles away and had a laissez-faire management style. Mark mistakenly interpreted these new circumstances as meaning the supervisor was displeased with his work. In due course, his asthma, which had been under control for years, suddenly became aggravated. Mark was admitted to the hospital in critical condition where he filed a long-term disability claim. Doctors told him he probably would never work again.

Pearl, a 20-year veteran of a large hospitality firm, was employed as a cook until a bottle of cleaning solution accidentally spilled on her head, causing temporary, partial baldness over small areas of her scalp. Four weeks later, Pearl had not returned to work. Friends noticed that her usually gregarious demeanor had become sullen. Not many more days passed before Pearl filed a claim, supported by her doctor, stating she was permanently disabled.

Luckily both stories have happy endings. When Mark sufficiently recovered, his supervisor assured him his performance was not in question. Pearl's case was different. It was not until a year later when a medical expert determined that the woman had undergone psychotic depression following the accident. Pearl's partial baldness did not really trigger her illness. More significant was the fact that her father died about the same time the incident occurred, and her supervisor, whom she revered like her father, neglected to ask how she was feeling after the accident. Pearl's ensuing treatment cost her company $78,000 during that "lost" year. Indeed, loss of productivity, medical, legal and administrative costs, and loss of future earnings can be as high as $130,000 or more for a disability case.

But cases like Mark's and Pearl's are just two of the 31 million cases involving Americans affected with some type of disability. The annual loss from pain-related disability is $160 billion a year, according to the Washington Business Group on Health. Although that loss is taken from many pockets, the cost to the employer is higher than the company can or should be willing to stand, especially when most of the cost can be avoided. It is important to remember that the total cost of disability includes the period of time before the employee actually leaves the workplace as well as the period following the claim. The "before" or work disorder stage, which typically lasts between six months and 18 months, gives risk managers enough time to intervene, if they know what to seek.

Workers have a 30 percent chance of being disabled by injury or illness once for at least 90 consecutive days during their career. A 40-year-old man has a 47 percent chance of becoming disabled within the next 15 years. Actuarial studies show that an executive is six times more likely to become disabled than to die before age 65. According to the Menninger Return-to-Work Center in Topeka, Kansas, if disability occurs before the worker is 55, there is a 67 percent chance he or she will return to work. After that age, the chance drops to 24 percent. Injuries are more likely to occur off the job than at the work-site, according to the National Safety Council. Still, there were 1.8 million disabling injuries at work during 1988, with one out of three happening to workers within their first year of employment.

The Bottom Line

DuPont calculated that, based on an industry average of 27 disabling injuries per 1,000 workers annually, at an average cost of $18,000 per injured worker, a company with a 4.5 percent profit margin needs an additional $11.3 million in sales for every 1,000 workers to offset the cost of disabling injuries.

At one time, medical costs were about 33 percent of workers' compensation costs, with indemnity payments comprising the rest. The ratio is now moving toward the 50-50 mark, with medical costs growing 8 percent faster than payroll, according to the National Council on Compensation Insurance. …

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