Handbook Extract: Understanding, calculating and using costs
The information in this article is from the Return to Work Matters Workplace Systems Handbook, under the "Understanding, calculating and using costs". The complete handbook is available in PDF and online format for all Return to Work Matters subscribers.
Illness and injury cost organisations money: poor injury management means that this cost is much higher than it needs to be.
Below, we explain the bottom line of injury, and give you some simple tools for estimating how much injury and illness cost your organisation. This information is vital when it comes to making the business cae for best practice injury management.
This section of the handbook explains the costs associated with delayed
We also describe how to allocate cost to promote best practice injury management.
Understanding the costs of poorly managed RTW
Who should know about the costs?
- Return to work coordinator
- Senior management
- Finance managers
- Human resources
- Line managers
- System benefits
Management in both small and large organisations tend
to underestimate the costs and misunderstand the impacts of workplace injury.
Ironically, while stationary purchase systems are in place to save hundreds of dollars, the mismanagement of RTW means that tens of thousands of dollars are spent without a clear understanding of the issues or a sensible decision-making process.
Why everyone benefits from understanding costs
an organisation understands the costs associated with different approaches to injury management, it can
make an informed, business-savvy decision about what approach is best.
There are strong business benefits to best practice injury management: there are also substantial health benefits for injured or sick workers.
All levels of an organisation benefit from understanding the issues at stake in RTW. The more staff and management ‘get it’, the better off the entire organisation.
Here’s how everyone benefits from understanding the injury management bottom line...
Return to work coordinator
Being able to quantify and compare the costs of poor injury management with best practice injury management enables the RTW coordinator to:
- Make the case for best practice systems; and
- Knowledge-share with the rest of the organisation
In the long run, this means that the RTW coordinator will have to spend less time worrying about the nitty gritty aspects of individual cases, and be freed-up to focus on strategic goals.
When the upper levels of management understand the costs of poorly managed work disability systems, they can provide the organisation with more effective leadership and are more likely to continually review the relevant procedures. This benefits the entire organisation.
Senior managers that understand the costs are more likely to be positively involved and support injury management.
Senior managers who understand where the financial bottom line sits in relation to work disability are more likely to:
- Also understand how they can contribute to reducing costs;
- Have confidence in the injury management system;
- Be involved in the injury management system;
- Hold subordinate managers to account for their role in injury management; and
- Lead the organisation in reducing unnecessary disability.
Understanding the costs of injury management is good for productivity and profits.
Finance managers who understand the cost implications of injury management are more likely to:
- Know how insurance premiums are calculated;
- Recognise the indirect costs of a claim;
- Set up reporting systems that are transparent and practical; and
- Provide senior managers with accurate information about the relevant costs.
HR teams can exert greater influence over the team approach when they understand and communicate the human cost implications of injury management.
A clear understanding of disability and work absence costs allows the human resources team to engage others, build a team, and make clear decisions about case management and the work injury system. A HR team that understands costs is able to:
- Talk to senior managers about the cost implications of different approaches to injury management;
- Influence line managers; and
- Decide on case management strategies at an early stage of the claim.
managers are more likely to comply with best practice procedures when they are aware that their actions
have demonstrable cost implications. A line manager who understands injury management will know that
spending money and time in the short term is sometimes the best way to make long-term savings.
Line managers who ‘get’ the relationship between costs and injury management are able to make informed decisions about employee support and claim disputation.
- A production manager does not consider a
worker’s stress claim to be valid and she must decide whether to dispute or accept the
- If the claim is accepted:
The production manager estimates that adopting a supportive approach as soon as the claim is presented will bring the person back to work within a week, taking the cost of the claim to $6500.
- If the claim is disputed:
Claim disputation is likely to result in the person remaining off work for longer. There are two possible outcomes:
1. A successfully disputed case will have lower direct costs than an accepted claim, although indirect costs will still be incurred.
2. However, if the claim is disputed and subsequently accepted the worker is unlikely to return to work. The cost here is estimated to be $185,000.
The production manager calculates the chance of the claim being ultimately accepted at approximately 60%.
Faced with those two options, and understanding the financial impact and the odds, the production manager picks up the phone and calls the stressed worker to ask how she - and the organisation – can be of assistance.
- If the claim is accepted:
Employees who understand the financial impact of being off work are in a better position to make important life decisions about their situation and their future.
Employees who do not understand injury management may inadvertently opt for perceived short term gain (eg. prolonged time off work with full or near-to-full pay) at the expense of long-term rehabilitation. This trade-off means poorer medical, financial, social and family outcomes for the worker. Employees who understand best practice injury management are more likely to:
- Want to be partners in the return to work process;
- Cooperate with rehabilitation requirements;
- Return to work sooner; and
- Have better health outcomes and job prospects in the long run.
An understanding of costs also assists in the development of best practice systems. For example, an organisation might decide that in some circumstances it is more cost effective to budget for capped assistance payments to employees who lodge a questionable claim than to dispute the claim.
A worker in a call centre has a throat problem and after assessment the insurer indicates that it is not a work-related matter. The worker requires minor surgery. Rather than go through a lengthy dispute process, the workplace allocates up to $850 to assist the employee with surgery through a special budget set up for the individual. By doing this the organisation helps the person with their needs, avoids disharmony, and expedites early return to work.
Putting a price on injuries: direct and indirect costs
Cost - The big picture
of the most common issues with work disability is a lack of understanding and transparency when it
comes to costs.
However it is in an organisation’s best interest to be able to put a price on different injury management options. An organisation that understands what it is dealing with is in a position to manage the situation.
The costs of work injuries are made up of direct and indirect costs:
- Direct costs are payments made as a direct consequence of an injury. They arise from the payments made to the injured person and the impact this has on the insurance premium, as well as any fines that occur as a result of the injury.
- Indirect costs are
more difficult to identify and are often ignored altogether when assessing the different
courses of action available. They include the staff resources used to deal with an injury as
well as the impacts of injury management on productivity, customer service and corporate
Direct costs are easy to identify and are often the main focus when injury management systems are reviewed, but the indirect costs of poor practice are higher. In fact, in poor practice systems, indirect costs are estimated to be between 2-10 times the direct costs.
Research has identified two equations that can be used to get a reasonable estimate of indirect costs:
Indirect costs = Direct costs x 4
Daily indirect costs = absent employee's daily salary x 2*
*When the employee is on an average wage
Direct costs often drive workplace approaches to disability management, but this approach can be expensive when the longer term impacts of case management are considered.
A longstanding employee
reports a knee problem. There is some question about whether the problem is a result of non work
related osteoarthritis. The enthusiastic WorkCover manager has the claim reviewed and determines
that the problem relates to the person's pre-existing osteoarthritis. The condition is not
accepted as a work related problem and the requested physiotherapy and scan are not paid for by the
The previously loyal employee considers that their knee problem is at least partly due to work. They feel that the review was unfair and become less engaged in their job.
Co-workers see that even loyal employees ‘get the short end of the stick’. Loyalty is reduced and over a period of time this lowers productivity and employee willingness to contribute to the organisation. Discretionary effort is reduced.
Six months later the same employee develops a sore back. They are determined that their second claim will not be rejected and, armed with their previous experience, know how to report the problem so that it will be accepted. The claim is accepted, and three months later they are still off work.
As the case study above illustrates, failing to take into account the indirect costs of injury management means that ‘savings ain’t savings’: what looks like a money-saving claim dispute may in fact be a money-waster.
Direct costs include:
- Direct premium costs—ie, impact of the claims on WorkCover premium;
- Any lost wages that are paid for by the employer before the WorkCover premium is activated – in many states this takes five to ten days;
- Health and safety fines that occur as the direct impact of the injury; and (in most cases)
- A threshold medical expense due from the employer to activate the insurance claim.
Indirect costs include;
- Supervisor time
- Human resources (HR) time
- RTW and Health and Safety staff time
- Staff replacement costs
- Reduced productivity
- Impact on company morale
- Impact on customer service
- Company reputation
Direct and indirect costs are important, but they are not the whole story. This chapter also contains information on the costs for employees and the community and allocating cost for best practice injury management.
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