Do You Understand Your Experience Modification Factor?

An experience modification factor is the ratio of the costs of a company’s actual workers’ compensation claims compared to the expected costs for companies of similar size in the same industry. The number is highly significant to employers—lower is better—because the experience modification factor determines workers’ compensation premiums.

But how can an employer improve its experience modification factor? Implementing a robust safety program, setting up an effective claims management program that includes proactive engagement with injured employees away from work, and developing a light-duty and return-to-work program that gets injured employees back on the job as soon as practicable can all have a positive impact.

The experience modification factor goes by many names. It is referred to as your “Experience Rating,” “Experience Modification Rate,” “Emod” or “E-Mod,” “EXP-Mod” or “E-X-P-mod,” “EMR,” or “ModX.”

Besides determining the premium employers pay for workers’ compensation coverage, the experience modification factor can affect an employer’s ability to bid on, win, and retain contracts with the federal and state governments or even private sector projects.

There are a variety of formulas for calculating an experience modification factor, and some are very complex. An insurance agent may be able to share what factors your state’s ratings bureau considers in calculating experience modification factors.

The calculations typically include 3 years of claims data, usually excluding the most recent year. To determine the pool of comparable companies, the ratings bureau will look at factors like the occupational classifications of employees (for example, clerical, manufacturing, and managerial occupations), number of employees, and size of payroll.

An experience modification rating 0f 1.0 means an organization’s workers’ compensation losses are in line with those of most companies of similar size in the same industry. A rating above 1.0 means a company’s losses are higher than expected. A rating below 1.0 means losses are lower. A favorable rating will result in discounted workers’ compensation insurance premiums.

However, not all employers are large enough to be experience rated. Such companies are not covered by regular workers’ compensation insurance, but are covered by an “assigned risk plan.” Premiums in an assigned risk plan can be higher.

Incentive in a No-Fault System

Regardless of the variations among insurance programs in different states, the underlying purpose of workers’ compensation insurance is to shield employers from liabilities arising from workplace accidents and injuries while compensating injured employees for medical expenses and lost wages. States introduced the experience modification factor to give employers a financial incentive to provide safer workplaces. The rationale behind the experience modification factor is that employers with safer workplaces should be rewarded with lower workers’ compensation insurance premiums, and those with more workplace injuries should be penalized with higher premiums.

Some argue with the rationale behind the experience modification rating. It may favor larger employers with better safety and claims management programs, or it may encourage employers to “game” the ratings system by trying to dissuade employees from reporting accidents or filing claims. Some accuse employers of engaging in “gimmicky” safety incentive or behavior-based safety programs to quash claims and accident reports.

Requirements and frameworks for workers’ compensation vary from state to state. Some are “monopoly” states, where workers’ compensation insurance is administered through a state program—the state is the only insurer. Most states allow employers to purchase workers’ compensation insurance from private insurers.

In most states, employers’ experience modification factor ratings are provided by the National Council on Compensation Insurance (NCCI). NCCI is owned by a group of insurance providers, and NCCI gathers and analyzes claims data from individual insurers to develop aggregate industry data and determine individual employers’ experience modification factors.

Some states operate their own ratings bureaus to assign experience modification factors. Some state rating bureaus include NCCI data when determining ratings for multistate employers, but others do not.

In its rating calculations, NCCI weighs injury frequency more highly than injury severity. For example, if two companies had workers’ compensation claims totaling $50,000 but one experienced 10 injuries while the other experienced 1, the company that had 10 injuries would receive a higher experience rating.

Bidding

Some states won’t accept bids from contractors with an experience modification factor higher than 1.0. However, the practice is controversial. Some in the insurance industry argue that the experience modification factor is not a measure of whether a company is “risky” or “safer.” Virginia enacted a statute forbidding the use of the experience modification factor in its contracting procedures.

Despite arguments that the experience modification factor is not a measure of employers’ relative safety, common practice still considers it during contract bidding and procurement.

The Department of Defense (DOD) considers an experience modification rating of 0.7 or lower as “Superior.” A rating of 0.7 to 1.0 is considered “Acceptable,” and a rating greater than 1.0 is considered “Sub-standard.”

Even some large private sector contracts also weigh experience modification factors in their procurement and contracting decisions.

Safety and Claims Management

The most important thing an employer can do to lower its experience rating is to put an effective safety and health management program in place. The less frequently workers are injured, the lower the rating will be. Examining accidents, claims, and near-miss data to get to root causes and prevent future accidents can help to identify injury trends and prioritize opportunities for improvement.

Many employers involve both workers and supervisors in loss prevention by setting up a safety committee. Some states or workers’ compensation insurance carriers may have specific requirements for establishing one. To be effective, a safety committee should have balanced membership, a defined set of roles and responsibilities for committee members, and concrete tasks and goals.

Implementing a safety and health management system is another often recommended strategy for reducing claims. It could be an informal program that conforms to OSHA’s “Recommended Practices for Safety and Health Programs,” a more formal program that follows the American National Standards Institute’s (ANSI) Z10 industry consensus standard of occupational health and safety management systems or the International Organization for Standardization’s (ISO) new ISO 45001 standard, or something in between. But regardless of the specific program chosen, any safety and health management system should include employer commitment and employee engagement, worksite hazard analysis and evaluation, hazard prevention and control, and safety training.

For companies that are already certified under the ISO 9001 standard for quality management systems or the ISO 14001 standard for environmental management systems, ISO 45001 certification may be a logical next step.

Claims Management Strategies

To control its experience rating, an employer must also carefully manage its workers’ compensation claims. Accident frequency matters more, but claims totals also matter.

Claims management responsibilities include:

• Establishing steps to follow after an injury occurs to handle the employee’s injury and to ensure critical information is gathered and claims are properly filed;
• Communicating with healthcare providers, supervisors, the worker, as well as the worker’s union if a collective bargaining agreement is in place; and
• Monitoring an injured worker’s needs and progress toward a return to work.

Any good claims management system also must include a clear, written light-duty and return-to-work policy.  Light duty gets an injured employee back on the job but with work responsibilities different from the worker’s regular duties.

Return to work also may involve restricted return to work, which is when workers resume some but not all of their regular duties. A partial return to work in which a worker resumes regular duties but for a limited number of hours can also qualify.

Employers should have a comprehensive light-duty and return-to-work policy in place before an injury occurs. Elements of a good program would include:

• Identifying potential light-duty positions before the need arises;
• Distributing handouts about your return-to-work program during the new hire onboarding process;
• Producing or purchasing videos and other materials about accommodation and job modification, rehabilitation, and workplace redesign that clearly communicate your return-to-work policies;
• Ensuring your light-duty assignments are appropriate for an injured worker’s capabilities and do not violate any of a physician’s restrictions;
• Involving injured workers in identifying suitable light-duty assignments; and
• Regularly reviewing the entire return-to-work program to confirm it reduces the number of days away from work and amounts of lost pay claims.

An injured worker will be dealing with healthcare providers, insurance companies, Human Resources personnel, and others during treatment, rehabilitation, and recovery. Some of these people will not have the company’s best interests in mind.

A return to work not only can help contain workers’ compensation claims cost and potentially improve an employer’s experience rating, but can also restore a worker’s sense of normalcy. Dealing with outsiders involved in benefits, treatment, and rehabilitation can leave an injured worker feeling disengaged. Returning an injured worker to work as soon as possible also controls the costs of lost productivity or having to train a new worker.