If a worker you employ sustains a minor injury on the job, should you pay the worker's medical expenses out of pocket to save money on workers compensation insurance? Many business owners have faced this dilemma. Here is a typical scenario.
Example Scenario of Worker Comp Claim
You own a restaurant called the Bordeaux Bistro. It's a weekday morning, and Benny, an employee of yours, is in the kitchen chopping vegetables. Suddenly, Benny's knife slips, and he accidentally slices his left index finger. The cut is deep and bleeding profusely. You immediately drive Benny to a nearby hospital for a tetanus shot and several stitches.
It is now the following day and Benny has returned to work. You are relieved that his injury is minor and that the cost of his treatment ($700) is relatively low. You are preparing to give Benny the forms he needs to file a claim for workers compensation benefits.
However, you hesitate. Your workers' compensation policy may be subject to an experience rating. You have already incurred two small claims within the last two years. A third claim will likely cause your experience modifier—and your premium—to go up. You wonder if you could reduce your workers' compensation costs by paying the $700 as a business expense rather than filing Benny's claim.
Worker's Compensation Experience Ratings
The Worker's Compensation experience rating plans impose a greater penalty for claim frequency than claim severity. That is, the formula used to calculate your experience modifier attaches more weight to a collection of small losses than to a single large one.
However, your experience modifier should not be your only concern with regard to your out-of-pocket payments for injured workers' medical expenses. Here are some other issues you should consider.
- Medical-only claims may be subject to an Experience Rating Adjustment.
- State law may prohibit you from paying expenses out of pocket. Laws vary by state so it is best to understand what the law in your location allows.
- You may pay higher fees for medical treatment than your insurer.
- The claim may not be compensable under your state's workers compensation law.
- A minor injury may become serious.
- You have reporting requirements under federal law if injured workers are Medicare-eligible.
- Your out-of-pocket expenses may exceed any savings in premium.
Reduction of Medical-Only Claims
In the above scenario, Benny's injury has resulted in medical expenses only. In many states, medical-only claims are subject to an Experience Rating Adjustment (ERA). If the ERA applies in your state, only 30% of medical-only claims are used in the calculation of your experience modifier.
Returning to the previous example, Benny's $700 medical expenses would be reduced by 70%. Thus, only $210 would be applied toward your experience modifier.
State Laws May Prohibit Out-of-Pocket Payments
Some states permit employers to pay minor medical expenses as an out-of-pocket expense rather than file a workers compensation claim. Other states prohibit this practice. Still, other states permit out-of-pocket payments of medical expenses only if the employer is a qualified self-insurer. Don't pay any injury-related medical expenses yourself unless you clearly understand how the laws apply in your state.
State bans on paying medical expenses out of pocket do not apply to first aid. Expenses incurred for first aid can include items such as ice, bandages, and splinter removal that are paid by employers. Also, what constitutes as "first aid" varies from state to state. If you aren't sure what this term signifies in your state, contact your workers' compensation insurer.
Many states mandate the use of workers compensation fee schedules. These schedules limit the amount medical providers are paid for medical treatment. In addition, some states permit workers compensation insurers to negotiate with providers to establish managed care plans.
Because of these arrangements, your insurer is likely to pay considerably less for medical treatment than you—the employer—will be billed. Employers are typically charged the "usual and customary" rates, not the discounted rates charged to insurers.
Some injuries incurred by employees are not compensable under workers compensation laws. Examples are mental illness (in the absence of a physical injury), an injury incurred by intoxicated employees, and injuries sustained by employees while commuting to or from work.
Minor Injuries May Become Costly
Minor injuries may worsen over time. For example, Benny's cut finger could become infected. If the infection becomes serious, Benny could require hospitalization and other costly treatment. Insurers know how to prevent small claims from ballooning into large ones. Most employers lack this knowledge.
Medicare does not normally cover medical expenses that arise from job-related injuries. Such expenses should be covered by workers compensation insurance. To ensure that Medicare has not been billed for medical expenses incurred by injured Medicare beneficiaries, the federal government requires insurers to file periodic reports with the Centers for Medicare & Medicaid Services. This obligation also applies to employers that pay injured workers' medical expenses out of pocket.
Costs May Exceed Savings on Premiums
If you pay an injured worker's medical expenses out of pocket in lieu of filing a claim, will you save money on workers compensation costs? In many cases, the answer is no. If you file a medical-only claim with your insurer, the loss will eventually be included in the calculation of your experience modifier.
Even if your modifier rises, the premium increase that results will likely be less than the amount of the claim. That is, a $700 medical-only claim is unlikely to cause your premium to rise by $700. This is especially true if an Experience Rating Adjustment applies in your state.