At one point, the legal system caught the brunt of the criticisms as seemingly litigation-hungry lawyers preyed upon injured workers who believed they were being denied their just rewards. A stream of large settlements fueled complaints that workers' compensation claims were raging out of control.

Employers became suspicious of both their workers and their insurance companies as they watched their premiums climb precipitously. Amid a growing employer paranoia, some employees were suspected of feigning injuries, particularly back problems. The recession of the late '80s offered what appeared to be additional confirmation of abuses. Workers' compensation cases were said to increase as downsizing gained momentum.

The legal profession and the workers were not the only groups to be criticized. Insurance carriers were accused of granting settlements to avoid rising legal costs. Employers believed that the behavior of the insurance providers contributed to the something-for-nothing attitude of many workers who were observed receiving substantial payments.

Insurance carriers appeared to lack interest in spending time and money ferreting out abuses. It seemed as if they were looking for the cheapest way out - making quick settlements. The workers' compensation system bred unnecessary suspicion, adversarial relationships, workplace disruption, and unproductive expense.

Although the Fortune 1000 corporations, and some smaller companies, have benefited from highly effective cost-containment programs, many smaller firms, including nonprofit corporations, found themselves far behind in taking control of workers' compensation claim costs.

Today, containing workers' compensation costs is a sophisticated discipline and is the model for current cost-containment concepts now being applied to the nation's health-care system. Two case histories demonstrate clearly what needs to occur if workers' compensation costs are to be systematically and permanently controlled and reduced.

Case 1

The Massachusetts Interlocal Insurance Association (MILA) is a non- profit insurance company serving 278 members associated with the Massachusetts Municipal Association. This self-insurance group was founded in 1986 and currently covers some 40,000 employees of cities, towns, and local public entities.

In 1993, the MILA board of directors determined that it was time to consider adding a managed-care component to its arsenal of cost- containment techniques. This was a predictable and understandable approach since managed care was one of the most popular mechanisms for controlling medical expenses. The indemnity system was all but dead. In addition, several other self-insurance groups had already moved to a preferred-provider system and MILA had already established a managed- care health program. The specter of national health-care reform was also involved in the managed-care discussions, and the board wanted MILA to be positioned for change. MILA commissioned a study to explore the merits of establishing a managed-care component. It didn't take the investigators long to uncover interesting information.

With an annual operating expense figure of 18%, this self-insurance group was operating efficiently; its overhead costs were 40% below the national average after giving substantial premium discounts. As a result, any savings must come from the 82% of the budget covering losses paid for worker injuries.

Quickly, the researchers determined that a managed-care approach could be beneficial in controlling rising medical costs. At the same time, they reasoned that simply capping medical costs or even reducing them was literally applying a Band-Aid approach to a serious injury. The major task was to methodically reduce the 82% set aside for losses. Although controlling medical costs through managed care would be valuable, the only way to reduce overall expenses was by reducing the number of accidents and returning the injured employees to work as quickly and compassionately as possible.

The researchers recommended that each member/owner go through a detailed self-audit to determine which of more than 50 possible cost-containment techniques were currently in place, recognizing that through MILA's efforts many of the strategies were already in place. What began as an investigation to help solve rising medical expenses brought a more basic cost problem into focus - reducing the causes of the costs.

Case 2

A second case history offers additional insight into the cost- containment problem. A very large Massachusetts health-care provider engaged consultants to perform an audit of its in-house claims department, a routine procedure followed every three or four years. At the same time, the consultants were asked to assist the senior vice president for human resources in preparing a presentation to the board of directors reviewing workers' compensation successes and problem areas needing attention.

The results of the investigations, which had nothing to do with the way the claims department was handling its work, led to a startling conclusion - this health-care provider should place safety at the top of if its workers' compensation cost containment strategy list.

Although injury claims were being handled efficiently, there were systemic problems. The consulting firm discovered that supervisors were only investigating one-half of the injuries, even though the official protocol called for a specific analysis of each and every injury.

Industry data also revealed that the medical facility was experiencing twice as many job-related injuries as comparable facilities. Clearly, there was a connection between the findings.

The consultants recommended implementing a program that would train supervisors on how to take the appropriate action when an injury occurs. Maintaining accurate statistics makes it possible to determine appropriate action for reducing injuries.

The claims department audit indicated that the lost work days were 32% lower than the industry average, suggesting that claims were being handled extremely well. The problem was simply too many claims.

The investigation also pointed out that the only injuries being tracked by the claims department were those that generated actual medical bills. As it was a medical facility, the hospital was inadvertently absorbing many of the expenses. As a result, the true cost of medical care was being masked, as was the total number of work-related injuries.

Since a high number of injuries were not being reported, there was no way to analyze why they occurred and to develop strategies for reducing their incidence. Delaware-based E. I. duPont de Nemours, long a leader in developing ways to achieve zero injuries, investigates every close call or near accident to determine and, if possible, eliminate the cause.

In light of the data, the consultants also recommended that a safety director be hired to implement injury-reduction programs. Although the existing safety committee would continue to play an important role in communicating with management and workers, the task demanded more focused responsibility. It was noted that the same consultants had recommended the creation of this position several years earlier.

The hospital administration was shown that a safety director could implement activities that would result in reducing the current 379 lost workday claims to the industry standard of about 175, producing a cost savings of at least $1 million annually. Since the total cost of establishing the office of safety director was about $150,000, the annual cost savings would come to at least $850,000.

Lessons Learned

These case histories offer a number of insights into maximizing workers' compensation cost containment:

1. Thorough recordkeeping is the key to identifying problem areas. Data determines destiny when it comes to containing workers' compensation costs.

2. Major savings cannot be achieved without reducing work-related injuries. Although it is possible to use a technique such as managed care to reduce medical expenses, eliminating injuries is the only way to achieve major, long-term cost reductions.

3. A narrow approach to analyzing problems can lead to inappropriate conclusions. In both case histories, focusing on the perceived problem would not have revealed the far more pervasive issues.

A study reported by the Workers' Compensation Research Institute (Research Brief, July 1992) compares employers with low workers' compensation claims and those with high claims experience. The low-claim employers realized that a program or system had to be built and that they could not rely on a single cost-contaiument strategy to prevent and manage workers' compensation claims.

It is a comprehensive system of workable cost-containment initiatives that produces positive results. The low-claims group had taken the appropriate steps, including monitoring and correcting unsafe workplace behaviors, providing safety training for new employees, actively involving management in safety programs, promoting employee health and well-being through the use of employee assistance and fitness programs, using modified duty to encourage return-to-work, and ensuring supervisor participation in return-to-work programs.

The combination of these strategies is mutually reinforcing. Together, in a seamless system, they form a cost-containment continuum that produces positive benefits for both the employee and the employer.

Frederic C. Church, Jr., is president of Boston Risk Management Corporation (617) 951-1570. His book, Avoiding Surprises, is a standard work in the risk-management field.