Staying Alive

Fighting for Their Lives

Entrepreneurs are trying anything and everything to manage rising workers' comp costs. "I'm not buying new capital equipment, and I'm trying not to lay off employees I've had for a long time," says Hamman. He says he isn't taking on new hires, yet still fears that if workers' comp continues to rise, he may go out of business.

Other small companies are adopting similar strategies. "Some have held back salary increases or say they're not going to add employees," says Hauge. At worst, he says, entrepreneurs are entering the underground economy-not carrying workers' comp or giving cash payoffs to injured employees and not reporting the claims to insurers, both of which are illegal.

Others are shopping around. Colleen Galli, president of InfoPac International Inc., a Burnsville, Minnesota-based Internet integration firm, says, "We are aggressive in our [insurance] shopping, and we try to buy from our own clients." Buying from local insurers who use her IT services, Galli says, gives InfoPac leeway to negotiate a better rate, because she can give them a deal on IT services.

Like other employers, Galli also tries to inculcate into employees the idea that everyone in the company must work together to keep workers' comp costs down because no one benefits if the company incurs huge workers' comp losses. "We try to get the message across that we're all on the same page," says Galli, 47.

Meanwhile, other entrepreneurs are removing themselves from workers' comp (laws don't require employers to cover themselves), increasing employees' contributions to other types of health insurance, and considering self-insurance for workers' comp or joining other small companies to create group self-insurance plans. But self-insurance can be risky, and group insurance makes every entrepreneur in the group liable for others' problems. "If you're going into self-insurance, be careful," warns Eric Oxfeld, president of UWC-Strategic Services on Unemployment & Workers' Compensation, a national business association. "You might be able to get a lower upfront cost [because you're not dealing with an insurer]. But a catastrophic cost can hurt you more."

Other entrepreneurs are trying to keep their workers' comp rates low by upgrading safety precautions. Paul Darley, president and COO of W.S. Darley & Co., a Melrose Park, Illinois, emergency equipment manufacturer with about $50 million in annual sales, hired a safety director in 1999. "Before that, workers' comp costs had been going through the roof," he says. "At the time, I didn't feel we were large enough to support a permanent safety director."

Darley was wrong: The new director proved he was worth his salary. He implemented safety programs, instructed employees in safety compliance, installed new equipment to reduce the amount of manual labor, and even combed through W.S. Darley's old accident reports to look for patterns. "It showed employees we were taking a serious interest in their health-and it became a collaborative effort," Darley says. "We put into place reward programs for hitting milestone dates without an accident." When Entrepreneur spoke with Darley in October 2003, his company was celebrating 800 days without a serious workplace accident. Says Darley, "[Our] workers' comp premiums were a fraction of what we paid four years ago."

Small firms can improve workplace safety by inviting an expert from the insurance company to assess their work environment, says Oxfeld. "Many insurers will provide free inspections if asked," he says. Oxfeld also suggests that employers increase scrutiny of drug use and abuse-particularly of prescriptions covered by workers' comp.

Other entrepreneurs feel they can't do anything about workers' comp costs individually. And to some extent, they're right. Millman, who has shopped for better rates and improved safety in his workplace, still watched helplessly as his workers' comp expenses increased precipitously. "Workers' comp is an uncontrollable expense," he says.

Laying Down the Law

To address the workers' comp crisis, state legislatures have begun to pass reform bills. Missouri stimulated competition in the workers' comp insurance market by forcing the state workers' comp insurer to compete with private carriers, and Oregon pioneered the use of managed-care controls in workers' comp health insurance. In the past year, Florida passed a reform to reduce 2004 workers' comp rates by nearly 14 percent, by defining injuries more objectively and preventing lawyers from receiving hourly workers' comp litigation fees. In October 2003, California passed a reform to control medical costs by increasing fraud penalties, encouraging generic drug use and promoting workplace safety. And at press time, Gov. Schwarzenegger proposed to slash $11 billion from California's workers' comp system to decrease insurance premiums.

Still, Eric Oxfeld of UWC-Strategic Services on Unemployment & Workers' Compensation says it's too early to say how effective the reforms will be. And some entrepreneurs are concerned that clauses in reform bills will mean more costs to them. "One problem with the legislation [in California] is every [business] now has to have an injury and illness prevention program in writing," says Scott Hauge, president of CAL Insurance & Associates Inc. "The cost of this will be $1,000 to $1,500 per company."

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This article was originally published in the January 2004 print edition of Entrepreneur with the headline: Staying Alive.

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