Understanding the Total Cost of an Injury

One reason that safety initiatives can struggle to achieve sufficient support is that those of us responsible for safety in our organizations haven’t consistently conveyed the total injury costs to key decision makers. Some costs associated with an injury are apparent and easy to assign to a specific incident. Other costs are embedded within larger issues or are less easily attributed to any specific injury. These two types of costs are often referred to within EHS as direct and indirect costs; however, it may be more appropriate to describe them as visible and hidden costs.

An iceberg is often used to illustrate the two types of costs. It’s notable that you will see the same concept being used if you search online for “hidden cost of poor quality.” This concept of hidden cost is not unique to safety, and it is likely to already be understood by members of the management team. The iceberg image conveys two important aspects about the types of costs. The more obvious point is that some costs are visible but accompanied by less visible costs. The iceberg image also conveys that more of the costs are hidden below the surface than are visible above it.

The estimated ratio between direct and indirect costs can vary considerably depending on the source of the estimate, the cost elements considered in the total direct costs, and the factors included in the indirect costs. The imagery of the iceberg can help explain some of these differences. Some costs are very near the surface and may be included as either direct or indirect costs, depending on the observer. Other costs are much farther beneath the surface and may not be included in some models. The ratio will also vary based on whether you are looking at the costs of one specific injury or the total costs of all injuries. OSHA has done a nice job of outlining how the ratio of indirect costs associated with a single injury could vary based on the severity of that injury.

When I explain the concept, I use an indirect cost multiplier of 4 to 6 times the direct costs. However, when I am financially justifying program enhancements or workplace improvements, I prefer to use a more conservative multiplier of 1 to 2 times the direct costs.

Direct Costs of an Injury

The direct costs of an injury can include:

Medical treatment costs for an injured worker. In situations where employers provide onsite health services, some of these costs may have shifted to hidden, indirect costs. It is also worth keeping in mind that, despite the legal and financial responsibility of the employer, some costs may fall to the employee.

Wages for time lost by the injured worker. These refer specifically to the lost wage payment through workers’ compensation. There may be additional hidden costs for time away from the job for ongoing medical appointments after returning to work.

Disability settlements with an injured worker. This may also show up in the reserves set aside for an injury.

Case management expenses. The first three costs would generally be covered by the workers’ compensation process. Depending on your specific insurance situation (general policy, third-party administrator, or self-insured), this may either be a directly visible cost, or it may be less directly reflected through your experience modifier.

If the direct costs of an injury aren’t readily obtainable, OSHA’s $afety Pays web page provides a list of average medical treatment costs by injury type.

Indirect Costs of an Injury

The indirect costs of an injury can include aspects directly related to that injury and other aspects related to the organization’s culture. The costs that may be attributed to an injury include:

Training costs. When one person is away from work and other people are needed to do the person’s job, it may require time from both a trainer and the new person assigned to the task. Training costs are likely even higher if a temporary employee or new hire is needed for the role. Training costs are highly variable based on the skills needed in the injured person’s job and the existing degree of cross-training in the organization.

Hiring costs. If a person leaves your active workforce, even temporarily, due to injury, you may need to hire a new person. New hires may also be necessary when someone is out for a prolonged period of time. The more skills associated with the role of the injured person, the higher the cost of obtaining a replacement. That skill-to-cost relationship is true whether it is a temporary backfill or a permanent replacement.

Lost productivity. There are nearly always immediate effects on productivity after an injury. Depending on organizational differences in cross-training and uniqueness of skill sets, the loss of productivity can vary dramatically. The more specialized the roles and skills of the injured person, the greater the ongoing loss of productivity. Even on a traditional moving assembly line, productivity loss may be evident in more frequent stopping of the line for a person to keep pace or more time spent in inspection and rework due to a newcomer lacking the same speed and accuracy as the experienced person.

Equipment damage. Equipment damage can occur in direct combination with a safety incident or as people with less training take over the tasks of an injured employee. For example, during a changeover, the less experienced person fails to properly secure a fixture, resulting in damage to the equipment.

Overtime. When an employee is out for a prolonged period of time, other people will have to assume their responsibilities. This may require the added cost of overtime. Instead of paying the usual wage for someone to complete the task, you now have to pay an overtime premium for the same work to be performed.

Machine downtime. The machine may have been damaged during the incident. A machine may be down because it isn’t being run until the cause of the incident has been fully investigated and the countermeasures implemented. A machine may also be down because the only person qualified to run the machine is injured and away from work. The overall production impact of a critical piece of machinery being down can be far greater than the productivity lost on that job.

Legal fees. Some injuries result in litigation. Regardless of the outcome of that litigation, there are likely to be legal expenses associated with the action.

Investigation. Every incident, no matter how minor, should be investigated. This usually involves a team of people being taken away from their regular job duties to complete the investigation. That disruption has an associated wage cost, along with the opportunity cost of the tasks those people could have been doing to help the business in other ways during that time.

Documentation. Every incident and investigation also requires documentation of the findings. The more serious the incident, the greater the amount of documentation. Again, this has both wage and opportunity costs.

Product delays. A disruption in the production process can affect revenue. The total business cost of product delays can be far greater than the actual production loss. Missing a customer deadline can impact contract language, pricing and renewals.

Employee engagement. A history of injuries in a work area can create a barrier to obtaining involvement from employees.

Loss of goodwill or reputation. A history of safety incidents can affect how potential employees, the surrounding community, customers and even shareholders view your company. For example, being considered an unsafe place to work by members of the community could interfere with the goal of being an employer of choice in your area. This, in turn, could result in increased hiring costs for every position.