Andrew Smith reports on nearly 10 years' research into the full cost of disability.

The core findings of this research commissioned by UNUM have been relatively consistent over the three studies since 1989, and we believe that as we are the world leader in disability insurance, they carry much relevance to European and, indeed, world-wide, markets.

In the US, disability costs the average business 8.3% of total payroll, or about $2,717 per employee. This figure was more than most employers surveyed would have suspected. Also, perhaps more significantly, the sources of the cost are more varied than most would suspect.

Our research revealed that 3.08% of payroll or about 40% of the total are "hidden" costs of disability. These are mainly losses in productivity that occur when a disabled employee is temporarily replaced or work is shifted to colleagues. There is a common understanding that these costs are significant, but the actual cost is rarely calculated. Firms that are over-staffed will obviously have an easier time replacing a lost worker. However, this extra capacity is a cost in itself.

Only half the total cost of disability - 4.03% of payroll - consists of direct benefit costs. This represents the money paid for sick leave, disability benefits, workers' compensation and several smaller, direct cost items. Disability management is the smallest cost category, representing 1.2% of total payroll.

The two bar charts on the next page show a graphic representation of these costs. The first chart shows the disability costs as a percentage of payroll, whereas the second puts a monetary value to these percentages. The pie chart below shows disability costs by category.

Managing disability

The team doing the research also had an opportunity to learn a tremendous amount about the state of disability management in today's workplace. They found that, in the US, disability management is now a widely accepted concept with the understanding that full disability costs are substantial. However, there is still insufficient recognition among employers that sick leave can be an expensive item. Administration most often remains at the department level, and there is little attention given to managing this cost.

There is also a growing acceptance of the impact hidden costs make on disability costs. More firms recognise that the related productivity losses are not trivial and are taking a full cost approach to manage their expense. More companies are seeing that the incidence and costs of back pain, stress and other so-called '90s disabilities can be controlled.

However, control strategies must go beyond ergonomics and engineering and extend to the whole work situation. Whether a worker is sitting in a proper chair is important, but, possibly, more important is how the worker relates to his or her boss and the entire corporate culture. This is not meant to imply that such injuries or illnesses are wholly psychological and do not have a medical basis. Rather, it is to say that in a productive, high morale work environment such conditions are recognised early, and appropriate measures can be taken before crisis situations develop.

There is also the consideration of legislation. In the US, where the studies have taken place, the Americans with Disabilities Act (ADA) has been in effect for over five years. However, the UNUM surveys indicate that this legislation is still somewhat of a non-event with most companies.

As with all of this research, parallels can again be drawn with other global markets. Indeed, our UK arm, UNUM Ltd, did some research on the fledgling UK disability legislation, The Disability Discrimination Act, and found a similar lack of understanding.

Recent research conducted by the Confederation of British Industry (CBI) indicates that workplace absence is rising. In 1996, an additional 12 million working days were lost through absence, meaning a total of 187 million days for the year, compared with 175 million in 1994. This cost British employers a massive £12 billion on wasted salaries, lost production and replacement costs.

The conclusion that must be drawn from all of this research is that
disability costs money. Conversely, managing disability adequately could present substantial savings to the employer. In the modern business world, savings in such unnecessary expenses could be the difference between success and failure.

Absence management

It is important to realise that disability is not a stand-alone event. It has complex causes and effects, but is also offers significant opportunities for risk reduction. Many firms are developing a more pro-active absence management policy in an attempt to reduce the number of staff who are off long term disabled. There are clear advantages to early intervention in absence.

Our experience indicates that motivation may be at a low immediately after the diagnosis of a disability. There are significant opportunities to help individuals through this very difficult time and, thus, speed the possible return to work. Simply brushing the problem under the carpet will do the individual no good and will also damage morale within the other employees of the firm.

At UNUM, we have always worked at helping claimants of disability benefits back to work, ideally with their own employer. We look beyond the disability to focus on the employee's abilities. We provide a service to more and more claimants each year which helps them to return to the workforce and improve the quality of their lives. Claimants have been successfully returned to their previous occupations with both previous and new employers, or to entirely new careers, and have, through our support, been able to trade their benefit cheques for pay cheques.

As a result of our expertise in disability management, we have done "private label" deals with other insurance providers, both in the US and the UK, where we offer product and risk management knowledge and the other insurer provides a distribution network.

We are finding that specialisation is very important in the field of disability management. As mentioned above, the causes and effects of disability are rarely simple and a generalised approach rarely works. Even two people with identical disabilities and identical occupations, may, and normally do, have very different needs. These needs will require individual attention to achieve successful disability management.

Measuring costs

More firms are finding that taking the full cost (hidden costs + direct costs + disability management costs) view of disability does indeed save money. There is a need, however, for more employers to measure full costs accurately and consistently. Continuous improvement in an employer's disability management effort will rely on a baseline understanding of disability cost and continuing flow of accurate data.

Measuring full cost has great value. Action must follow the measurement and analysis of data. In larger companies, it is useful to look at the different divisions and make comparisons. If specific costs seem out of line, management can examine the problem and suggest remedies.

Among smaller companies, there is a powerful need for benchmarks that do not exist at the moment, or at least are not yet sufficient to rely upon with confidence. Spreading the full cost philosophy and methods will encourage publication of more results that can go into the data base and establish these necessary reference points.

Disability management is destined to emerge as an essential cost control factor. Once a firm's management is assured that its financial management of these risks is optimal, that administration is efficient and all opportunities to save are canvassed, the remaining frontier is disability management.

Andrew Smith is a public relations manager with UNUM UK. Tel: +44 (0) 1306 873154. Fax: +44 (0) 1306 740052.