Workers’ compensation and economic incentives
Carsten Brück, Dr Lothar Lissner, The Cooperation Centre (Kooperationsstelle), Hamburg
- 1 Introduction
- 2 Models of worker compensation systems
- 3 Prevention and worker compensation
- 4 Insurance-related economic incentives
- 5 Publicly funded prevention incentives
- 6 Contribution of incentive models to prevention and aspects of measurability
- 7 References
- 8 Links for further reading
“An ounce of prevention is worth a pound of cure” (American proverb) In occupational safety and health, prevention – the practice of stopping an unwanted event from happening – usually refers to measures taken in the work place to keep workers healthy and safe. Accident insurance providers, public institutes or other OSH stakeholders frequently try to improve the effectiveness of such measures by offering strategic programmes, economic or other incentives, and practical support. Such steering approaches must be sensitive to the framework and circumstances set by the national workers’ compensation system (WCS).
Models of worker compensation systems
Worker compensation systems (WCS) are usually part of the social benefit or social security schemes of the EU Member States. The purposes of the different WCS are always the same. They were introduced to establish a system which insures workers against the impairment of work-related injuries and, at the same time, relieves the employers from their financial liability. In this way WCS contribute substantially to social peace and stable markets.
However, the details of each WCS are different with regard to organisation, funding, coverage and membership. Principally there are two traditional schemes for social security and for worker compensation. A detailed description of different schemes and compensation systems can be found in the OSH Wiki Article ‘International comparison of occupations accident insurance systems’(see also: International comparison of occupational accident insurance system).
- The Bismarckian scheme, named after Otto von Bismarck, the chancellor of the German Reich who introduced the first social insurance scheme in the 1880s. Bismarckian social insurance is mainly financed by contributions from its members. In the case of worker compensation the members are the companies (employers).
- The Beveridgean scheme, named after William Henry Beveridge, who issued a ground-breaking report on “Social Insurance and Allied Services” to the British Parliament in 1942. In practice, the social insurance schemes in EU Members States following the Beveridgean tradition are mainly tax financed.
- The models can also be clustered by considering cultural heritage and the political nature of the welfare system: In this way we can distinguish between three (or four) models, those being the Anglo-Saxon (market oriented) welfare state, the Central European (Bismarckian) welfare state, the Scandinavian (social-democratic) welfare state, and the Mediterranean / Eastern European models, which are either described as hybrid (combining attributes of the first three) or as still developing systems.
As EU-OSHA stated in its report , some EU Member States combine elements of the two basic models. Furthermore, cultural and societal elements play a decisive role. Moreover, within each of the two general schemes, insurance for occupational accidents and diseases can be offered by public (monopolistic) institutions or by private (market oriented) providers . Most worker compensation systems grant benefits for material damages (damage compensation in contrast to compensation of immaterial damages due to suffering) and for reconvalescence and rehabilitation due to work and travel accidents, regardless of questions of worker negligence. There are bigger differences with regard to compensation for occupational diseases: Usually they are specified on an approved list of occupational diseases, and the worker is only compensated when a clear link between the disease and the particular type of work can be proven . The OSH Wiki Article ‘International comparison of occupations accident insurance systems.’ provides a detailed overview: see International comparison of occupational accident insurance system.
Prevention and worker compensation
Mandate for prevention
Prevention, in its most basic sense, can be defined as the practice of stopping, or making impossible, an unwanted event. In the case of occupational safety and health, the event can be any situation that could lead to work-related ill-health (accidents, sick-leave). In the European legislative framework, the general responsibility for prevention at work place level is assigned to the employer: “The employer shall have the duty to ensure the safety and health of the workers in every aspect related to the work” (Art.5 No.1, Dir 89/391 EEC). More details on this issue can be found in the OSH Wiki Article ‘The role of legislation in OSH management (see also: The role of legislation in occupational safety and health management).’ In reality, prevention is not a standalone act carried out by one sole responsible party. The mandate for supporting OSH prevention measures can be with national or regional authorities, as well as accident insurance providers. The mandate can be explicit, implicit, be covered by the general membership or insurance premium, or simply allow the insurance provider to offer services on the “prevention market” .
Models of economic incentives and prevention
In various EU Member States, OSH policy makers and accident insurance bodies try to improve prevention measures at work place level by offering economic incentives. Different methods exist, and a distinction can be made between direct and indirect economic incentives. Direct economic incentives range from insurance premium variations, tax incentives, to funding schemes that immediately improve a company’s OSH performance or help them to invest in new prevention measures. Indirect economic incentives can be prevention programmes that provide publicly subsidised services, thus allowing companies access to certain occupational services below market prices (e.g. implementation and certification of OSH management systems).
Some of the different economic incentive schemes depend on the national worker compensation system. We can also differences in the range of incentives offered by the different policy makers: Is the incentive related to the insurance system and offered by an insurance provider (e.g. premium variations, funding schemes), or is it part of a national policy (e.g. tax incentive, public subsidies) .
Additional models aimed at stimulating prevention in companies are strategies, programmes and prevention campaigns that are set up and carried out by the government or other OSH stakeholders.
Insurance premium variations
Insurance premium variations are used in several countries with a premium financed or ‘Bismarckian’ social insurance system. In some countries they are already integrated on a collective basis in the general premium calculation system, e.g. in Germany, where companies are categorised in risk classes.
To be considered as a genuine incentive, premium variations should work on an individual basis, i.e. a company profits from their own good OSH performance and pays less than those who perform badly (bonus system). Some insurance systems generally consider the individual performance when calculating the premium (in France, for example, but only for large businesses with more than 200 workers) .
Other insurance systems operate with risk classes for sectors and activities. Those cannot be considered as incentive-based because the individual approach is lacking. To offer individual incentives, insurance providers usually set up individual accounts to monitor the OSH performance of companies over a number of years for adjusting the general premium calculation. In this way, annual extremes that particularly affect small and medium enterprises (SMEs) are evened out. This provides a better insight into the general development , case study at pp.106 ff.].
There are also malus systems which penalise companies for below-average OSH performance by increasing their premiums, such as for German companies in the raw material and chemical industry .
Funding schemes are not very common among insurance providers, but there is a growing number of insurances interested in such incentives schemes. Member companies can get funding or re-financing of prevention measures. Some funding schemes are limited to the prevention of focal risks or to typical sectoral hazards, or they are linked to prevention campaigns and further temporary action. There are also examples where funding schemes are used solely as incentives or in addition to premium variation models. Instead of immediate monetary funding, insurance providers may also make use of subsidised services for their member companies (e.g. Austrian social insurance institute AUVA).
All the models of premium variation systems have something in common; namely that they can only be applied in a premium based compensation system which is financed by the contributions of the companies. This is the case in a ‘classic’ Bismarckian social insurance system with a single monopolistic insurance institution (or sector-specific insurance bodies) as well as in a private market based insurance system, with various players.
However, in systems based on free markets, competitors have to consider some structural adjustments. While monopolistic non-profit insurance bodies also usually have the public mandate to invest in prevention, private insurance providers always have to prioritise economic interests . Furthermore, investments in safety and health may pay off in the long run, but, in a free market insurance system, companies are free to change their insurance provider in the short term. Especially with regard to funding schemes, this may lead to a situation where one insurance provider invests in the improvement of the safety of its members, only for another provider to profit when the company decides to switch .
Some countries with a private insurance system have therefore set out a prevention mandate for private insurance companies. Furthermore, they have established a common funding system, which can be commonly financed by all private insurance companies. One example is the Finnish Work Environment Fund (Työsuojelurahasto). The fund receives 1.7% of the insurance premiums of the employers. With this budget, the fund supports research and development projects, as well as the transfer in Finnish companies.
In the UK, the Health and Safety Executive (HSE) developed an OSH performance index for the safety and health performance of small and medium companies (SME index) as well as for larger organisations (CHaPSI). On the one hand, the OSH performance index is a tool for self evaluation of companies; on the other hand, it makes the performance of the companies transparent for the insurance provider. In this way, companies with a better performance can profit from lower insurance premiums .
Publicly funded prevention incentives
Tax variations can be any kind of tax reduction granted to companies with an above-average OSH performance, or to companies that invest in order to stimulate prevention. In contrast to insurance-related incentives, tax incentives are offered by the government. In theory, they can be used in a tax-financed social security system in the Beveridgean tradition.
In practice, tax incentives are rarely used as an incentive for companies to invest in safety and health at work. As of 2010, the only EU Member States making use of tax incentives are Germany and Latvia. Germany grants a tax exemption of 500 EUR per worker per annum for companies that introduce workplace health (WH) promotion measures . Latvia gives a tax exemption for investment in OSH measures. In other Member States, tax incentives were taken into consideration but never introduced (France), or abolished and changed into a subsidy scheme (the Netherlands) .
Interestingly, all the countries mentioned above have social security systems which are considered as being in the Bismarckian tradition .
Public programmes, funding and subsidies
Setting up strategic programmes for prevention is more typical for a government measure. As of 2009, 20 of the 27 EU Member States have a national strategy for safety and health at work, aimed at reducing the accident rates and cases and severity of work-related ill-health . Other studies indicate that 26 out of 27 EU Member States had at least some kind of programme for steering national OSH policy with strategic elements .
Depending on the national landscape and political system, the strategy may be a single actor or a multi actor strategy. In systems with monopolistic insurance institutions (typically Bismarckian systems), such institutes often participate in the strategic planning and in the operation of programmes based on the strategy. A current example is provided by the Joint German OSH strategy (Gemeinsame Deutsche Arbeitsschutzstrategie, GDA) where the insurance institutes join the strategy steering committee as equal partners, the so-called ‘National OSH Conference’ (Nationale Arbeitsschutzkonferenz, NAK). In addition social partners are frequently included in decision making processes .
As well as strategic measures, public bodies often offer further funding and subsidies for individual activities. Subsidised public services that offer the introduction and certification of OSH and WH management systems are very common, as are training measures or individual management consultation. Such measures are offered by public inspection services as part of their general portfolio.
Relationship between strategic planning and worker compensation systems
The strategic planning of publicly funded prevention activities or insurance services depends on the precise analysis of statistical key numbers or burden of costs on social systems. Typical key indicators are absolute numbers of accidents, accident rates, occurrence of work-related diseases and sick leave days due to certain diagnoses. The burden of costs expresses the total compensation sum that insurance bodies or social systems have to cover in order to compensate the workers due to the statistical numbers.
In order to provide effective prevention at the workplace level, services rely on precise statistical analysis. However, in practice, statistical analysis and evidence in each EU Member State is heavily influenced by the compensation system itself. It is a well known fact that in some Member States reporting rates tend to be notoriously low in comparison to others . It is supposed that in some European countries only 30% the work-related accidents are reported to the authorities . There are various reasons for this phenomenon:
- In general, some authors see a difference between countries where accidents are reported to the labour inspectorate (high level of underreporting) and reporting to insurance providers (low level of underreporting . Also national practice in collecting data can have a significant influence .
- Other reasons for significant underreporting are seen in the lack of motivation to make a report on occupational accidents and illnesses by employers and physicians due to unlikeliness of compensation, specific cultural habits and sectoral customs (“tough guys”), or societal lack of attention .
- The benefits granted can also stimulate or hinder reporting of work-related accidents: In Sweden and the Netherlands, the fact that work accidents and private accidents allow for the same treatment and compensation is thought to have lead to substantial underreporting, as the registration of work accidents would lead to additional administrative burden. In contrast, in Germany, work and communting accidents allow for better medical treatment and additional rehabilitation measures by the accident insurance (in comparison to the benefits covered by the public health insurance). In this way both, the worker and the physician have an interest in the registration of work accidents. More details are provided in the OSH Wiki Article ‘International comparison of occupations accident insurance systems.’ (see also: International comparison of occupational accident insurance system).
The effective prevention of occupational diseases is dominated in practice by the burden of costs caused by the occupational diseases on the social security system. The burden is dependent on a) the list of occupational diseases in the respective country (if available) and b) the recognition practice executed by insurance institutions and the jurisprudence [see details in OSH Wiki Article ‘International comparison of occupations accident insurance systems’ (see also: International comparison of occupational accident insurance system). Both factors, the legal framework set up by national lists of occupational diseases and the recognition schemes, can highly influence and even impede an analysis of the real situation of work-related illnesses . Inaccuracy of statistics, as well as the national practice of recognition of occupational diseases and resulting burden of cost on the national social system, can possibly influence the political decision of setting priorities in strategic planning. However, despite the fact that Germany has the lowest recognition rate of MSD in Europe, the prevention of MSD has become a strategic goal of the joint German OSH Strategy (GDA) for the first and the second period .
Contribution of incentive models to prevention and aspects of measurability
Insurance based incentive schemes
The core argument of promoting insurance based incentives measures is that they are more flexible and more cost effective instruments compared to regulation . Therefore, the effect of incentives on prevention activities at work place level has been the subject of various evaluation studies. In general, there have been studies that indicate that insurance-based prevention programmes are effective in reducing accident and sick leave rates . Cost-benefit calculations even show that incentive schemes pay off for both, accident insurance providers and member companies . However, there are methodological barriers and, in some cases, political interests that prevent the effectiveness of incentive schemes from being scientifically evaluated.
With regard to insurance-based funding schemes and premium variation schemes, there are indicators for certain schemes that demonstrate a high probability of efficiency. The former German social accident insurance institute for the butchery sector (Fleischerei-BG, now merged into the German social accident insurance institute for the foodstuffs and catering sector, BGN) carried out an analysis of the their own funding schemes that indicated that companies that frequently participated in particular funding schemes (e.g. for the prevention of communting accidents) showed a steadily decreasing number of accidents. In addition, an overall analysis of various funding schemes revealed a positive correlation between the number of accidents and the reimbursement rate . However, a common problem is the attribution of a direct link between effects and funding .
Furthermore, there seems to be limitations to the various forms of bonus systems (including funding schemes and premium reductions): So called ‘free riders’ take the bonus but would have invested anyway (see also the example of tax incentives at 6.2). A ceiling effect takes place – i.e. at a certain point the investments in the companies is greater than the benefit, and the efficiency of funding, bonuses and subsidies decreases.
In addition, the “black sheep” phenomenon refers to the observation made by some stakeholders that notorious under-performing companies seem to be immune to positive incentives. The idea is to stimulate their prevention activities by fining them. An example has been published by the German social accident insurance institute for the raw materials and chemical industry (BG RCI) . The efficiency of such malus systems has not yet been evaluated.
Tax incentive schemes
Surveys and evaluation studies on tax incentive schemes throw doubt upon the effectiveness of such incentives. In the evaluation of the now discontinued FARBO tax incentive scheme, the Dutch institute TNO highlighted the fact that the scheme was not cost-effective, as well as the fact that 83% of the companies stated they would have invested in prevention anyway, without a tax incentive. However, the answers may have been influenced by a social desirability effect, i.e. that most employers wanted to demonstrate that they care about their workers’ welfare regardless of the economic incentive. The evaluation also showed that the Dutch subsidy programme for investments in new OSH-friendly machinery and equipment led to better working conditions in 76% of enterprises .
The German tax incentive scheme was evaluated by IGA (Initiative Gesundheit und Arbeit) in a survey among enterprises and health insurance workers. On the one hand the main criticism was that the scheme does not offer substantial new possibilities to companies to save taxes and therefore does not set a real incentive for investing in safety and health at work . On the other hand the tax incentive is seen as a positive signal by many enterprises because it increases the importance of workplace health promotion. Generally the possibility to deduct health promotion measures from tax was regarded quite positively by the enterprises.
Obviously the success of such measures depends to a great degree on how exactly they are designed to the need of the target groups. As a survey among UK employers shows, many managers believe tax breaks would benefit their businesses and encourage them to provide more health-related support for their employees .
Regardless of the true effect, a certain dead weight loss (“free riders”) probably has to be accepted in any kind of economic incentive scheme, but it seems to be generally accepted in other policy areas as well, for example in economic subsidy programmes. Recent examples were the so-called ‘scrappage programmes’, which aimed at stimulating the private purchase of new cars in order to fight the economic crisis, without knowing whether some people would have bought a car anyway . In order to reduce the free-rider effect, it should be made sure that only those prevention measures are incentivised that go beyond legal standards. Enterprises should not be rewarded for just fulfilling legal OSH requirements.
Publicly funded prevention programmes
The mere fact that almost every EU Member State makes use of strategies and programmes shows the importance of such measures for prevention, regardless of the worker compensation system. Evaluation is habitually part of strategic planning. For the existing strategies, a number of indicators have been set up and evaluation studies have been carried out. Studies often indicate the effectiveness of programmes and campaigns. However, in some cases results must be considered as vague, or assumed positive effects were overcompensated by contextual factors, as the evaluation study of the Danish strategy shows .
It should be mentioned that what has already been said about methodological barriers and political interest regarding economic incentives also applies to strategic and public prevention programmes. Despite the fact that they are absolutely necessary, those studies seldom stand the test of methodological accuracy when confronted with public mandates and political interests. There are conceptual barriers due to the obligation of ethical behaviour of public authorities  as well as biases among the participants due to social desirability. Because of these difficulties, statistical effects could not always be attributed to political or strategic measures.
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Links for further reading
BMAS – Bundesministerium für Arbeit und Soziales, Sozialkompass Europa, 3rd Ed., Berlin 2012. Available at: http://www.sozialkompass.eu
EU-OSHA – European Agency for Safety and Health at Work 2010 ‘Economic Incentives and OSH’. Retrieved 20 September 2012, from: http://osha.europa.eu/en/topics/economic-incentives
EU-OSHA – European Agency for Safety and Health at Work, Insurance and OSH, undated. Retrieved 20 May 2012, from: http://osha.europa.eu/en/topics/business-aspects-of-osh/insurance_html
European Commission, Social Protection Systems (MISSOC), undated. Retrieved 20 May 2012, from: http://ec.europa.eu/social/main.jsp?catId=815&langId=en
ISSA – International Social Security Association, Social Security Country Profiles, undated. Retrieved 20 May 2012, from: http://www.issa.int/Observatory/Country-Profiles
ILO – International Labour Organisation, Encyclopaedia of occupational health and safety, 4th Ed, Vol.1, Part III (Management and policy), No.25 (Workers' compensation systems) and No.26 (Workers' Compensation Systems, Topics in.). Geneva 1998.