Understanding Integration: What Are The Total Costs of Absence?

Most employers can’t quantify the magnitude of lost productivity associated with medical absence.

As a result, most employers ignore the total costs of medical absence and concentrate only on direct benefits costs when they calculate the rates of return on investment in absence and disability management.

Benchmarking Costs versus Productivity

A recent analysis of IBI benchmarking data for workers’ compensation, non-occupational disability and incidental absence in the telecommunications industry demonstrates how great the shortfall is when only direct benefits are considered.

Benefits Costs/EE: Telecom Industry

Direct benefits costs are dominated by the costs of group health in telecommunications and many other service industries.

Lost Productivity: Telecom Industry

But when we calculate the potential lost revenue that can result from absence in each program, we get a much different picture. Based on average revenue per employee in the telecommunications industry, incidental absence is associated with $11.54 billion in revenue lost as a result of absence. This number is almost never included in employers’ calculations of the costs of absence, nor is it part of a return-on-investment savings calculation. It is the equivalent of 8% of total revenue for participating companies. Almost half of those costs come from incidental absence and FMLA, two programs most employers do a poor job monitoring and managing.

When we put all costs together in the same framework, it is apparent that direct benefits costs are only a fraction of the total costs of absence, based on a lost-revenue calculation. Productivity loss based on this measure can be as much as three times the direct benefit costs of group health and all disability program expenditures combined.

Full Costs: Telecom Industry

Case Study

For a case study of a large, midwestern manufacturer, we quantified productivity costs associated with STD absence more conservatively by determining the employer’s extra staffing costs to cover for workers away on STD leave. This approach recognizes that most employers are not willing to forgo revenue resulting from employee absence, so they use overtime work, employ temporary help or use extra workers to make up for the shortfall due to absence.

Productivity Impact: Case Study

Based on this employer’s estimate of an extra 20% workforce to cover absence, we estimate that the lost productivity potential approaches $1 billion in additional wages and retirement benefits for replacement workers (based on an "ideal" average of 5% STD absence).

Using payments for medical care under the employer’s group health program, $220 million, payments for STD benefits ($60 million) and the conservative "added-staffing" estimate of productivity loss, we found this productivity loss potential dwarfs direct benefit program costs - accounting for three dollars of every four in total costs.

Had we used the lost-revenue test, this employer would lose $2 billion in productivity from absence.

As one IBI member said, "We’ve been fighting for years to save pennies on our group health bill, only to miss the real issue: managing workplace productivity."