5 ways wellness reduces costs – Part 4: disability insurance costs


Flickr, Noblitt



This part four of my five-part series on getting the complete picture on the economic impact of your wellness program. Last week I covered workers’ compensation, the week before was on sick leave, and the first week was on health plan costs.  Today we are on to disability costs…

Not all employers offer disability insurance coverage to their employees but they should! Disability coverage protects employees financially against injury or illness that happens outside of work and keeps them from working. There are two kinds of disability insurance (DI) coverage. One is called Short Term Disability (STD) which usually provides about 60% of your salary or wage tax-free beginning 30 – 90 days into your absence and lasts up to six months. The other is called Long Term Disability (LTD) which usually starts at the six month mark and usually covers up until two years. Coverage does vary in different markets but these parameters are pretty common.


This private insurance coverage is usually insured rather than self-insured so any economic savings from generally healthier employees usually results from lower increases in future premiums. However, an employee that is absent from work costs the employer more than just his or her salary or wage. For one thing, if there are fewer DI claims then future premiums are likely to be lower. Wellness program managers should dig deeper to measure the other costs of disability. DI claims go hand in hand with needing additional workers to make up for missing employee(s), loss of work continuity, loss of additional sales, reduced quality of customer service, more cross-training needed, and less efficient utilization of space and resources. These costs are real but very hard to nail down and measure over time. You can make an estimate of these costs but you will need to make your assumptions explicit. BTW: the incidence of disability insurance claims are usually in the area of 1% to 4% of a work force each year. Remember, if your organization does not provide disability insurance coverage to employees then there won’t be any savings from your wellness program.


Here again as with any relatively rare events you need a large number of employees (events) to measure and track these costs with acceptable levels of accuracy and validity. Our measurement strategy with DI claims costs are also similar to how we deal with Workers’ Compensation costs and savings. Here also we only want to work with “closed” or completed cases where no additional claims costs are likely to occur.


Measurement Options

The first option is to track the overall pattern of the frequency and severity of disability insurance claims costs in your entire work force. If you have from 50 to 1,000 FTEs covered by disability insurance this method probably makes sense. You then are tracking the overall annual frequency (Number of closed STD (or LTD) cases per year per100 FTE’s) and the severity (The average cost per closed case) and creating a time-series trend analysis for each metric by year. If you see a pattern of declining frequency and/or severity and nothing else changed in how you manage these costs then you can attribute the reductions to the effects of your wellness program. To derive the economic value you would multiply the reduced frequency times the reduced severity.


The second option If you are dealing with employee groups with more than 1,000 FTEs is to track the frequency and severity of disability claims for wellness program participants as a group versus non-participants as a group over time. If the participants and non-participants are close in disability insurance claim experience for both frequency and severity during the baseline or pre-program period, then any positive trends are again likely to be related to the wellness program. You then take the frequency difference between the participants and non-participants and multiply it by the difference in average cost for the two groups.


Don’t Forget to Keep track of Your Assumptions

Again, make all your econometric assumptions explicit so that everything in your methodology is transparent to your audience.   It will also help you duplicate the analysis for the following years.


As with workers compensation costs, if your organization is not doing much to manage or minimize these costs (and the illness and injuries that employees experience!) then there may be some real opportunity for savings. If your disability insurance claims experience is already tightly controlled and managed then don’t expect a lot of savings associated with your wellness program.


This approach doesn’t necessarily address the pain, discomfort, disability, work and family disruption, quality of life effects of fewer injured or ill employees due to healthier lifestyles brought about by the wellness program. You should definitely include these non-economic impacts when you communicate your program’s effects! In my experience, the most powerful way to promote your program’s value is to provide BOTH hard economic sizing as well as the human impact of improved health.


Again, always make your methods for estimating savings transparent so if critics have concerns they can be challenged to come up with a better approach.


Check out our wellness economics series courses on measuring the impact of wellness on disability insurance claims costs to go deeper on this topic.

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