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Workers’ Compensation Experience Modification Factor
The workers’ compensation contribution for each MCIT member is calculated using employee payroll data by job classification code that is collected in the annual payroll estimate request and applied against an actuarially calculated historical loss data formula. The loss data formula is the experience modification (or mod factor).
The purpose of the mod factor is to assist in accurately collecting the proper contribution to cover anticipated future losses.
Every MCIT member that has an annual workers’ compensation contribution of more than $5,000 has an experience modification factor. Those with contributions less than $5,000 maintain a static mod rate of 1.0 regardless of loss history (see more about mod rate below).
Base Rates and Standard Contribution
The base rate for each payroll classification code is calculated by evaluating the total of all members’ classifications and payroll.
The formula for calculating a member’s workers’ compensation contribution begins with assigning payroll to the proper classification codes.
Payroll is the total gross pay an employee receives, including vacation, sick, holiday and overtime pay, as well as stipends and cafeteria plan contributions.
Payroll classification codes reflect the type of work being done by employees and officials. The MCIT Workers’ Compensation Classification Codes Handbook includes explanations of the codes.
Each classification code has a base rate that reflects the risk level of the work done in the work category. For example, the base rate for law enforcement patrol officers is significantly higher than for general office employees, as the risk of injury is higher for law enforcement. The base rates for each classification code are the same for all members.
The amount calculated at this point is known as the standard contribution for the member.
Workers’ Compensation Experience Modification Factor
The final step in calculating a member’s workers’ compensation contribution is to apply its individual experience modification factor to the standard contribution amount. The workers’ compensation contribution formula is:
- Payroll (per $100) x Classification Code Rate = Standard Contribution
- Standard Contribution x Experience Modification Factor = Member’s
Workers’ Compensation Contribution
The mod factor is developed by measuring the difference between a member’s actual past experience and the expected experience of the classification. This factor may be either a debit or credit and, therefore, will increase or decrease the standard contribution in response to past loss experience.
When applied to the standard contribution, the experience modification produces a contribution that is more representative of the member’s actual loss experience.
- A mod factor of 1.0 does not increase or decrease a member’s workers’ compensation contribution. This essentially means that the member’s experience is what is expected.
- A modification factor below 1.0, decreases the amount of contribution, as this indicates that the member’s experience is better than expected.
- A mod factor above 1.0 increases the amount of contribution, as this means that the member’s experience is worse than expected.
Three full years of payroll, expected losses and actual losses are used to calculate a member’s mod factor each year. The most recent full year is not included. For example, the 2024 mod considers information from 2020, 2021 and 2022; and the 2025 mod considers data from 2021, 2022 and 2023.
Reported incidents that do not result in any dollars paid are not considered in the modification factor calculation, so there is no penalty for reporting all incidents to MCIT.
Example: How Changes in Mod Factor Affect Contribution
A modification factor of 1.0 indicates that the member’s claims experience is as expected, so the member would pay the standard contribution. If the mod factor increases or decreases, the member’s actual contribution would increase or decrease relative to the change in the mod factor.
The below illustrates how this would work when applied to a standard contribution of $200,000.
Recommendations to Manage Costs of Workers’ Compensation Coverage
An individual member entity can influence how much it pays for workers’ compensation contribution each year. The below are some steps the member can take to help control the contribution cost.
- Review the payroll audit information and classification codes for accuracy. If employees are misclassified or the payroll amount is inaccurate, the contribution could be more than necessary.
- Establish and train employees on reporting policies and procedures, and report incidents to MCIT promptly. Timely and accurate reporting can help lead to better recoveries for employees, as they can receive appropriate medical interventions faster. This can also help contain the cost of a claim.
- Report all work-related injuries and incidents to MCIT even if no professional medical attention is sought. If a situation never becomes a payable claim, it does not affect the members’ experience modification factor or cost of coverage. If it does turn into a payable claim, MCIT can quickly work with the employee and employer to treat the injury or illness.
- Review status of open claims with the designated MCIT workers’ compensation representative. Such communication can assist with accurate adjusting and timely closing of claims, which can positively affect overall claims costs.
- Take an active role in return to work efforts. Employers can minimize their workers’ compensation costs, including any temporary total disability payments, by offering an injured employee the opportunity to assume a modified role when medically possible until the employee can fully return to his or her normal job duties. The return of an experienced employee can also save the cost of training and compensating a temporary replacement. Having a policy that does not allow an employee to return to work until he or she has no restrictions is detrimental to long-term cost containment.
- Work to prevent similar work-related injuries/illnesses in the future. Review workers’ compensation claims to understand how and why the losses occurred. Reducing the number and cost of claims directly reduces the cost of coverage.
- Utilize the MCIT loss control consultant to assist in identifying risk exposures and ways to mitigate those risks.
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