5 ways wellness reduces costs – Part 2: sick-leave costs

Monday, November 3rd, 2014

 

American workers are absent from work due to sickness an average of 8 days a year. Wellness programs have been documented to reduce that amount by 25% or an average of 2 days a year. That reduction in absenteeism represents economic return that is potentially attributable to your wellness program, but it takes some effort to capture the data needed to make that case.

In simple terms, we just need to compare the trends in per-employee sick leave use of employees who participate in wellness programs to the employees on the sidelines. By making this comparison, we can infer the effect our wellness programs have on sick days. Of course, gathering the data to make this comparison can be tricky depending on the structure of your sick leave benefits—a factor that drives what data your organization already collects.

 

‘Dedicated’ Sick Leave

Dedicated sick leave refers to arrangements where there is a formal policy about the number of sick leave days earned by each employee per year. It’s easier to get data on dedicated sick leave because employers have to keep track of it. Some employers provide 6, 8 or 10 days of dedicated sick leave per year. This makes it easy to get the data on sick leave for participants and non-participants in your program.

 

Combined Leave

Another common type of sick leave is called “combined” leave. If your organization uses “combined leave” (also called “Paid Time Off”), all the distinctions between types of leave including administrative, sick, vacation, jury duty, family emergency, etc. are eliminated and each employee gets a lump sum of annual leave. Sick leave is converted into annual leave and is expected to be taken with adequate advance notice. When employees are sick the leave is arranged usually within 24 or 48 hours of its use, giving us a proxy for the amount of sick leave used by the population. If you can get data on each employee’s unscheduled leave within a year, you can do the comparison between wellness program participants and non-participants and measure the reduction in sick leave.

 

Using an HRA to measure sick leave trends

In many organizations, there are holes in the data a wellness program manager can get their hands on to gauge their impact on sick leave. As a result many wellness program managers use a question in their annual HRA that asks about sick leave usage. A question like: ”How many days in the past 12 months were you absent from work due to a personal illness or health problem?” can be used to track sick leave over time. If you ask a question like this at the beginning of your program, the result can be used as a baseline, as it gathers information about the 12 months prior to the launch of the program.

If lots of people complete the HRA then it can become your baseline sick leave measure for the entire population. The same question can also be used as a reference point for the individual participant in your wellness program in what is called a “cohort” analysis. This is when you compare the participants’ own sick leave usage in year one of the program to their usage in year two, etc. (Also called “participant to participant” comparison). In both these methods you are expecting to find a reduction in sick leave usage as participation in the program increases.

 

Monetizing the benefits of reducing sick leave

Using one of these data collection approaches, you can compare the trends in sick leave use in populations who have participated in your wellness program to those who haven’t. Once you have the raw number of days of sick leave reduction attributed to your program, you have to come up with the right cost-basis to use for each day to translate days into dollars of savings.

In many cases, all you need to do is take the average salary costs and apply them to the number of days saved to quantify the benefit to the organization. You can assume that each lost day of employee work is worth at least as much money as the organization was willing to pay them for it!

There are two ways to calculate the wage/salary savings. The first uses an estimate of the average labor cost per day of work. To use this method you need: the total wage/salary cost for all employees for the year, the average number of Full Time Equivalents (FTEs) employed during the same year and the average number of work days expected to be worked per year. It is typical in this method to arrive at an average wage/salary amount of $400 to $1,200 per day per FTE. This number then gets multiplied by the number of sick leave days reduced by the wellness program to derive a total amount of economic return.

The second method for uses the actual labor cost per work day of the program participant. This method is similar to the average method, but uses the actual labor cost of each day of work of the specific program participants that have experienced lower sick leave usage. Of course, this requires that you identify the labor costs of the specific individuals who saw a reduction in their sick leave use.

However, this simple approach breaks down in situations where employees can simply use the days they aren’t sick to extend their planned vacations! This is a great benefit for the employees who are now healthier, but it doesn’t result in bottom-line savings to the employer who still has to pay for those days off…or does it? In organizations with combined leave arrangements, there is often the false assumption that wellness programs don’t drive economic returns from a reduction in sick leave. The reality is there are additional savings we can calculate—costs from unscheduled absences.

Unscheduled leave is a nuisance to managers particularly in manufacturing, school and retail settings. It may lead to line delays, service level reduction and the use of lower-skilled substitute labor. If it is possible to estimate the economic value of the elimination of an “unscheduled leave” event then that value can be used to monetize the reduction in sick leave absenteeism. This can be achieved by estimating the average labor cost per work day and then taking a fraction of that cost, for example 10%, 25%,or 33% of that cost. The unscheduled leave event may lead to bringing in a substitute teacher for a school district, hiring a temporary for a call center, reducing a manufacturing goal or losing a fraction of sales for a retail outlet. Just make sure you make the assumptions explicit so everyone knows how you are coming up with your numbers.

Remember: 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 course on measuring the impact of wellness on sick leave absenteeism to go deeper on this topic.

 

Reference: Chapmaninstitute.com