The economic dimension of occupational safety and health management

Introduction

Occupational safety and health management is basically concerned with the principles of how to organise this activity in companies and other organisations. The economic dimension adds an optimisation approach to the organisational and principal perspectives. The non-economic approach typically assumes that health and safety have an intrinsic value of their own, which for instance forms the basis for the zero-accident-vision. The economic approach takes a more balanced view, emphasising that resources are limited and choices are needed to set priorities. From this point of view, even life and health must be compared to other values, and resources must be allocated accordingly. 

System view and efficiency approach

The economic approach to occupational safety and health (OSH) management implies that one takes a system view or adopts an efficiency approach. Most often this kind of analysis is made in monetary terms. In a system view, the inputs and outputs of OSH activities are compared in order to draw conclusions and decisions. The highest productivity is attained when the greatest output is achieved with the smallest relative input. The best efficiency is attained when the greatest intended effectiveness as a result of the output is reached through the relatively smallest amount of input. When both the input and the output are measured in monetary terms, the efficiency can be expressed as a cost-benefit ratio. When the analysis is constrained to the boundaries of an enterprise one can talk about a financial appraisal^[1].

Poor health and safety create costs for organisations. The most common costs are related to sickness absenteeism, health care, individual productivity losses or presenteeism, personnel turn-over, insurance and pension costs and indirect cost effects, such as hiring replacement, paying for overtime, subcontractor work etc. In addition, occupational safety and health (OSH) generates benefits such as improved productivity and added value through a better corporate image and increased employee motivation. According to the study Costs and benefits of investments in occupational safety and health (ISSA, 2013) the spending on occupational safety and health is an investment that “pays off” for companies. The Return on Prevention (ROP) is assessed to be 2.2 (1€ spent yields 2.2€)^[2].

Systematic literature reviews have indicated that both small-scale measures and comprehensive occupational health and safety programmes can be profitable to organisations. Finnish intervention studies have revealed that there can be positive profitability effects even without immediate measurable productivity effects, which indicates that the economic benefit-mechanisms of OSH are more subtle than often assumed^[3].

Macro approach

The economic approach to occupational safety and health can be divided into macro and micro subtypes. In the macro approach, work related activities or phenomena are analysed from a social or societal point of view. According to the EU-OSHA study The value of occupational safety and health and the societal costs of work-related injuries and diseases^[4], cost estimates are based on a bottom-up approach or a top-down approach.

Bottom-up approach

The bottom-up approach involves two key steps for providing a quantitative estimate of the cost of occupational injuries and illnesses:
(1) the identification of the number of cases. This is typically determined through surveys or statistical sources such as worker compensation data.
(2) the application of monetary values. Costs are attributed to the identified cases to provide a quantitative estimate.

The costs are categorised into five main types^[5]:

1. Productivity costs: these refer to the loss of output or production.
2. Healthcare costs: medical costs, including both direct (e.g. pharmaceuticals) and indirect (e.g. caregiver time).
3. Quality of life losses: monetary valuation of the decrease in quality of life, such as physical pain and suffering.
4. Administration costs: costs of administration, for example applying for social security benefits or reporting workplace accidents.
5. Insurance costs: costs regarding insurance, such as compensation payments and insurance premiums.

In each case of occupational injury or illness, these cost components are considered. Summing up the costs across all cases provides an estimate of the total occupational burden of injury and disease.

Top-down approach

In addition to a bottom-up approach, it is also possible to take a ‘top-down’ approach^[4]. In such an approach, total costs are estimated by considering the total burden of injury and disease, and estimating the fraction that was caused by occupational factors. Subsequently, the costs associated with this occupational burden of injury and disease can be estimated. These costs are often expressed in terms of existing measure of overall health burden, such as disability-adjusted life years (DALYs) or quality- adjusted life years (QALYs)4. 

The OSHwiki article The value of OSH: Estimating the societal costs of work-related injuries and diseases provides more information on both approaches and presents results of estimates for five European countries; Finland, Germany The Netherlands, Italy and Poland.

Micro approaches

The microeconomic approach to the management of occupational health and safety is concerned with optimising the resource allocation at the enterprise level. Microeconomic analysis can be applied also to public organisations. Micro approaches include management control principles and procedures, financial appraisal and various calculation methods, and these will be considered in the following paragraphs.

Management control methods

Management control is about ensuring the strategic goals of an organisation. Typically, the accounting system, budgeting and reward systems are used as tools for management control. However, it has been observed that these OSH items are not properly budgeted in management control systems. Therefore, there is a need to develop management control concepts and tools which include work-related health aspects. Work health can be included for instance as an element in Balanced Scorecards (BSC), human resource accounts and health accounts^[6].

Financial appraisal method

Financial appraisal refers to an analysis conducted at the micro level in an enterprise or some other organisation. In financial appraisal all cash-flow effects of an OSH related activity or phenomenon are estimated. The simplest form is to make an estimate of the financial effects of a certain state of affairs, e.g. the current level of sickness absenteeism. A more advanced form is to analyse the economic feasibility of a specific occupational safety and health intervention, for example, a reduction of the noise level. In such an analysis, the annual input costs and the annual cost reductions and other economic benefits are compared for a number of years. By discounting the present value of the annual effects, the economic feasibility can be expressed in financial terms, e.g. return of investment (ROI).

Value-based health promotion methods

Porter and Teisberg (2006)^[7] coined the term value-based promotion of health. The term refers to an approach that is based on the total economic effects of health care. At the other end of this spectrum is transaction-based health care, which optimises the costs of each health care transaction. In the context of occupational health management, it requires a system based on a detailed and up-to-date information and reporting system, with strict quantitative goals and clear managerial responsibilities. Most importantly, the value-based strategy concentrates on the financial value created and lost in the company, not on the direct cost of occupational health management[^8]. In a Finnish study^[9] it was demonstrated that the adoption of a value-based strategy to promote work-wellbeing, reduced significantly sick-leave, insurance and pension costs for the company. The total benefits of the program were estimated to be 11.5 M€ this being achieved in a company with total profits in the region of 600 M€. The subjective estimate made by management was that the real savings were much higher, around 60 M€.

Calculation models

Various calculation models have been developed to help in the estimation of the input costs and related financial benefits. Two such models are The Productivity Model and the Potential Model. The Potential model is an input-output model, or a before-after model. It compares two states of affairs; the one before some measure is taken or investment made and the second after the intervention is made. The effects of the differences between these two states are calculated in order to establish the financial benefit, achieved by the investment. Also the cost of the investment is calculated. Both the cost and the benefit are calculated on an annual basis. For multi-period calculations annual effects are transformed to the present value, by taking account of the interest rate in the calculation. The overall assumption when calculating the benefits is that the real value of work equals the total cost of labour divided by efficient work hours. This assumption is based on the principle that when a company is making an investment it has to be able to cover its current costs by selling what is produced by its personnel, otherwise the firm would go bankrupt. Based on this assumption, the calculation must include all labour costs, the number of all annual paid work hours, and the number of all annual non-productive work hours. In basic terms the calculation of benefits is based on the total cost of productive work hours. Ultimately, the benefit will be dependent on changes in either productive hours or the unit cost of production.

The production cost of personnel turnover is calculated by applying the productivity gap concept. The existence of the personnel turnover productivity gap is well known^[10]. It appears as a result of departing individuals reducing their effort as a result of deteriorating motivation, cooperation and morale, and slowly increasing productivity of newcomers. In the Potential Model, the productivity reductions and increases are assumed to be linear. In order to calculate the value of the productivity gap, only the number of annually departing and arriving people and the average exit period and introduction period have to be entered into the model. the model assumes the value of the productivity gap to be equal to the product of lost hours and the value of a productive hour of the firm’s time.

In these models depreciated initial investments and annual operations costs make up the annual input costs. The benefits include changes in productive time (sickness absenteeism), overtime costs, subcontracting costs, personnel turnover costs health care costs and productivity. The use of these models demonstrate that the total financial benefits of occupational health and safety investments often greatly exceed the direct benefit effects. A reduced number of sickness-leave days for instance often leads to reduced overtime-work and less subcontractor work. In addition, reduced personnel turnover and increased individual productivity can be a by-product of health promotion projects. In some cases, the benefits related to improved individual productivity have been the main effect^[11]. In several cases the actual productivity effects have not been measured, though they have been assumed to be considerable. For instance the Potential Model was used to calculate the economic feasibility of the so-called Druvan-project, in which a 20-fold increase in OSH-expenditure lead to a 46% return of investment^[12].

Examples of good practices

In order to communicate the economic significance of occupational safety and health, business cases are needed^[6]. The business cases explain in detail how OSH measures affect the employees and their behaviour and related cost and productivity factors for the company. 

For instance, the EU-OSHA study The business case for safety and health at work: Cost-benefit analyses of interventions in small and medium-sized enterprises^[13], brought together 91 existing cases and 13 new, ‘unpublished’, cases. The results showed that most of the interventions appeared to be economically beneficial within the five-year period examined because of increased productivity or lower costs. 

Another study presenting case studies assessing the costs and benefits of OSH interventions is the benOSH project^[14]. Cost–benefit analyses were performed on 56 proposed interventions focused on prevention measures clustered into 6 main categories: substitution/avoidance, organisational measure, new equipment, workplace adjustment, training, and personal protective equipment. The study team applied two approaches for estimating the financial benefits of these prevention measures: under the conservative assumptions, the study estimated €1.29 of financial benefits for each €1.00 invested in prevention. Under a less conservation set of assumptions, the study estimated €2.18 of financial benefits for each €1.00 invested in prevention. The highest values were found for measures aimed at substitution or avoidance; the lowest for measures such as training and personal protective equipment^[14]. 

The ISSA and DGUV study^[2] found that, on average, employers spent more than €1,200 per worker per year on OSH measures in a sample of around 330 European employers. The participating employers estimated that these preventive measures yielded financial returns of approximately €2.20 in benefits for every €1.00 invested. Similarly, a US survey of over 400 senior financial officers^[15] gathered data on perceptions of the financial impact of work-related injuries and illnesses, as well as the estimated benefits of prevention spending. The survey asked each firm's representative to estimate the ratio of financial benefits to OSH expenditures, with a reported median of $2.00 in financial benefits for each $1.00 spent on prevention. This study accounted for both tangible and intangible financial benefits in its estimations^[15] [16].

A study in the Canadian province of Ontario^[16] estimated the financial benefits of OSH expenditures in a sample of employers with strong OSH performance. Financial benefits combined estimates of the tangible financial benefits arising from averted disabling work-related injury and illness and intangible financial benefits associated with improved employee retention and morale, improved production quality and strengthened corporate reputation. The results show that the average return on OSH expenditures was 1.24 for 289 manufacturing employers, 2.14 for 56 transportation employers and 1.34 for 88 construction employers^[16].

The importance of strategic business cases is based on the fact that return on investments occurs through many channels. In addition, achieving reductions in sick-leaves and health care and insurance costs, there are more subtle effects which need to be noted. For example, the participation of relevant stakeholders helps to identify changes in delivery time, reliability and client satisfaction. This kind of broader view is helpful in obtaining a more realistic perspective on the true value of work health development in companies.

In the industrial era, the cost reducing strategy was predominant. As society moves towards more knowledge intensive production and consumption^[17] the basis of competition has changed. Knowledge as the basis of business places the main focus on the three main forms of intangible assets: Human Capital, including the knowledge and skills of the employees, Structural capital, including the work community and the production processes, and relational capital, including the perceptions of the company held by the relevant stakeholders, including the perceptions of the customers, suppliers and competitors. All aspects of intangible assets are related to occupational safety and health. Thus, safety directly affects the amount of available human capital. All forms of occupational safety and health activities impact on the quantity, quality and effectiveness of human capital and contribute to business performance. Measures taken to improve corporate culture and leadership have beneficial effects on the productivity of work and innovative activity. Finally, all measures promoting employee satisfaction improve the employer and consumer image of the company, and ultimately its economic performance.