Feature Article - Multiplier Effect: The Financial Consequences of Worker Absences

Published: December 14, 2005 in Knowledge@Wharton

When workers take sick days, the financial impact on the company is not always related only to the specific job the sick employee performs. The impact can often ripple throughout the company, especially if the employee is part of a team whose output is time sensitive. Until recently, however, it was hard for companies to measure the impact of employee absenteeism with any hard data.

Many paralegals, for example, serve as the "memory and legs" of lawyers in a law firm by helping to keep tabs on deadlines and making sure filings are delivered in a timely fashion, says Wharton professor of health care systems Mark V. Pauly. So, when a paralegal is sick, the loss in productivity can be large as replacements struggle to learn about the absent worker's cases. That's not as true, however, with fast food cooks, waiters and hotel maids. Because employees in those fields tend to perform discrete, measurable tasks and work individually, managers don't struggle as much to replace sick workers.

There are broad implications for this sort of job-by-job assessment, says Pauly. For starters, when researchers calculate the cumulative cost of these productivity losses, their estimate of the overall cost of health-related workforce absences for the entire economy increases by one-third. But perhaps more importantly, the analysis can help companies justify spending more money to improve the quality of employee health benefits. Programs that help workers manage chronic health conditions, for example, could pay for themselves by reducing absences and improving productivity, yet executives need hard numbers before agreeing to make these up-front expenditures. That's especially the case these days when health care inflation is rampant and some firms are being pushed to the brink of dropping health benefits.

"Relative to a healthy person, an employee in poor health is more likely to be absent from work and less productive when he or she is at work," Pauly writes in a forthcoming paper entitled, "How to Present the Business Case for Healthcare Quality to Employers," co-authored by Sean Nicholson of Cornell University and Daniel Polsky of the University of Pennsylvania. "A recent study suggests that these indirect costs of poor health may actually exceed direct medical costs. But how can one accurately and convincingly quantify the benefits to employers of investing in their workers' health?"

From Waiters to Mechanical Engineers

Pauly, Nicholson and Polsky joined with researchers from Dow Chemical and Merck to develop a formula that could help companies address these issues.

One concept that's central to presenting the business case, Pauly says, is that the cost of a health-related absence often is more than just the wage paid to the worker who is out sick. When perfect replacement workers are not available to substitute for an ill colleague, there are broader implications for productivity. That's especially true in organizations where employees work in teams, and where the team's output is time sensitive.

To put numbers to the concept, the researchers identified 35 jobs in 12 industries that involve different types of production functions, and then interviewed more than 800 managers to determine the financial consequences of worker absences. Based on the interviews, they estimated wage "multipliers" for each of the jobs, in which the multiplier reflects the cost to the firm as a proportion of the absent worker's daily wage. The median multiplier was 1.28, which means that for the median job the cost of an absence was 28% higher than the worker's wage, because of the impact on overall productivity.

Waiters and non-residential construction workers were on the low end of the scale, with multipliers less than 1.1. Mechanical engineers and motor vehicle salespeople were at the high end, with multipliers greater than 1.5. Companies that employ workers with high multipliers would be more likely to invest in their workers' health, because the productivity impact of having those workers out sick is relatively high, Pauly says.

If companies took these multipliers into account when evaluating potential expenditures on health benefits, they might make very different decisions. Pauly and his colleagues present a hypothetical example of a disease management program in which registered nurses monitor employees with chronic health conditions to ensure they receive appropriate, timely medical care. The hypothetical program doesn't generate enough of a return on investment simply in terms of the medical costs it helps workers avoid. Nor is the program's net present value overwhelmingly positive when considering the wage value of the absences it helps reduce.

But when these wage values are weighted by the multipliers, it's a different story. The net present value of the hypothetical program over the first five years jumps nearly four-fold -- making the program a much easier sell to senior management.

"Impaired Presenteeism"

Dow Chemical Company helped take the analysis a step further by looking at "impaired presenteeism," or the impact of sickness on the productivity of those who come to work while ill. Dow asked about presenteeism issues in a massive survey on worker health issues during 2002, in which the company found that 64% of employees reported having one or more chronic conditions. The survey generated a startling finding. While chronic ailments such as diabetes, arthritis and circulatory disorders were responsible for the most direct medical costs among employees, the costliest condition per worker overall -- after factoring the costs of presenteeism -- was depression/anxiety.

Such data helped Dow develop focused intervention strategies on specific conditions that the company wouldn't have known as much about without the survey, the authors write, adding that "Dow's strategy is focusing more on prevention, quality of care, and more sophisticated purchasing, such as pay-for-performance programs."

Dow provides an example of how private sector employers can serve as catalysts for improving health care, Pauly adds. Companies have the power to drive change because they provide health insurance coverage for 160 million workers. Indeed, employers spent an average of $6,700 and $2,900 for a family and single health plan, respectively, above the employee's contribution during 2003.

Yet two current and seemingly contradictory trends in employer benefits suggest that companies are ambivalent about how they want their benefits programs to work. On the one hand, many employers are investing in new programs to improve the quality of medical care, partly in response to recent concerns from the Institute of Medicine (the arm of the National Academy of Sciences that handles medical care issues) and others about the less-than-ideal state of the U.S. health care system. For example, a coalition of employers called the Leapfrog Group has, for several years, encouraged hospitals to adopt computerized systems for entering medication orders in hospitals as a way to prevent errors. General Electric has worked for at least five years on a program to identify the higher quality doctors and hospitals used by its employees, thereby setting the stage for providing financial incentives for those workers who use better providers.

At the same time, more companies are shifting the costs of their health plans to workers, partly because health insurance costs have ballooned more than 50% during the past six years. The highest-profile example of the cost-sharing trend has been the move to Health Savings Accounts, championed by the Bush administration as a way to combat health care inflation by giving consumers incentives to shop more astutely for care. The accounts also represent a way for companies to make workers more responsible for their own health care and thus get the employer out of patient-doctor transactions. High-profile HSAs aside, cost-sharing can also be something as simple as increasing co-pays at the pharmacy counter.

Taken together, the trends illustrate that companies are struggling to accurately assess how decisions about health benefits affect the bottom line, Pauly says. The cost-sharing trend, in particular, comes at a time when information is lacking about whether short-term savings will lead to long-term health problems -- and costs -- because workers avoid primary care for financial reasons, or whether workers will try harder to stay healthy in order to avoid paying more if they get sick.

Also, companies might just have to pay higher money wages when the quality of benefits is reduced, the authors write. What is missing in this whole debate, they add, is a practical and accurate method to determine how much employers should invest in the health of their workers, and to identify the best benefit designs to encourage appropriate health care delivery and use.

"What we are trying to say in our paper," notes Pauly, is that when discussing such subjects as measuring the true cost of worker absences, "let's at least get employers to accurately measure the payoffs that come from improving the health of their employees."