All About the Net Rate
Staffing & Workers' Compensation
In an industry where the slightest over (or under) estimate in client fees and billing rates may result in a lost bid or new business – and still negatively impact your bottom line – it’s important to have the numbers just right. One component within those numbers is workers’ compensation (WC) costs. In order to determine the most accurate WC cost to build into your model, you must have the most accurate WC rate.
Contrary to what your natural inclination may be, the most accurate WC rate is not the one listed on your WC policy next to the corresponding class code. This is called a manual or base rate. The base rate is merely just that – a base. There are several other factors that serve as a multiplier to those base rates that can significantly adjust the rate up or down. These factors include, but aren’t limited to:
- Experience Modification Factors
- State Surcharges
- State Taxes
The first step in properly calculating a net rate is to identify the rate modification factor (RMF). The simplest way to calculate the RMF is to:
- Remove any flat charges or expenses from the state total premium that wouldn’t be considered a multiplier (e.g. expense constant)
- Divide your state total (standard) premium by your manual premium
Once you’ve completed steps one and two, you now have your RMF. It’s important to note the RMF must be calculated by state, as it can vary (sometimes significantly) from one state to another. Why does it vary? Each state has their own tax load and surcharges, not to mention you may be eligible for different experience mods in non-NCCI states (e.g. California), resulting in different multipliers and ultimately a different RMF.
What do you do once you have the RMF calculated by state? Simply multiply that factor by the base rate, and voila, you have your net rate per classification code. This is the rate that should be used when determining the WC cost to build into your client billing model, as it’s more representative of your WC costs than simply using the base rate. Again, using the net rate will minimize the risk of over or undercharging your clients as it pertains to the WC cost component within your cost structure, which ultimately impacts bottom line.
For additional questions on calculating net rates, contact a member of the ‘A’ Team.
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