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Short-Term Disability Plan Design: Effects on Employee Behavior and Outcomes

By Maria Henderson, Certification of Disability Management Specialists Commission  4/23/2007

Companies wanting to get a handle on how to reduce costs and absences covered by short-term disability need to take a look at their plan design. The predominant plan design features—from the length of the benefit elimination period to the level of wage replacement—can have a direct impact on how long employees are off work because of short-term disability.

From an HR standpoint, when presenting short-term disability outcome data—to senior management or as part of external benchmarking—it is essential to distinguish what results are attributable to plan design and therefore do not necessarily reflect on the effectiveness of your disability management program. Further, understanding how aspects of design have intended and unintended results will help produce a more effective and efficient plan.

Maximum Length of Benefits

One of the most obvious factors influencing employee behavior is maximum length of benefits, which may be as short as 90 days or as long as 52 weeks. Most short-term disability plans typically exhaust at 26 weeks because the majority of employees will return to work within six months.

The difference in maximum length of benefits is also important to note as companies benchmark their experiences against that of other employers.

Tip. Unless the maximum length of benefits is the same, the duration comparisons will be skewed. For that reason, companies might want to do internal benchmarking between business units or divisions first.

Wage Replacement

Another plan design factor to consider is wage replacement. According to research by Kenneth Mitchell, vice president for health and productivity at UnumProvident, the "watershed level" wage replacement is 70 percent. "Over 70 percent increases lost time, and below 70 percent reduces lost time," he reports.

Mitchell's research noted that a key factor is "the number of individuals with lower wage replacements coming back to work prematurely." Further, duration averages were at least 20 percent higher than normal when companies offered 100 percent income replacement.

There are other factors in short-term disability plan design that influence employee behavior. Among them:

  • Elimination period. When do benefits start; for example on day 1, after 7 days, 14 days, 30 days? Are benefits retroactive to day one if the disability claim is approved?
  • Definition of disability. Is the company's definition of disability aligned with the return-to-work (RTW) policy, and does it promote participation in a transitional RTW program?
  • Relapse/recurrence. How does the plan define a relapse or recurrence of a disability? When is the same condition considered a new claim?

Elimination Period

When an employee is first absent from work because of a non-occupational illness or injury, the first few days are usually covered by sick leave or paid time off (PTO). Then, after a set number of days (known as the elimination period), if an employee still cannot return to work a short-term disability claim is initiated.

Although elimination periods may range from 0 to 30 days, the industry best practice is seven days, with benefits beginning on the eighth day. This balances the use of PTO for short medical absences with the ability to promote timely clinical and RTW interventions in the disability management process.

Tip. When managing short-term disability claims, early intervention is key to reducing costs and duration of absences. With longer elimination periods, there is little opportunity for early intervention and RTW planning to help the employee return to productivity, such as with a transitional work assignment.

The key component to evaluate, however, is not the length of the elimination period but the practice of retroactive benefit payment to day one. This can produce unintended effects on employee behavior.

Take, for example, the plan with a 30-day elimination period, which requires employees to exhaust PTO time first but will pay benefits to day one retroactively if the absence goes beyond 30 days—thereby reinstating the 30 days into the individual's PTO bank. Although the intent is to reduce the incidence rate of short-term disability claims and thus costs, the opposite can occur. Employees might seek a doctor's authorization for a longer absence beyond the 30-day limit in order to keep from using up their PTO, which most perceive as vacation time.

Definition of Disability

A best practice is to align the definition of disability with the company's RTW policy, using language such as "any transitional assignment available" to promote employees returning to productivity.

Tip. The definition of disability should not include language that would result in the unintended effect of employees being able to refuse a temporary or transitional assignment and continue to receive benefits when the company has identified productive work.

Definitions that include terminology such as "regular occupation" and "material and substantial duties" can lead to greater duration, higher litigation rates and union grievances as the parties dispute written job descriptions and focus on inconsistent practices across work units. The objective is to make sure that employees who have the ability to be productive in some capacity are at work.

As companies evaluate their plan design, the goal is to have greater continuity and consistency, particularly as it relates to RTW, explains Pamela Caggianelli, manager of corporate health for Bausch & Lomb Inc. in Rochester, N.Y., and chair of the Certification of Disability Management Specialists Commission (CDMSC). "It's so much easier for a company to handle all employees who have the ability to work in this way," she notes.

Relapse/Recurrence

Most short-term disability plans will define what is considered to be a continuation of a previous claim following a relapse or recurrence, and what is classified as a new claim. With some injuries (e.g., a broken arm) this is fairly straightforward. However, employees with chronic medical conditions may be off work for 30, 60 or even 90 days, come back to work for two weeks, and then be off again. This may be considered part of the same claim or trigger a new one, depending on the length of the relapse/recurrence period defined in the plan.

Tip. If the recurrence period is too short, it is more difficult to determine whether the person is able to sustain permanent employment.

Although many insured plans have a standard of 14 days, self-insured plans that focus more on productivity outcomes embrace a relapse/recurrence cycle of at least 30 days to ensure alignment with RTW interventions.

Integration with Health and Productivity Programs

Employers should focus on addressing health and lost time in a coordinated way rather than with piecemeal programs, says George Faulkner, a principal at consultancy Mercer Health and Benefits.

Tip. An emerging best practice in short-term disability plan design is to include greater coordination with health and productivity initiatives, which can provide incentives for employees to seek health coaching or disease management programs.

"This means vendor coordination, putting in place decision support systems with integrated data, and seamless, event-focused communications," Faulkner advises.

There is already evidence of this best practice in evidence, Faulkner adds. The 2006 Mercer/Marsh Survey on Health, Productivity, and Absence Management Programs indicated that 12 percent of participants have integrated their health and disability programs in substantial ways. The survey found that 25 percent combine data from multiple programs on a regular basis using data warehouses, carriers or other resources, and another 33 percent were considering it.

"Not surprisingly, large employers often have the resources and dollars at stake to lead these efforts," Faulkner observes. "While 17 percent of all survey participants have a strategy to achieve greater program integration, 25 percent of employers with 5,000 or more employees do."

Plan Design and Expectations

For HR professionals, understanding the effects of plan design on employee behavior can help determine where problems lie when short-term disability costs, duration or other factors appear out of line with expectations. Rather than be surprised by results, employers are urged to analyze outcomes and examine employee behavior—even on an anecdotal level—to determine if the short-term disability plan design is the best for the company and the needs of the workforce.

Maria S. Henderson, MS, CRC, CDMS, CCM, is a commissioner of the Certification of Disability Management Specialists Commission (CDMSC), a nationally accredited organization that certifies disability management specialists. She is also founder and principal of HDM-Solutions Inc., a Denver-based consulting firm.

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