Full text of Economic Commentary (Federal Reserve Bank of Cleveland) : Issue 1 and Workers' Compensation in Ohio, September 21, 1981

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Federal Reserve Bank of Cleveland
cent, whereas the corresponding
ratio for
exclusive state funds was 5.8 percent. The
administrative-expense
ratio of private carriers is more likely to be in the area of 23
percent.P The cost advantage enjoyed by
state funds should be available to employers
in the form of lower rates. However, as
the Elson and Burton study demonstrated,
Ohio's rates are above the national average.
Higher-than-average
costs for Ohio's employers simply might be the result of higherthan-average WC benefits for Ohio's employees. According to Price (1979), benefits
paid in Ohio appear to surpass the national
average, although the benefit scale is typical
of other states. Ohio seems to grant more
claims and perhaps
larger benefits
per
claim. For instance, benefits inOhio in 1976
were about 1 percent of payrolls in covered
employment,
placing them above the national average: only 15 other states paid at
a rate at least as great as Ohio's. By comparison 14 other states (including New York,
Illinois, and Pennsylvania) paid 0.50 percent
to 0.69 percent of payroll in total benefits.
Samers and Kelly (1980) studied a third
dimension
of comparison
between state
funds and private carriers-the
promptness with which claims are paid.? This aspect of WC generally has been overlooked
6. The estimate
of 23 percent is based on my
reconciliation
of the data reported by Price in his
tables 8, 9, and 11. Table 11 reports expenses as
10.1 percent of premiums written for state funds
in 1976. Table 9 reports expenses of $1. 77 billion
and premiums earned of $6.67 billion for stock
and mutual companies
in 1976. Table 8 reports
the ratio of premiums written to premiums earned
for all private carriers in 1976 as 1.13. Thus,
premiums written in 1976 by stock and mutual
carriers are approximated
by 1.13 times $6.67
billion,
or $7.57
billion. Therefore,
for stock
and mutual companies
in 1976, expenses consti·
tuted
approximately
23 percent
of premiums

written.
7. See Bernard N. Samers and Dorothy
I. Kelly,
"Promptness
of Payment
in Workers'
Compensation,"
in Research Report of the Interdepart-

mental

Workers'

Compensation

Task

Force,

vol. 3, U.S. Government
Printing Office, 1980,
pp. 63-90. Data refer to a national
sample of
over 40,000 we claims that closed in 1975.

in the lssue-l debate. Since WC is designed
to protect against the interruption
of income, timeliness of payment is an important
factor in evaluating insurance programs. Delays in the payment of uncontested claims
are fundamentally
administrative
in origin;
contested-claim
payments are subject to delay until a hearing process is completed.
Samers and Kelly's study of this attribute
of the WC program concludes that differences among state and types of carriers
are substantial.
Their data indicate that
nationwide
72 percent of all uncontested
cases were paid [i.e., first payment) within
one month, and 91 percent were paid in
three months; comparable figures for Ohio
are 41 percent in one month and 75 percent
in three months. Only a few states had a
worse record of promptness.
In contested
cases nationwide, 78 percent of the claims
were paid in three months. In Ohio, only
62 percent of contested claims were paid
in three months (13 states had a worse
record). Ohio contested about 18 percent
of all cases, about average for the cases in
the national sample.
Perhaps more relevant to the discussion
of service quality are the differences among
state, private, and self-insured carriers. In
the national sample, private-insurance
carriers have the best promptness record, and
self-insurers have the worst. These findings
are of some consequence
in Ohio because
of the large proportion of employees covered
by self-insuring employers.
Given the different records of promptness between uncontested
and contested
cases, the incidence of contested cases also
can provide some clues as to quality of service. While Ohio contested cases at the same
rate as the national sampie (18 percent),
state funds on average contested fewer (10
percent);
insurance
companies
contested
slightly more (20 percent to 22 percent);
and self-insurers contested
the most (29
percent). Since private-insurance
companies
contested
roughly the same percentage of
cases as Ohio and paid no less promptly, it is
not clear that Ohio claimants would suffer in
this regard from private-insurance
coverage.

By another measure of service qualitysuccessful
litigation-state
insurers seem
inferior to other insurers. Samers and Kelly
demonstrate
that state funds are much less
willing to compromise contested cases than
other carriers, yet they still lose a much
greater proportion
of the litigated claims
than other insurers.

Concluding Remarks
WC is currently a much-debated
topic
throughout the nation. Several states recently
modified or considered
modifications
in
rate-setting
or benefit
provisions.
State
legislatures set the benefit levels and establish oversight rules and market structure; the
latter influences the economic cost of insurance
and the administrative
process
governing claims and payments.
Issue 1
does not call for a change in benefits or costs,
but a change in market structure from monopoly toward competition.
Despite the difficulty in making comparisons, the wide variation in WC systems
among states provides some information
that bears on the lssue-l debate. The Ohio

WC system entails both larger costs and
benefits than the national average, although
not much different from the national average in either case. Private coverage would
appear to offer the possibility of an improvement
in the promptness with which
claims are handled.
Evidence
reported
in this Economic
Commentary does not strongly indict Ohio's
current WC system, but neither does a basis
for praise emerge. Perhaps the most fundamental aspect of the lssue-l debate is the
choice between two very different regulatory mechanisms for WC in Ohio. At issue
is whether the long-term public interest is
best served by monopoly or by competition. In light of Ohio's experience just prior
to 1976, this is a meaningful choice. Those
concerned
with workers'
welfare might
press for reforms in the claims handling of
Ohio's WC system rather than prevent
private carriers from entering
the WCinsurance
business.
Experience
in other
states suggests that opportunities
for significant improvement
in Ohio's WC system
do exist.

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Research Department
P.O. Box 6387
Cleveland,OH
44101

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~£Q2QOmic ommentary
C

Issue1 and Workers' Compensation in Ohio
by Mark S. Sniderman

The state of Ohio, which currently forbids private-insurance companies from competing with the state-run workers' compensation program, is now in the throes of
deciding whether to allow private-insurance
carriers to enter the market. A number of
organizations have announced their opposition to this change, including the Ohio
Manufacturers' Association, the Ohio Chamber of Commerce,
the Greater Cleveland
Growth Association, the Ohio AFL-CIO, and
the Nationwide Insurance Company. Such a
unique amalgam of interests opposing private competition
for workers'
compensation indicates the extent of confusion,
complexity,
and emotion in the lssue-l
debate. The passage of Issue 1 will not
Mark S. Sniderman is an economic advisor with
the Federal Reserve Bank of Cleveland. The author
wishes to thank Michael F. Bryan for his contribution of the historical section.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.

guarantee competition; it will merely permit
private-insurance
carriers to enter the market. The Ohio Department of Insurance will
be responsible for regulating these carriers
if Issue 1 passes.
Both economic
theory and economic
experience
demonstrate
the benefits
of
competitive
markets to consumers. Therefore, arguments in favor of a state monopoly
are viewed with skepticism. This Economic
Commentary
discusses workers'
compensation (We) in Ohio and compares public
and private systems in the United States
using the criteria of costs, benefits, and
quality of service. With proper supervision
a competitive
market has the potential of
reducing employers'
costs and improving
service to employees,
with no change
in benefits.

Historical Perspective
The industrialization
of America brought
with it social concern over the employer's
responsibility for safety in the work place.
As was the case for many early social re-

forms,
however,
there was resistance
to
state control
over private enterprise.
The
American
system of compensation
in the
case of work-related
injury
was largely
bound
by precedents
passed down from
English
common
law. Under
this legal
framework
it was difficult to hold an employer in any part responsible
for injuries
sustained
by his employees.
Moreover,
where cases did fit some rather
narrow
liability definitions,
the cost of litigation
was often a major deterrent
to employee
action. There were relatively few WC claims
prior to 1900.
In 1902, decades after
anisms for compensating
had been legislated
munities,

the

insurance mechinjured workers

in many

state

of

European

Maryland

comenacted

legislation
establishing
a cooperative
accident-insurance
fund providing
benefits
to
families in the event of an employmentrelated death. The act soon was rescinded,
as opponents
successfully
attacked
its constitutionality.

Similar

efforts

in other

states

either failed somewhere along the legislative
process or were struck down by the courts.
The resistance of legislatures and courts to
early compensation
laws was softened
by
criticism from Presidents Theodore
Roosevelt and William Taft. In 1911, Wisconsin
enacted the first effective WC legislation in
the United States. That same year other
states (including Ohio) enacted similar laws.
Within five years a majority
of states
followed the Wisconsin initiative.
While

none

of

the

state

programs

had
de-

veloped identically,
most now have comparable features. Virtually all compel coverage of certain types of employers, especially
those engaged in businesses where employees
are exposed to hazards. Most states require
employers
to purchase
WC from private
insurers
(Wisconsin's
WC legislation
gave
rise to a number of private-insurance
firms
specializing
in work-related
injury protection). Some states, however, operate their
own insurance programs as supplements
to
the private market;
these programs
originated because some employers
could not
purchase
adequate
coverage
from private

carriers. Today,
aliSO states, the District
of Columbia,
and Puerto Rico have WC
laws. In 34 states insurance is sold strictly
through private carriers; in 12 states a stateinsurance program competes with the private
insurers. Ohio is one of six states where
the state government
operates
a WC insurance monopoly
(the others are Nevada,
North Dakota,
Washington,
West Virginia,
and Wyoming).
Ohio
permits
employers
to self-insure
(act as their own insurance company and not
pay into the state fund) if they can demonstrate adequate
financial solvency. Out of
240,000 employers
in the state-WC system,
723 self-insure;
though
the self-insurers
account for less than 1 percent of all employers,
they represent
almost
one-third
of the nearly 4,000,000
covered employees.
Although
the
lssue-l
debate
does not
directly
concern
self-insurance
in Ohio,
self-insurance
is an important
aspect of
Ohio's WC program.
In the summer of 1975, an investigation
of the Ohio WC program revealed questionable uses of funds and general mismanagement. In April 1976, Governor
Rhodes appointed
a new chairman
of the Ohio Industrial
Commission
(OIC),
whose
first
act was to request an audit of the state fund.
In March 1977 the audit concluded that the
fund
($1.3

had a substantial
billion). Soon after

actuarial
deficit
the release of the

audit,
the new OIC chairman
speculated
that complete
recovery of the fund could
take as long as a decade. That same month,
a Cleveland newspaper editorial planted the
seeds of what has now become

Issue 1 :

... In view of the horrendous
bureaucratic
problems
historically
experienced
by the
Ohio system and the rising employer contri·
bution rates, this would be a fit moment for
the General Assembly to undertake a careful
feasibility study of the benefits of turning
the state monopoly
over to private
insurance companles.]

1. See "Avoiding
Dealer (Cleveland,
1977, p, A20.

Financial
Ruin,"
Ohio),
editorial,

The Plain
March 26,

Even

prior

to the audit,

some

reforms

had been initiated.
A system designed to
protect fund outlays and improve accounting procedures was implemented.
Even more
significant
was a new state law that mandated the OIC to set employer-contribution
rates at levels assuring actuarial soundness.
The immediate
result was an average rate
increase of 28 percent in 1976 and another
22 percent increase in 1977. Rates declined
19 percent in 1978 and have been relatively
stable since.
The recovery
of the Ohio fund will
probably
not take as long as most had
feared.
The state-fund
deficit
has been
greatly reduced during the past four years,
though it is uncertain
whether
the deficit
has yet been el iminated. The recovery stems
in part from the increases
in employercontribution
rates, the 1976 reforms, and
fund-investment
gains. The current
and
prospective
actuarial condition
of the state
fund figure prominently
in the opposition
to Issue 1. For example,
some opponents
actually favor the entry of private carriers
into the WC market,
but not until the
actuarial
soundness
of the state fund is
assured.
Another
lssue-l
opponent
contends that the Ohio fund need not be subjected
to the same accounting
standards
as private-insurance
carriers,
in the belief
that the state of Ohio ultimately guarantees
fund solvency.

Costs, Benefits, and Services
Most Issue-1 opponents
fear that a competitive
WC system
would
increase employers'
costs and reduce injured-workers'
benefits.
Issue-1 proponents
take the opposite stance.
Each side cites supporting
studies and statistics, and, indeed, there are
a host of "facts" from which to choose.
In comparing the costs of the WC systems
in the United States,
Elson and Burton
(1981) estimate
employers'
costs for WC
with several measures:
manual
rates, adjusted manual rates, and net costs of WC
insurance
per ernplovee.?
Manual
rates
are the insurance costs in dollars per $100
of weekly earnings per employee
as listed

by each state in its official schedule. However, employers in general pay less than the
manual rates. Their insurance costs are reduced by premium
discounts
for quantity
purchases,
dividends
received
from insurance
companies,
and
modifications
resulting from the employers'
own accident
experience.
Adjusted
manual rates, which
provide a more accurate
measure of employers' costs, are derived from these considerations.I
The net costs of insurance
per employee are simply the product of the
state's adjusted manual rate and its average
weekly wage. Elson and Burton
provide
estimates of these three measures as of July
1978, for a diversified group of 45 employertypes in 47 jurisdictions
(see table 1). Where
a rank of 1 denotes
the least expensive
jurisdiction,
Ohio ranks 26 out of 47 in
manual rates, 35 in adjusted manual rates,
and 36 in net costs of lnsurance.f
These
figures illustrate
that Ohio is not a lowcost WC state for employers.
Issue-1 opponents
claim

that

Ohio

em-

ployers
enjoy a cost advantage,
because
state funds have lower operating costs than
private carriers. A study by Price (1979) supports this view.> State funds, in general,
spend very little money to obtain business,
and exclusive
state funds
spend
almost
nothing for this purpose. In 1976, the ratio
of administrative
expenses
written for all publ ic funds

to premiums
was 10.1 per-

2. See Martin W. Elson and John F. Burton, [r.,
"Workers' Compensation
Insurance: Recent Trends
in Employers'
Costs,"
Monthly
Labor Review,
vol. 104, no. 3 (March 1981),
pp, 45-50. This
study
analyzes
47 jurisdictions:
the 50 states
plus the District of Columbia, less Nevada, North
Dakota, Washington,
and Wyoming.
These four
states
and all self-insuring
employers
are excluded because of data limitations.
The cost estimates assume that the distribution
of employees
by industry
in each state is identical to the national distribution.
3.

See Elson and Burton,

4. The average adjusted
Ohio's rate is 1.550.

p. 46.
manual

rate

is 1.376;

5. See Daniel N. Price, "Workers' Compensation
Programs in the 1970's," Social Security Bulletin,
vol. 42, no. 5 (May 1979), pp. 3-24.

Table 1 Employers'
As of July 1, 1978

Average Weekly Costs of Workers'

Adjusted manual
rates (per $100
of payroll)

Manual rates
(per$100
of payroll)
Jurisdiction
Alabama
Alaska
Arizona
Arkansas
California

45 types
of employers

Compensation

Rank

$1.043

9

2.149
3.055
1.576

38
44
23

45 tv pes
of employers
$0.855
1.762
2.505
1.292

2.604

43

2.135

Colorado
Connecticut
Delaware
District of Columbia
Florida

1.475
1.650
1.742
4.271
3.221

20
25
32
47
45

1.210

Georgia
Hawaii
Idaho
Illinois
Indiana

1.313

16

2.508
1.569
1.685
0.585

42
22
30
1

Iowa
Kansas
Kentucky
Louisiana
Maine

1.322
1.072

17
11

1.685
1.844

29
35

1.684

28

Maryland
Massachusetts
Michigan
Minnesota
Mississippi

1.539
1.674
2.305
2.220
1.100

21
27
41
40
14

Missouri
Montana
Nebraska
New Hampshire
New Jersey

0.903
1.712
0.865
1.422

4
31
3
18

2.057

36

1.353
1.428
3.502
2.641

Rank

Insurance
Net costs
of insurance
(per employee)
45 types
of em players

Rank

9
38
44
23
43

$1.544
4.879
5.294
2.078
4.816

9
44
45
17
43

20
25
31
47
45

2.554
2.768
2.922
8.199
4.793

25
29
33
47
42

1.912

16
40
20
34

1.077
2.057
1.287
1.382
0.480

16
42
22
28

1.084
.879
1.382

17
11
29
34
27

2.190
1.659
2.781
2.909
2.581

19
13
30
32
26

21
26
41
40
14

2.526
2.757
4.370
3.733
1.457

24
28
41
38

5
30
4
18
36

1.196

3

2.795
1.484
2.128
3.651

31
7
18
37

32
39
2
35
33

3.844
0.899
3.352
2.654

36
27

46
19
24
7
8

6.288
2.382

46
21

2.387
1.360

22

1.666
3.293
1. 701

3

1.229
1.582

1.512
1.380
1.262
1.373
1.890
1.821
0.902
0.740
1.404
0.710
1.166
1.687
1.441
1. 770

New Mexico
New York
North Carolina
Ohio
Oklahoma

1.757

33

2.158
0.649
1.664
1.763

39
2
26
34

Oregor.
Pennsylvania
Rhode Island
South Carolina
South Dakota

3.558
1.431
1.589
1.020
1.027

46
19
24
7
8

Tennessee
Texas
Utah
Vermont
Virginia

1.101

15

2.13 7
1.087
1.067
1.074

37
13
10
12

0.892
0.875
0.880

15
37
13
10
12

West Virginia
Wisconsin

0.962
0.917

6
5

0.660
0.752

6

0.532
1.550
1.446
2.918
1.173
1.303
0.836
0.842
0.903
1. 753

3.964
2.238
3.063
1.015

2.479

1.649

1.646
1.525

SOURCE:
Martin W. Elson and John F. Burton, [r., "Workers' Compensation
Insurance:
Trends in Employers' Costs," Monthly Labor Review, vol. 104, no. 3 (March 1981), p. 46.

2

6

23
39

5
12
14
35
15
11

8
4
10
Recent

forms,
however,
there was resistance
to
state control
over private enterprise.
The
American
system of compensation
in the
case of work-related
injury
was largely
bound
by precedents
passed down from
English
common
law. Under
this legal
framework
it was difficult to hold an employer in any part responsible
for injuries
sustained
by his employees.
Moreover,
where cases did fit some rather
narrow
liability definitions,
the cost of litigation
was often a major deterrent
to employee
action. There were relatively few WC claims
prior to 1900.
In 1902, decades after
anisms for compensating
had been legislated
munities,

the

insurance mechinjured workers

in many

state

of

European

Maryland

comenacted

legislation
establishing
a cooperative
accident-insurance
fund providing
benefits
to
families in the event of an employmentrelated death. The act soon was rescinded,
as opponents
successfully
attacked
its constitutionality.

Similar

efforts

in other

states

either failed somewhere along the legislative
process or were struck down by the courts.
The resistance of legislatures and courts to
early compensation
laws was softened
by
criticism from Presidents Theodore
Roosevelt and William Taft. In 1911, Wisconsin
enacted the first effective WC legislation in
the United States. That same year other
states (including Ohio) enacted similar laws.
Within five years a majority
of states
followed the Wisconsin initiative.
While

none

of

the

state

programs

had
de-

veloped identically,
most now have comparable features. Virtually all compel coverage of certain types of employers, especially
those engaged in businesses where employees
are exposed to hazards. Most states require
employers
to purchase
WC from private
insurers
(Wisconsin's
WC legislation
gave
rise to a number of private-insurance
firms
specializing
in work-related
injury protection). Some states, however, operate their
own insurance programs as supplements
to
the private market;
these programs
originated because some employers
could not
purchase
adequate
coverage
from private

carriers. Today,
aliSO states, the District
of Columbia,
and Puerto Rico have WC
laws. In 34 states insurance is sold strictly
through private carriers; in 12 states a stateinsurance program competes with the private
insurers. Ohio is one of six states where
the state government
operates
a WC insurance monopoly
(the others are Nevada,
North Dakota,
Washington,
West Virginia,
and Wyoming).
Ohio
permits
employers
to self-insure
(act as their own insurance company and not
pay into the state fund) if they can demonstrate adequate
financial solvency. Out of
240,000 employers
in the state-WC system,
723 self-insure;
though
the self-insurers
account for less than 1 percent of all employers,
they represent
almost
one-third
of the nearly 4,000,000
covered employees.
Although
the
lssue-l
debate
does not
directly
concern
self-insurance
in Ohio,
self-insurance
is an important
aspect of
Ohio's WC program.
In the summer of 1975, an investigation
of the Ohio WC program revealed questionable uses of funds and general mismanagement. In April 1976, Governor
Rhodes appointed
a new chairman
of the Ohio Industrial
Commission
(OIC),
whose
first
act was to request an audit of the state fund.
In March 1977 the audit concluded that the
fund
($1.3

had a substantial
billion). Soon after

actuarial
deficit
the release of the

audit,
the new OIC chairman
speculated
that complete
recovery of the fund could
take as long as a decade. That same month,
a Cleveland newspaper editorial planted the
seeds of what has now become

Issue 1 :

... In view of the horrendous
bureaucratic
problems
historically
experienced
by the
Ohio system and the rising employer contri·
bution rates, this would be a fit moment for
the General Assembly to undertake a careful
feasibility study of the benefits of turning
the state monopoly
over to private
insurance companles.]

1. See "Avoiding
Dealer (Cleveland,
1977, p, A20.

Financial
Ruin,"
Ohio),
editorial,

The Plain
March 26,

Even

prior

to the audit,

some

reforms

had been initiated.
A system designed to
protect fund outlays and improve accounting procedures was implemented.
Even more
significant
was a new state law that mandated the OIC to set employer-contribution
rates at levels assuring actuarial soundness.
The immediate
result was an average rate
increase of 28 percent in 1976 and another
22 percent increase in 1977. Rates declined
19 percent in 1978 and have been relatively
stable since.
The recovery
of the Ohio fund will
probably
not take as long as most had
feared.
The state-fund
deficit
has been
greatly reduced during the past four years,
though it is uncertain
whether
the deficit
has yet been el iminated. The recovery stems
in part from the increases
in employercontribution
rates, the 1976 reforms, and
fund-investment
gains. The current
and
prospective
actuarial condition
of the state
fund figure prominently
in the opposition
to Issue 1. For example,
some opponents
actually favor the entry of private carriers
into the WC market,
but not until the
actuarial
soundness
of the state fund is
assured.
Another
lssue-l
opponent
contends that the Ohio fund need not be subjected
to the same accounting
standards
as private-insurance
carriers,
in the belief
that the state of Ohio ultimately guarantees
fund solvency.

Costs, Benefits, and Services
Most Issue-1 opponents
fear that a competitive
WC system
would
increase employers'
costs and reduce injured-workers'
benefits.
Issue-1 proponents
take the opposite stance.
Each side cites supporting
studies and statistics, and, indeed, there are
a host of "facts" from which to choose.
In comparing the costs of the WC systems
in the United States,
Elson and Burton
(1981) estimate
employers'
costs for WC
with several measures:
manual
rates, adjusted manual rates, and net costs of WC
insurance
per ernplovee.?
Manual
rates
are the insurance costs in dollars per $100
of weekly earnings per employee
as listed

by each state in its official schedule. However, employers in general pay less than the
manual rates. Their insurance costs are reduced by premium
discounts
for quantity
purchases,
dividends
received
from insurance
companies,
and
modifications
resulting from the employers'
own accident
experience.
Adjusted
manual rates, which
provide a more accurate
measure of employers' costs, are derived from these considerations.I
The net costs of insurance
per employee are simply the product of the
state's adjusted manual rate and its average
weekly wage. Elson and Burton
provide
estimates of these three measures as of July
1978, for a diversified group of 45 employertypes in 47 jurisdictions
(see table 1). Where
a rank of 1 denotes
the least expensive
jurisdiction,
Ohio ranks 26 out of 47 in
manual rates, 35 in adjusted manual rates,
and 36 in net costs of lnsurance.f
These
figures illustrate
that Ohio is not a lowcost WC state for employers.
Issue-1 opponents
claim

that

Ohio

em-

ployers
enjoy a cost advantage,
because
state funds have lower operating costs than
private carriers. A study by Price (1979) supports this view.> State funds, in general,
spend very little money to obtain business,
and exclusive
state funds
spend
almost
nothing for this purpose. In 1976, the ratio
of administrative
expenses
written for all publ ic funds

to premiums
was 10.1 per-

2. See Martin W. Elson and John F. Burton, [r.,
"Workers' Compensation
Insurance: Recent Trends
in Employers'
Costs,"
Monthly
Labor Review,
vol. 104, no. 3 (March 1981),
pp, 45-50. This
study
analyzes
47 jurisdictions:
the 50 states
plus the District of Columbia, less Nevada, North
Dakota, Washington,
and Wyoming.
These four
states
and all self-insuring
employers
are excluded because of data limitations.
The cost estimates assume that the distribution
of employees
by industry
in each state is identical to the national distribution.
3.

See Elson and Burton,

4. The average adjusted
Ohio's rate is 1.550.

p. 46.
manual

rate

is 1.376;

5. See Daniel N. Price, "Workers' Compensation
Programs in the 1970's," Social Security Bulletin,
vol. 42, no. 5 (May 1979), pp. 3-24.

Table 1 Employers'
As of July 1, 1978

Average Weekly Costs of Workers'

Adjusted manual
rates (per $100
of payroll)

Manual rates
(per$100
of payroll)
Jurisdiction
Alabama
Alaska
Arizona
Arkansas
California

45 types
of employers

Compensation

Rank

$1.043

9

2.149
3.055
1.576

38
44
23

45 tv pes
of employers
$0.855
1.762
2.505
1.292

2.604

43

2.135

Colorado
Connecticut
Delaware
District of Columbia
Florida

1.475
1.650
1.742
4.271
3.221

20
25
32
47
45

1.210

Georgia
Hawaii
Idaho
Illinois
Indiana

1.313

16

2.508
1.569
1.685
0.585

42
22
30
1

Iowa
Kansas
Kentucky
Louisiana
Maine

1.322
1.072

17
11

1.685
1.844

29
35

1.684

28

Maryland
Massachusetts
Michigan
Minnesota
Mississippi

1.539
1.674
2.305
2.220
1.100

21
27
41
40
14

Missouri
Montana
Nebraska
New Hampshire
New Jersey

0.903
1.712
0.865
1.422

4
31
3
18

2.057

36

1.353
1.428
3.502
2.641

Rank

Insurance
Net costs
of insurance
(per employee)
45 types
of em players

Rank

9
38
44
23
43

$1.544
4.879
5.294
2.078
4.816

9
44
45
17
43

20
25
31
47
45

2.554
2.768
2.922
8.199
4.793

25
29
33
47
42

1.912

16
40
20
34

1.077
2.057
1.287
1.382
0.480

16
42
22
28

1.084
.879
1.382

17
11
29
34
27

2.190
1.659
2.781
2.909
2.581

19
13
30
32
26

21
26
41
40
14

2.526
2.757
4.370
3.733
1.457

24
28
41
38

5
30
4
18
36

1.196

3

2.795
1.484
2.128
3.651

31
7
18
37

32
39
2
35
33

3.844
0.899
3.352
2.654

36
27

46
19
24
7
8

6.288
2.382

46
21

2.387
1.360

22

1.666
3.293
1. 701

3

1.229
1.582

1.512
1.380
1.262
1.373
1.890
1.821
0.902
0.740
1.404
0.710
1.166
1.687
1.441
1. 770

New Mexico
New York
North Carolina
Ohio
Oklahoma

1.757

33

2.158
0.649
1.664
1.763

39
2
26
34

Oregor.
Pennsylvania
Rhode Island
South Carolina
South Dakota

3.558
1.431
1.589
1.020
1.027

46
19
24
7
8

Tennessee
Texas
Utah
Vermont
Virginia

1.101

15

2.13 7
1.087
1.067
1.074

37
13
10
12

0.892
0.875
0.880

15
37
13
10
12

West Virginia
Wisconsin

0.962
0.917

6
5

0.660
0.752

6

0.532
1.550
1.446
2.918
1.173
1.303
0.836
0.842
0.903
1. 753

3.964
2.238
3.063
1.015

2.479

1.649

1.646
1.525

SOURCE:
Martin W. Elson and John F. Burton, [r., "Workers' Compensation
Insurance:
Trends in Employers' Costs," Monthly Labor Review, vol. 104, no. 3 (March 1981), p. 46.

2

6

23
39

5
12
14
35
15
11

8
4
10
Recent

forms,
however,
there was resistance
to
state control
over private enterprise.
The
American
system of compensation
in the
case of work-related
injury
was largely
bound
by precedents
passed down from
English
common
law. Under
this legal
framework
it was difficult to hold an employer in any part responsible
for injuries
sustained
by his employees.
Moreover,
where cases did fit some rather
narrow
liability definitions,
the cost of litigation
was often a major deterrent
to employee
action. There were relatively few WC claims
prior to 1900.
In 1902, decades after
anisms for compensating
had been legislated
munities,

the

insurance mechinjured workers

in many

state

of

European

Maryland

comenacted

legislation
establishing
a cooperative
accident-insurance
fund providing
benefits
to
families in the event of an employmentrelated death. The act soon was rescinded,
as opponents
successfully
attacked
its constitutionality.

Similar

efforts

in other

states

either failed somewhere along the legislative
process or were struck down by the courts.
The resistance of legislatures and courts to
early compensation
laws was softened
by
criticism from Presidents Theodore
Roosevelt and William Taft. In 1911, Wisconsin
enacted the first effective WC legislation in
the United States. That same year other
states (including Ohio) enacted similar laws.
Within five years a majority
of states
followed the Wisconsin initiative.
While

none

of

the

state

programs

had
de-

veloped identically,
most now have comparable features. Virtually all compel coverage of certain types of employers, especially
those engaged in businesses where employees
are exposed to hazards. Most states require
employers
to purchase
WC from private
insurers
(Wisconsin's
WC legislation
gave
rise to a number of private-insurance
firms
specializing
in work-related
injury protection). Some states, however, operate their
own insurance programs as supplements
to
the private market;
these programs
originated because some employers
could not
purchase
adequate
coverage
from private

carriers. Today,
aliSO states, the District
of Columbia,
and Puerto Rico have WC
laws. In 34 states insurance is sold strictly
through private carriers; in 12 states a stateinsurance program competes with the private
insurers. Ohio is one of six states where
the state government
operates
a WC insurance monopoly
(the others are Nevada,
North Dakota,
Washington,
West Virginia,
and Wyoming).
Ohio
permits
employers
to self-insure
(act as their own insurance company and not
pay into the state fund) if they can demonstrate adequate
financial solvency. Out of
240,000 employers
in the state-WC system,
723 self-insure;
though
the self-insurers
account for less than 1 percent of all employers,
they represent
almost
one-third
of the nearly 4,000,000
covered employees.
Although
the
lssue-l
debate
does not
directly
concern
self-insurance
in Ohio,
self-insurance
is an important
aspect of
Ohio's WC program.
In the summer of 1975, an investigation
of the Ohio WC program revealed questionable uses of funds and general mismanagement. In April 1976, Governor
Rhodes appointed
a new chairman
of the Ohio Industrial
Commission
(OIC),
whose
first
act was to request an audit of the state fund.
In March 1977 the audit concluded that the
fund
($1.3

had a substantial
billion). Soon after

actuarial
deficit
the release of the

audit,
the new OIC chairman
speculated
that complete
recovery of the fund could
take as long as a decade. That same month,
a Cleveland newspaper editorial planted the
seeds of what has now become

Issue 1 :

... In view of the horrendous
bureaucratic
problems
historically
experienced
by the
Ohio system and the rising employer contri·
bution rates, this would be a fit moment for
the General Assembly to undertake a careful
feasibility study of the benefits of turning
the state monopoly
over to private
insurance companles.]

1. See "Avoiding
Dealer (Cleveland,
1977, p, A20.

Financial
Ruin,"
Ohio),
editorial,

The Plain
March 26,

Even

prior

to the audit,

some

reforms

had been initiated.
A system designed to
protect fund outlays and improve accounting procedures was implemented.
Even more
significant
was a new state law that mandated the OIC to set employer-contribution
rates at levels assuring actuarial soundness.
The immediate
result was an average rate
increase of 28 percent in 1976 and another
22 percent increase in 1977. Rates declined
19 percent in 1978 and have been relatively
stable since.
The recovery
of the Ohio fund will
probably
not take as long as most had
feared.
The state-fund
deficit
has been
greatly reduced during the past four years,
though it is uncertain
whether
the deficit
has yet been el iminated. The recovery stems
in part from the increases
in employercontribution
rates, the 1976 reforms, and
fund-investment
gains. The current
and
prospective
actuarial condition
of the state
fund figure prominently
in the opposition
to Issue 1. For example,
some opponents
actually favor the entry of private carriers
into the WC market,
but not until the
actuarial
soundness
of the state fund is
assured.
Another
lssue-l
opponent
contends that the Ohio fund need not be subjected
to the same accounting
standards
as private-insurance
carriers,
in the belief
that the state of Ohio ultimately guarantees
fund solvency.

Costs, Benefits, and Services
Most Issue-1 opponents
fear that a competitive
WC system
would
increase employers'
costs and reduce injured-workers'
benefits.
Issue-1 proponents
take the opposite stance.
Each side cites supporting
studies and statistics, and, indeed, there are
a host of "facts" from which to choose.
In comparing the costs of the WC systems
in the United States,
Elson and Burton
(1981) estimate
employers'
costs for WC
with several measures:
manual
rates, adjusted manual rates, and net costs of WC
insurance
per ernplovee.?
Manual
rates
are the insurance costs in dollars per $100
of weekly earnings per employee
as listed

by each state in its official schedule. However, employers in general pay less than the
manual rates. Their insurance costs are reduced by premium
discounts
for quantity
purchases,
dividends
received
from insurance
companies,
and
modifications
resulting from the employers'
own accident
experience.
Adjusted
manual rates, which
provide a more accurate
measure of employers' costs, are derived from these considerations.I
The net costs of insurance
per employee are simply the product of the
state's adjusted manual rate and its average
weekly wage. Elson and Burton
provide
estimates of these three measures as of July
1978, for a diversified group of 45 employertypes in 47 jurisdictions
(see table 1). Where
a rank of 1 denotes
the least expensive
jurisdiction,
Ohio ranks 26 out of 47 in
manual rates, 35 in adjusted manual rates,
and 36 in net costs of lnsurance.f
These
figures illustrate
that Ohio is not a lowcost WC state for employers.
Issue-1 opponents
claim

that

Ohio

em-

ployers
enjoy a cost advantage,
because
state funds have lower operating costs than
private carriers. A study by Price (1979) supports this view.> State funds, in general,
spend very little money to obtain business,
and exclusive
state funds
spend
almost
nothing for this purpose. In 1976, the ratio
of administrative
expenses
written for all publ ic funds

to premiums
was 10.1 per-

2. See Martin W. Elson and John F. Burton, [r.,
"Workers' Compensation
Insurance: Recent Trends
in Employers'
Costs,"
Monthly
Labor Review,
vol. 104, no. 3 (March 1981),
pp, 45-50. This
study
analyzes
47 jurisdictions:
the 50 states
plus the District of Columbia, less Nevada, North
Dakota, Washington,
and Wyoming.
These four
states
and all self-insuring
employers
are excluded because of data limitations.
The cost estimates assume that the distribution
of employees
by industry
in each state is identical to the national distribution.
3.

See Elson and Burton,

4. The average adjusted
Ohio's rate is 1.550.

p. 46.
manual

rate

is 1.376;

5. See Daniel N. Price, "Workers' Compensation
Programs in the 1970's," Social Security Bulletin,
vol. 42, no. 5 (May 1979), pp. 3-24.

Table 1 Employers'
As of July 1, 1978

Average Weekly Costs of Workers'

Adjusted manual
rates (per $100
of payroll)

Manual rates
(per$100
of payroll)
Jurisdiction
Alabama
Alaska
Arizona
Arkansas
California

45 types
of employers

Compensation

Rank

$1.043

9

2.149
3.055
1.576

38
44
23

45 tv pes
of employers
$0.855
1.762
2.505
1.292

2.604

43

2.135

Colorado
Connecticut
Delaware
District of Columbia
Florida

1.475
1.650
1.742
4.271
3.221

20
25
32
47
45

1.210

Georgia
Hawaii
Idaho
Illinois
Indiana

1.313

16

2.508
1.569
1.685
0.585

42
22
30
1

Iowa
Kansas
Kentucky
Louisiana
Maine

1.322
1.072

17
11

1.685
1.844

29
35

1.684

28

Maryland
Massachusetts
Michigan
Minnesota
Mississippi

1.539
1.674
2.305
2.220
1.100

21
27
41
40
14

Missouri
Montana
Nebraska
New Hampshire
New Jersey

0.903
1.712
0.865
1.422

4
31
3
18

2.057

36

1.353
1.428
3.502
2.641

Rank

Insurance
Net costs
of insurance
(per employee)
45 types
of em players

Rank

9
38
44
23
43

$1.544
4.879
5.294
2.078
4.816

9
44
45
17
43

20
25
31
47
45

2.554
2.768
2.922
8.199
4.793

25
29
33
47
42

1.912

16
40
20
34

1.077
2.057
1.287
1.382
0.480

16
42
22
28

1.084
.879
1.382

17
11
29
34
27

2.190
1.659
2.781
2.909
2.581

19
13
30
32
26

21
26
41
40
14

2.526
2.757
4.370
3.733
1.457

24
28
41
38

5
30
4
18
36

1.196

3

2.795
1.484
2.128
3.651

31
7
18
37

32
39
2
35
33

3.844
0.899
3.352
2.654

36
27

46
19
24
7
8

6.288
2.382

46
21

2.387
1.360

22

1.666
3.293
1. 701

3

1.229
1.582

1.512
1.380
1.262
1.373
1.890
1.821
0.902
0.740
1.404
0.710
1.166
1.687
1.441
1. 770

New Mexico
New York
North Carolina
Ohio
Oklahoma

1.757

33

2.158
0.649
1.664
1.763

39
2
26
34

Oregor.
Pennsylvania
Rhode Island
South Carolina
South Dakota

3.558
1.431
1.589
1.020
1.027

46
19
24
7
8

Tennessee
Texas
Utah
Vermont
Virginia

1.101

15

2.13 7
1.087
1.067
1.074

37
13
10
12

0.892
0.875
0.880

15
37
13
10
12

West Virginia
Wisconsin

0.962
0.917

6
5

0.660
0.752

6

0.532
1.550
1.446
2.918
1.173
1.303
0.836
0.842
0.903
1. 753

3.964
2.238
3.063
1.015

2.479

1.649

1.646
1.525

SOURCE:
Martin W. Elson and John F. Burton, [r., "Workers' Compensation
Insurance:
Trends in Employers' Costs," Monthly Labor Review, vol. 104, no. 3 (March 1981), p. 46.

2

6

23
39

5
12
14
35
15
11

8
4
10
Recent

Federal Reserve Bank of Cleveland
cent, whereas the corresponding
ratio for
exclusive state funds was 5.8 percent. The
administrative-expense
ratio of private carriers is more likely to be in the area of 23
percent.P The cost advantage enjoyed by
state funds should be available to employers
in the form of lower rates. However, as
the Elson and Burton study demonstrated,
Ohio's rates are above the national average.
Higher-than-average
costs for Ohio's employers simply might be the result of higherthan-average WC benefits for Ohio's employees. According to Price (1979), benefits
paid in Ohio appear to surpass the national
average, although the benefit scale is typical
of other states. Ohio seems to grant more
claims and perhaps
larger benefits
per
claim. For instance, benefits inOhio in 1976
were about 1 percent of payrolls in covered
employment,
placing them above the national average: only 15 other states paid at
a rate at least as great as Ohio's. By comparison 14 other states (including New York,
Illinois, and Pennsylvania) paid 0.50 percent
to 0.69 percent of payroll in total benefits.
Samers and Kelly (1980) studied a third
dimension
of comparison
between state
funds and private carriers-the
promptness with which claims are paid.? This aspect of WC generally has been overlooked
6. The estimate
of 23 percent is based on my
reconciliation
of the data reported by Price in his
tables 8, 9, and 11. Table 11 reports expenses as
10.1 percent of premiums written for state funds
in 1976. Table 9 reports expenses of $1. 77 billion
and premiums earned of $6.67 billion for stock
and mutual companies
in 1976. Table 8 reports
the ratio of premiums written to premiums earned
for all private carriers in 1976 as 1.13. Thus,
premiums written in 1976 by stock and mutual
carriers are approximated
by 1.13 times $6.67
billion,
or $7.57
billion. Therefore,
for stock
and mutual companies
in 1976, expenses consti·
tuted
approximately
23 percent
of premiums

written.
7. See Bernard N. Samers and Dorothy
I. Kelly,
"Promptness
of Payment
in Workers'
Compensation,"
in Research Report of the Interdepart-

mental

Workers'

Compensation

Task

Force,

vol. 3, U.S. Government
Printing Office, 1980,
pp. 63-90. Data refer to a national
sample of
over 40,000 we claims that closed in 1975.

in the lssue-l debate. Since WC is designed
to protect against the interruption
of income, timeliness of payment is an important
factor in evaluating insurance programs. Delays in the payment of uncontested claims
are fundamentally
administrative
in origin;
contested-claim
payments are subject to delay until a hearing process is completed.
Samers and Kelly's study of this attribute
of the WC program concludes that differences among state and types of carriers
are substantial.
Their data indicate that
nationwide
72 percent of all uncontested
cases were paid [i.e., first payment) within
one month, and 91 percent were paid in
three months; comparable figures for Ohio
are 41 percent in one month and 75 percent
in three months. Only a few states had a
worse record of promptness.
In contested
cases nationwide, 78 percent of the claims
were paid in three months. In Ohio, only
62 percent of contested claims were paid
in three months (13 states had a worse
record). Ohio contested about 18 percent
of all cases, about average for the cases in
the national sample.
Perhaps more relevant to the discussion
of service quality are the differences among
state, private, and self-insured carriers. In
the national sample, private-insurance
carriers have the best promptness record, and
self-insurers have the worst. These findings
are of some consequence
in Ohio because
of the large proportion of employees covered
by self-insuring employers.
Given the different records of promptness between uncontested
and contested
cases, the incidence of contested cases also
can provide some clues as to quality of service. While Ohio contested cases at the same
rate as the national sampie (18 percent),
state funds on average contested fewer (10
percent);
insurance
companies
contested
slightly more (20 percent to 22 percent);
and self-insurers contested
the most (29
percent). Since private-insurance
companies
contested
roughly the same percentage of
cases as Ohio and paid no less promptly, it is
not clear that Ohio claimants would suffer in
this regard from private-insurance
coverage.

By another measure of service qualitysuccessful
litigation-state
insurers seem
inferior to other insurers. Samers and Kelly
demonstrate
that state funds are much less
willing to compromise contested cases than
other carriers, yet they still lose a much
greater proportion
of the litigated claims
than other insurers.

Concluding Remarks
WC is currently a much-debated
topic
throughout the nation. Several states recently
modified or considered
modifications
in
rate-setting
or benefit
provisions.
State
legislatures set the benefit levels and establish oversight rules and market structure; the
latter influences the economic cost of insurance
and the administrative
process
governing claims and payments.
Issue 1
does not call for a change in benefits or costs,
but a change in market structure from monopoly toward competition.
Despite the difficulty in making comparisons, the wide variation in WC systems
among states provides some information
that bears on the lssue-l debate. The Ohio

WC system entails both larger costs and
benefits than the national average, although
not much different from the national average in either case. Private coverage would
appear to offer the possibility of an improvement
in the promptness with which
claims are handled.
Evidence
reported
in this Economic
Commentary does not strongly indict Ohio's
current WC system, but neither does a basis
for praise emerge. Perhaps the most fundamental aspect of the lssue-l debate is the
choice between two very different regulatory mechanisms for WC in Ohio. At issue
is whether the long-term public interest is
best served by monopoly or by competition. In light of Ohio's experience just prior
to 1976, this is a meaningful choice. Those
concerned
with workers'
welfare might
press for reforms in the claims handling of
Ohio's WC system rather than prevent
private carriers from entering
the WCinsurance
business.
Experience
in other
states suggests that opportunities
for significant improvement
in Ohio's WC system
do exist.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland,OH
44101

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21,1981

~£Q2QOmic ommentary
C

Issue1 and Workers' Compensation in Ohio
by Mark S. Sniderman

The state of Ohio, which currently forbids private-insurance companies from competing with the state-run workers' compensation program, is now in the throes of
deciding whether to allow private-insurance
carriers to enter the market. A number of
organizations have announced their opposition to this change, including the Ohio
Manufacturers' Association, the Ohio Chamber of Commerce,
the Greater Cleveland
Growth Association, the Ohio AFL-CIO, and
the Nationwide Insurance Company. Such a
unique amalgam of interests opposing private competition
for workers'
compensation indicates the extent of confusion,
complexity,
and emotion in the lssue-l
debate. The passage of Issue 1 will not
Mark S. Sniderman is an economic advisor with
the Federal Reserve Bank of Cleveland. The author
wishes to thank Michael F. Bryan for his contribution of the historical section.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.

guarantee competition; it will merely permit
private-insurance
carriers to enter the market. The Ohio Department of Insurance will
be responsible for regulating these carriers
if Issue 1 passes.
Both economic
theory and economic
experience
demonstrate
the benefits
of
competitive
markets to consumers. Therefore, arguments in favor of a state monopoly
are viewed with skepticism. This Economic
Commentary
discusses workers'
compensation (We) in Ohio and compares public
and private systems in the United States
using the criteria of costs, benefits, and
quality of service. With proper supervision
a competitive
market has the potential of
reducing employers'
costs and improving
service to employees,
with no change
in benefits.

Historical Perspective
The industrialization
of America brought
with it social concern over the employer's
responsibility for safety in the work place.
As was the case for many early social re-

Federal Reserve Bank of Cleveland
cent, whereas the corresponding
ratio for
exclusive state funds was 5.8 percent. The
administrative-expense
ratio of private carriers is more likely to be in the area of 23
percent.P The cost advantage enjoyed by
state funds should be available to employers
in the form of lower rates. However, as
the Elson and Burton study demonstrated,
Ohio's rates are above the national average.
Higher-than-average
costs for Ohio's employers simply might be the result of higherthan-average WC benefits for Ohio's employees. According to Price (1979), benefits
paid in Ohio appear to surpass the national
average, although the benefit scale is typical
of other states. Ohio seems to grant more
claims and perhaps
larger benefits
per
claim. For instance, benefits inOhio in 1976
were about 1 percent of payrolls in covered
employment,
placing them above the national average: only 15 other states paid at
a rate at least as great as Ohio's. By comparison 14 other states (including New York,
Illinois, and Pennsylvania) paid 0.50 percent
to 0.69 percent of payroll in total benefits.
Samers and Kelly (1980) studied a third
dimension
of comparison
between state
funds and private carriers-the
promptness with which claims are paid.? This aspect of WC generally has been overlooked
6. The estimate
of 23 percent is based on my
reconciliation
of the data reported by Price in his
tables 8, 9, and 11. Table 11 reports expenses as
10.1 percent of premiums written for state funds
in 1976. Table 9 reports expenses of $1. 77 billion
and premiums earned of $6.67 billion for stock
and mutual companies
in 1976. Table 8 reports
the ratio of premiums written to premiums earned
for all private carriers in 1976 as 1.13. Thus,
premiums written in 1976 by stock and mutual
carriers are approximated
by 1.13 times $6.67
billion,
or $7.57
billion. Therefore,
for stock
and mutual companies
in 1976, expenses consti·
tuted
approximately
23 percent
of premiums

written.
7. See Bernard N. Samers and Dorothy
I. Kelly,
"Promptness
of Payment
in Workers'
Compensation,"
in Research Report of the Interdepart-

mental

Workers'

Compensation

Task

Force,

vol. 3, U.S. Government
Printing Office, 1980,
pp. 63-90. Data refer to a national
sample of
over 40,000 we claims that closed in 1975.

in the lssue-l debate. Since WC is designed
to protect against the interruption
of income, timeliness of payment is an important
factor in evaluating insurance programs. Delays in the payment of uncontested claims
are fundamentally
administrative
in origin;
contested-claim
payments are subject to delay until a hearing process is completed.
Samers and Kelly's study of this attribute
of the WC program concludes that differences among state and types of carriers
are substantial.
Their data indicate that
nationwide
72 percent of all uncontested
cases were paid [i.e., first payment) within
one month, and 91 percent were paid in
three months; comparable figures for Ohio
are 41 percent in one month and 75 percent
in three months. Only a few states had a
worse record of promptness.
In contested
cases nationwide, 78 percent of the claims
were paid in three months. In Ohio, only
62 percent of contested claims were paid
in three months (13 states had a worse
record). Ohio contested about 18 percent
of all cases, about average for the cases in
the national sample.
Perhaps more relevant to the discussion
of service quality are the differences among
state, private, and self-insured carriers. In
the national sample, private-insurance
carriers have the best promptness record, and
self-insurers have the worst. These findings
are of some consequence
in Ohio because
of the large proportion of employees covered
by self-insuring employers.
Given the different records of promptness between uncontested
and contested
cases, the incidence of contested cases also
can provide some clues as to quality of service. While Ohio contested cases at the same
rate as the national sampie (18 percent),
state funds on average contested fewer (10
percent);
insurance
companies
contested
slightly more (20 percent to 22 percent);
and self-insurers contested
the most (29
percent). Since private-insurance
companies
contested
roughly the same percentage of
cases as Ohio and paid no less promptly, it is
not clear that Ohio claimants would suffer in
this regard from private-insurance
coverage.

By another measure of service qualitysuccessful
litigation-state
insurers seem
inferior to other insurers. Samers and Kelly
demonstrate
that state funds are much less
willing to compromise contested cases than
other carriers, yet they still lose a much
greater proportion
of the litigated claims
than other insurers.

Concluding Remarks
WC is currently a much-debated
topic
throughout the nation. Several states recently
modified or considered
modifications
in
rate-setting
or benefit
provisions.
State
legislatures set the benefit levels and establish oversight rules and market structure; the
latter influences the economic cost of insurance
and the administrative
process
governing claims and payments.
Issue 1
does not call for a change in benefits or costs,
but a change in market structure from monopoly toward competition.
Despite the difficulty in making comparisons, the wide variation in WC systems
among states provides some information
that bears on the lssue-l debate. The Ohio

WC system entails both larger costs and
benefits than the national average, although
not much different from the national average in either case. Private coverage would
appear to offer the possibility of an improvement
in the promptness with which
claims are handled.
Evidence
reported
in this Economic
Commentary does not strongly indict Ohio's
current WC system, but neither does a basis
for praise emerge. Perhaps the most fundamental aspect of the lssue-l debate is the
choice between two very different regulatory mechanisms for WC in Ohio. At issue
is whether the long-term public interest is
best served by monopoly or by competition. In light of Ohio's experience just prior
to 1976, this is a meaningful choice. Those
concerned
with workers'
welfare might
press for reforms in the claims handling of
Ohio's WC system rather than prevent
private carriers from entering
the WCinsurance
business.
Experience
in other
states suggests that opportunities
for significant improvement
in Ohio's WC system
do exist.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland,OH
44101

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September

21,1981

~£Q2QOmic ommentary
C

Issue1 and Workers' Compensation in Ohio
by Mark S. Sniderman

The state of Ohio, which currently forbids private-insurance companies from competing with the state-run workers' compensation program, is now in the throes of
deciding whether to allow private-insurance
carriers to enter the market. A number of
organizations have announced their opposition to this change, including the Ohio
Manufacturers' Association, the Ohio Chamber of Commerce,
the Greater Cleveland
Growth Association, the Ohio AFL-CIO, and
the Nationwide Insurance Company. Such a
unique amalgam of interests opposing private competition
for workers'
compensation indicates the extent of confusion,
complexity,
and emotion in the lssue-l
debate. The passage of Issue 1 will not
Mark S. Sniderman is an economic advisor with
the Federal Reserve Bank of Cleveland. The author
wishes to thank Michael F. Bryan for his contribution of the historical section.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors
of the Federal Reserve System.

guarantee competition; it will merely permit
private-insurance
carriers to enter the market. The Ohio Department of Insurance will
be responsible for regulating these carriers
if Issue 1 passes.
Both economic
theory and economic
experience
demonstrate
the benefits
of
competitive
markets to consumers. Therefore, arguments in favor of a state monopoly
are viewed with skepticism. This Economic
Commentary
discusses workers'
compensation (We) in Ohio and compares public
and private systems in the United States
using the criteria of costs, benefits, and
quality of service. With proper supervision
a competitive
market has the potential of
reducing employers'
costs and improving
service to employees,
with no change
in benefits.

Historical Perspective
The industrialization
of America brought
with it social concern over the employer's
responsibility for safety in the work place.
As was the case for many early social re-