By NORMAN WALZER
Where does Illinois really stand The rising rates for worker's comp IN 1975 legislation was enacted increasing benefits to injured employees under the state worker's compensation program. These benefit increases were followed by a series of premium increases which created a major controversy over their effect on the ability of Illinois to attract industry. The controversy has been plagued by a lack of accessible data regarding the probable impact of the benefit increases and a lack of objective standards for determining essential or appropriate benefit levels. The debate intensified with the pressures exerted by business and labor on legislators to support a particular position. Almost everyone was aware that the pre-1975 benefits were inadequate and needed improvement. The labor position stressed the need for adequate protection for employees so that an injury and resulting loss of work did not financially cripple an employee and his family. The position taken by the business community was that, although the benefits were inadequate, substantial insurance premium increases could place Illinois businesses at a serious competitive disadvantage. (For details on the amendments passed in 1975, see June 1976.) This article presents a brief comparison of the manual insurance rates for worker's compensation charged in Illinois with rates charged in two groups of states — those bordering Illinois and other industrialized states. Manual insurance rates are those approved by the state Department of Insurance and subsequently inserted into the manuals used by insurance companies to calculate premiums. The manual rates can be adjusted by the individual companies on the basis of prior loss experience and/or the environment under which the employees are working. The comparison of manual rates in Illinois with those in other states is not intended to support or disprove any particular position in the controversy but rather to present information on rates that will more clearly define the issues involved.
In 1972, the National Commission on State Workmen's Compensation Laws issued its report decrying the existing benefit levels provided under state worker's compensation programs. As a result of its analysis, the commission published 19 essential recommendations for improving state programs. The implication was that if the states did not improve benefits and administration, the federal government might be disposed to mandate certain standards. Many of the states responded by increasing the benefits that employers (both public and private) must provide and, in some instances, requiring more employers to take part in insuranace programs. The programs, however, vary considerably from state to state, and these variations remain. This lack of uniformity is one of the key factors underlying the current controversy. The issues surrounding worker's compensation benefits are complex because benefit levels are based on subjective ideas of equity. There are no completely objective benefit levels. The standards promoted by the national commission serve as useful guidelines, but they are not absolute standards. Legislators involved in setting benefits must reach a consensus on the appropriate level of benefits in light of the costs to employers for providing them. Organized labor and business organizations have high stakes riding on the final outcome and are applying as much pressure as possible to gain supporters for their positions. In Illinois, beginning July 1, 1975 benefits under the worker's compensation programs were increased substantially. The initial premium increase resulting from these changes was 46.8 per cent but, as is well recognized, the actual increases were substantially higher for many employers — and in some cases, coverage was difficult to obtain at all. Insurance companies experienced losses in this line of insurance (especially after 1975) and responded by attempting to avoid insuring employers with high risk or poor loss experience. The initial increase was followed by two rate increases: 3.2 per cent in December 1975 and 24.3 per cent in July 1976. The major attention in Illinois has centered on the rate increases. Business leaders have drawn attention to the fact that rates in Illinois now far exceed those in neighboring states and contend that this situation is contributing to the slow growth or loss of employment that has been plaguing Illinois in recent
NORMAN WALZER 8/June 1978/Illinois Issues years. The Insurance Services Office (ISO), a service organization developed by the industry, provides the industry with information on rating and other matters. Another organization, the National Council on Compensation Insurance(NCCI), provides the supportive material for worker's compensation rate revision and submits filings for rate increases in many states. In Illinois, where the NCCI is not a licensed ratemaker, rate increases are filed with the state Department of Insurance by the ISO. Filings are reviewed and approved or disapproved by the department, and the approved manual rates are then distributed to the various companies. The manual rates become the basis for determining insurance premiums charged to employers, but the rates actually charged by an insurance company can be adjusted based on experience and schedule rating factors. Thus an employer with a bad loss record would pay higher rates. Likewise, insurers have a list of schedule rating factors including working conditions, medical facilities and safety devices which can serve as the basis for a rate discount or surcharge of up to 25 per cent. Whether an employer receives a discount or surcharge depends on the attitude of the insurer with regard to the risk, the conditions under which the employees are working and the previous loss experience of the insurer. Information on the average discount or surcharge is hard to obtain — and sometimes contradictory — making it difficult to determine how closely manual rates coincide with the rates actually charged. The general view is that over the past several years the rates actually charged have moved from a substantial discount to a surchage. One estimate developed during the Department of Insurance's 1976 administrative hearing (No. 1548), headed by University of Chicago law professor Spencer L. Kimball, showed that the average rate paid by employers moved from 86 per cent of the manual rate in 1973 to 102 per cent in 1976. If this information is accurate, it appears that the rates actually charged are slightly higher than the manual rates. However, a brief examination of data for municipalities in the Chicago area in 1977 suggests just the opposite — the rates charged were, on the average, a little lower than the manual rates. The change from a discount to a surcharge is one explanation for premium increases reported by employers as being substantially above the manual rate increases. The insurance industry argues that the move from a discount to a surchage simply demonstrates the inadequacy of the manual rates — especially given the exodus of insurance companies from the worker's compensation line. For many employers, however, rate increases do not begin to tell the full story. Their coverage has been terminated, sometimes for little apparent reason, and they have been forced to go to the assigned risk pool or to insure themselves. The risk pool option is probably not viable for small businesses because they are not large enough to spread the risk, and an increase in the number of applicants has created considerable confusion in the administration of the risk pool. The outcome of worker's compensation insurance rate comparisons is determined to a large extent by the choice of states with which Illinois is compared. Two groups come to mind. All things being equal, the rates in Illinois should compare favorably with those in other industrial and urban states. Also, rate differences between Illinois and surrounding states or other Midwestern states should be minimal. Otherwise, Illinois will be at a disadvantage in attracting industry interested in locating in the Midwest. The following analysis provides a comparison between industrialized states and surrounding states for selected employee or industrial classifications. Manual rates for Illinois have been divided by the average rates in other states. Thus a number greater than one indicates that Illinois rates are above the average of those in other states. Table 1 compares the rates for selected industrial categories in the private sector. One is immediately struck by the different findings, depending on which group of states is used. For example, the unweighted average manual rate as of July 1977 for these 16 employee classifications was $5.01 per $100 payroll in Illinois. The average rate in four surrounding states (Indiana, Iowa,
June 1978/Illinois Issues/9 Missouri and Wisconsin) was $2.23 on a comparable payroll base. Thus, the average rate in Illinois was 2.25 times or 225 per cent of the average of the surrounding states. But this is not the whole story. When Illinois rates are compared with those in other industrial states, Illinois is much closer to the norm. Specifically, the average Illinois rate of $5.01 compares with an average of $5.34 for California, Michigan, New York, Ohio and Pennsylvania — which makes Illinois manual rates approximately 93 per cent of the average. If the manual rates in Illinois understate the actual rates charged, the Illinois rates may be even closer to those in the other states. However, the Illinois rates have been decreased by nearly 9 per cent on policies issued after September 1977 because of a recent Department of Insurance order so that the manual rates may be reasonable approximations for current rates charged. The controversy over insurance rates is now easier to understand. If one is using the industrial or urban states as a guide, Illinois rates appear to be about average. However, if one is concerned about the migration of business into neighboring states, there is cause for concern. In particular, Indiana has very low rates, an average of $1.41 per $100 payroll compared with the Illinois average of $5.01 for the same employee classifications. A similar pattern is found for employees in the public sector. On the basis of 21 employee classifications, the average manual rate in Illinois was $3.52 per $100 payroll. The average in the surrounding states was $1.86 on the same pay base which places the Illinois rates at 1.89 times or 189 per cent of the corresponding average in surrounding states. The policy issue with respect to public employees is somewhat different. Policymakers need not fear that an Illinois municipality will move to Indiana, but they are worried about how local governments are going to raise funds to pay the premiums. The benefit increases legislated in 1975 did not carry any provision for local governments to expand their taxing powers nor did the state authorize additional revenue to provide the benefits. This, of course, touches another controversy, namely mandated costs, which will not to be examined here. The choice of states for worker's compensation insurance rate comparisons is less clear when public employees are involved. It would seem, however, that given the competition between the private and public sector for the same labor pool within a city, industrialized states might be used and this was the
10/June 1978/Illinois Issues approach followed. When Illinois rates for the public sector are compared with those in other industrial states, once again, Illinois is in a representative position. The average manual rate in Illinois ($3.52 per $100 payroll) compares with an average in the other states of $4.25 on the same pay base. Within this group California was considerably higher than the others and if its average is removed from the analysis, then Illinois rates are 96 per cent of the average. The very limited evidence now available suggests that in the public sector the rates actually charged by insurance companies may reasonably approximate the manual rates. If this is true, then it appears that, at least for the employee groups shown in Table 2, Illinois is at or below the average of these industrial states. This, of course, still does not solve the problem of where to find the money to pay for the increased premiums. At this point one might ask why Illinois rates are above those in surrounding states. Because worker's compensation programs and benefits are under state jurisdiction, the states upgrade their benefit structures at their own pace. Within the Midwest, Illinois took stronger action and took it earlier than surrounding states. A comparison are benefits, for example, reveals that the maximum payment per week for permanent partial disability in Illinois was $304.21 (133 1/3 per cent of the state's average weekly wage) compared with an average of $123 in the other ten states examined (California, Indiana, Iowa, Michigan, New York, Ohio, Oregon, Pennsylvania and Wisconsin). Iowa was next highest with a maximum payment $228 (122 2/3 per cent of the state's average weekly wage), and Wisconsin was lowest with $57. In Iowa, however, as of July 1979, the percentage of average weekly wage will increase to 153 1/3 per cent and to 184 per cent by 1981. Thus, the dollar benefit gap between Illinois and Iowa will certainly narrow — especially if the Illinois percentage remains constant. Worker's compensation insurance rates are also determined by the awards to individuals making claims under the program. Permanent partial benefits are particularly difficult to determine because an injury such as partial hearing loss may represent a substantial loss of earnings in some occupations, but be only a minor handicap in other lines of work. In this type of situation there may be a tendency to favor the injured employee and make an award in excess of loss of earnings. In Illinois, permanent partial benefits represented more than half (54.2 per cent) of the total benefits awarded compared with an average of 33.43 per cent in Indiana, Wisconsin, Missouri and Iowa. The high percentage of benefits awarded in this category may be a symptom of difficulties in the administration of the program rather than in the benefits provided by law. The two are related, however, because the more specific the legislation is regarding benefits to be provided, the less opportunity there is for subjective judgments to enter.
An attempt was made to place part of the blame for the large rate increases on the insurance industry, which, it was charged, was taking advantage of the benefit increases to make greater profits. The insurance industry responded by showing losses in the worker's compensation line and the exodus of many insurers. The controversy peaked in 1976 when administrative hearing No. 1548 was ordered by then director of the Department of Insurance Michael P. Duncan. The result of the hearing was a rate decrease of, on the average, 8.6 per cent on policies issued after September 1977 (this figure includes the approval of a rate filing with a 1 per cent decrease). A reading of the hearing report indicates the complexity of the issues involved and the difficulty in obtaining detailed information. At one point, hearing officer Kimball noted that since the burden of proof for excessive rates was on the applicants (Coordinating Committee of the Mechanical Speciality Contractors Association), they had not proven their contention. However, had the burden of proof been on the respondents (the Insurance Services Office), the outcome, Kimball said, might have been reversed. Perhaps the most obvious "proof that the rates were not providing high profits is the fact that a number of firms have been moving out of the worker's compensation insurance line completely. Views about the level of worker's compensation benefits depend on many factors including standards of equity, status as an employer or employee — and even party affiliation. On this kind of issue, policymakers search either for objective standards or look to see what other states are doing. In 1972, the National Commission on State Workmen's Compensation Laws provided recommendations which have been adopted by other states as guides. Illinois meets the vast majority of these recommendations and, in fact, surpasses a few. A comparison of the dollar benefits as measured by the maximum weekly payment shows Illinois to be substantially above the other states and, in fact, very near the top. Because Illinois moved earlier and more rapidly than other states, it is likely that in the future the benefit gap will close. In terms of rates, Illinois is once again above the average but by no means at the top. At present the critical issue is the level of rates compared with those in other states. There is no question that Illinois rates far exceed those in surrounding states, sometimes by more than twice. In the case of industries interested in locating in the Midwest and not particularly tied to a fixed resource, Illinois is at a serious disadvantage since the average wage is not appreciably lower to offset the higher insurance costs. On the other hand, those concerned about comparisons of rates with other industrial or urban states can take solace in the fact that Illinois rates are at or slightly below the average. Thus, an industry seeking an industrial or urban location might have less reason to discriminate against Illinois. Insurance benefits must protect workers. Insurance rates must not encourage an exodus of industry to neighboring states. Somewhere between these two poles lies a reasonable solution to the worker's compensation insurance controversy. Objective analysis can locate and clarify the issues, but the traditional political bargaining process will have to work them out. June 1978/Illinois Issues/11
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