Policy Documents

Privatizing Public Services and Strategic Behavior: The Impact of Incentives to Reduce Workers’ Compensation Claim Duration

Melissa McInerney –
August 1, 2009

During the 1990s, the state of Ohio contracted out Workers’ Compensation (WC) case management, incorporating a large bonus payment intended to reward reduced claim duration. The bonus is essentially a decreasing function of average days away from work, excluding claims longer than 15 months. In response, duration is predicted to decrease for minor claims and increase for some severe claims so that claimants miss more than 15 months of work and are excluded from the calculation. Contractor responses are consistent with these expected heterogeneous responses but inconsistent with state intentions, suggesting public entities should anticipate strategic behavior when crafting performance-based incentives.