The issues surrounding Hawaii’s workers’ compensation system have been a topic of debate for agents, brokers, politicians and small businesses over the past several months as reform attempts to fix the troubled system failed in the 2004 legislature.
Hawaii’s workers’ comp premium rates are the third highest in the nation, a recent study found. (IJ West, Oct. 11). Behind the skyrocketing rates, a variety of problems: increased medical costs, fraud, and income replacement.
Hawaii’s flailing workers’ comp market is beginning to take a toll on the local economy, and small businesses are feeling the burn. In a state where the majority of income comes from a tourist-dependent economy and the majority of resources are imported at a costly price, small businesses are in a precarious position, and workers’ comp woes are on the forefront of their concerns.
Small businesses are affected
“Workers’ comp has always been a problem in Hawaii,” said Hawaii State Senator Sam Slom, who also serves as the president and executive director of Small Business Hawaii. “There was some rate relief about four years ago with the previous administration. Basically what they did [was] artificially force down the medical fee schedule so that gave the appearance that the rates were alright. What happened though was that a number of doctors refused to accept workers’ compensation cases. And there were (and still are) backlogs and extreme delays in workers’ compensation itself.”
Slom explained that while the administration touted its attempt at rate relief, a new hike in premium rates went unnoticed. The effects were detrimental for Hawaii’s small businesses. “While premiums may have gone down [during that period], most notably by larger businesses, there were fewer actual premium rate reductions among smaller businesses—even with this artificial situation which had been created.”
He added that a number of insurance companies refused to renew some small business accounts for seemingly no reason. “[They were] not based on negative experience or anything like that, they just didn’t want to renew them and they didn’t.” Many small businesses found themselves with no other alternative than HEMIC, he said. “They found immediately that their rates, once they were pushed into HEMIC, were automatically being increased by three to five times.”
Overall, workers’ comp premiums increased 24 percent in 2003, according to the Work Loss Data Institute. Slom also said that small businesses in Hawaii reported that their biggest problem and the number one cost that they cannot budget for is workers’ comp insurance.
Jim Fujioka, vice president of Ilima Insurance Agency Inc. said that the only real solution for small businesses is HEMIC. “I don’t feel that the small businesses are suffering from the lack of availability as HEMIC has a price for everyone,” he said. “It really isn’t hard to obtain coverage, if you place the business with HEMIC and their pricing mechanism.
“HEMIC ‘forces’ the independent agent’s hand in the placing of workers’ comp business,” he continued. “HEMIC has a pricing advantage over other carriers. Most if not all of my markets won’t touch new business and are tightening up on renewal business. Thus HEMIC is the only answer to meet my clients’ needs.”
Bob Borkovec, senior vice president of Bank of Hawaii Insurance Services Inc., disagreed.
“Many agents here and many insureds, especially those who have bad loss records, hate HEMIC with a passion,” Borkovec said. He said that most of them dislike HEMIC for placing them in a high-risk surcharge category, which can double their premiums.
“Clients may have to pay,” he said. Borkovec gave the example of one of his clients that had a premium of $20,000 and produced losses of $70,000 a year average in three years. Their standard carrier gave up on them.
“We put them into HEMIC, doubled their premium and they screamed and hollered,” he said. “But they also put into play some safety recommendations and partly as a result of that they had no losses the next year and they got out of the high risk surcharge. Their premiums were cut in half. That’s the way it ought to work. Folks who don’t pay attention to safety and have losses need to help support that system.”
Borkovec said he sees HEMIC as a viable solution to the prior workers’ comp system.
Insurance Commissioner J.P. Schmidt agreed.
“I think HEMIC is doing a good job,” he said. “I think it was a very important reform from the prior system, the high-risk pool. Everybody agreed that was really a mess and wasn’t working. I believe that HEMIC brought stability to the market. But I have heard complaints about them and I do watch HEMIC very closely because they are very important to our market.”
Will there be reform?
Hawaii Governor Linda Lingle worked with Department of Labor Director Nelson Befitel to develop and introduce a proposal to address problems in the workers’ comp system in the 2004 legislative session, but both SB 2961 and HB 2486, its companion bill, died in the committee.
The package had several provisions dealing with the wording to certain terms including the establishment of a definition for the term “attending physician,” and the exclusion from the definition of “employment.” It also disallowed compensation for mental injury or illness caused by good faith personnel actions and allowed an employer to require an injured employee to select a physician from an employer designated healthcare provider list for medical service for the first 10 days of treatment.
Among the other provisions included limits to charges for emergency room services, clarification as to when benefits may be terminated if a false claim is filed, validation of arbitration agreements and mediation, and a provision allowing the Insurance Fraud Investigations Branch to initiate prosecutions and disciplinary actions.
“Essentially the reform effort was thwarted in the Legislature primarily because of concerns that the allegations that the governor’s reform proposal would take away benefits from injured workers,” Sam Sorich, vice president and western regional manager of Property Casualty Insurers Association of America (PCI), said.
“The bill did address many of the inefficiencies in the system. Unfortunately, reform normally takes place when a crisis exists,” Bob Dove, president of Hawaii Employers’ Mutual Insurance Company, said. “That is not how things should be, but it is how they are. During the 2004 legislative session Hawaii had a hard market, not a California-style crisis.
“In my opinion, what prevented the bill from being passed was the perception of labor that the bill represented significant “takeaways” from workers with no similar concessions by business. Whether that was an accurate perception is open to conjecture. However, without placing blame it is fair to say there was no effective dialogue between business and labor, Republicans and Democrats. As a result we had polarization. That led to stalemate,” Dove said.
The insurance commissioner said that some members of the Legislature with close ties to unions felt threatened by the reforms.
“They chopped up the reform into little pieces and killed off each little piece one by one,” Schmidt said. The only piece left concerned workers’ comp fraud, but he said that part of the legislation is ineffective.
Sorich said that reforms passed recently in California are needed in Hawaii before the crisis hits.
“Hawaii has not adopted some of the reforms that we’ve seen here in California,” he said. “In California we have significantly limited the number of stress claims that can be pursued. In terms of our choice of medical providers, we here in California do have some guidelines as to the choice of physicians that an employee has; in Hawaii there is no such limitation. We also have a limitation on the number of weeks for temporary total disability payments; Hawaii does not have that limitation. I think in California we are lowering our workers’ comp costs because of those elements and Hawaii has not adopted those controls.”
Dove said that future reform is possible but will take a lot of work. “Future reform is not only possible, but important for a healthy economy benefiting both businesses and workers,” he said.
“For reform to happen, absent a real or manufactured crisis, there must be a significant effort at consensus building among the stakeholders including the executive and legislative branches. HEMIC is non-partisan, and we hope to be both a contributor to and a facilitator of that process,” Dove added.
Sorich added that the governor’s proposal should be revisited. “The Legislature should look more closely at the content of the governor’s proposal because I think she said some sound ideas that merit some further consideration,” he said.
Both Commissioner Schmidt and a representative at the Governor’s office said another worker’s comp reform measure will be introduced in the 2005 legislative session. Until then, small businesses and Hawaii agents will continue to struggle under the wavering system until relief is found.