Feeling the Crunch

Hawaii’s workers’ compensation system has been a hot topic in recent months – although the system has been on the industry’s radar for some time now. A recent study by the Oregon Department of Consumer and Business Services (ODCBS) found that Hawaii’s workers’ comp premium rates are the third highest in the nation. What’s behind the skyrocketing rates? Is Hawaii’s workers’ comp system headed towards a crisis stage? Is Hawaii headed for the same downward spiral California’s workers’ comp system is caught up in? Hawaii’s workers’ comp system is quickly becoming a force to be reckoned with – and one that must be carefully brought under control before the local economy suffers.

Workers’ comp premiums have reportedly increased 24 percent in 2003, compared to 2002. And small businesses are suffering; reaping the negative effects of a workers’ comp system in peril.

For every $100 paid in wages, employers pay $3.48 in workers’ comp costs. Only California ($5.23) and Florida ($4.50) are higher, according to the ODCBS.

Another recent study conducted by Washington, D.C.-based National Academy of Social Insurance, also said Hawaii workers’ comp payments increased in 2002. The study found that total workers’ comp payments in 2002 were $368 million, a 6.3 percent increase over $252 million in 2001. The study concluded that medical spending in Hawaii grew 2.5 percent; payments to replace workers’ lost wages grew at a faster pace, with an increase of 8.8 percent. Employers spent $162 million to replace the lost wages but only spent $106 million on medical care.

Bob Dove, president of Hawaii Employers’ Mutual Insurance Company, a private mutual company that provides insurance to many Hawaii employers, downplayed the statistics.

“One report says Hawaii’s rates are third highest,” Dove said. “Anecdotally, another said 11th. The fact is that none of these studies may necessarily reflect the true cost to the employer because they are usually based upon filed loss costs or rates for certain classifications of work. Or, they compare total premiums paid to total payroll or to some other factor such as claims paid. Obviously rates are impacted by benefit levels, wage levels and the general cost of living. Any study that does not equalize for the appropriate factors is fundamentally flawed.”

Dove said that comparing Hawaii’s rates to other states was not the central issue.

“The key question is, ‘Does the system have inefficiencies, waste and fraud that can be eliminated?’ In virtually every state the answer is ‘yes,’ and Hawaii is no exception,” Dove said. “And when the answer is ‘yes’ all stakeholders should be working to improve the system.

“Examined over a 15 or 20 year timeline, workers’ comp costs have risen at a slower rate than many other business expenses,” he added. “However, because the insurance cycle consists of periods of rapidly falling premiums and rapidly increasing premiums, when premiums are rising the perception always exists that workers’ compensation costs are out of control. To use an analogy familiar to many Hawaii residents, the insurance cycle is much like a wave. Measured from sea level the wave may be five feet high. However, from the trough the wave is 10 feet high. Businesses tend to measure workers’ compensation costs from the troughs. If you are in the trough and a big wave is falling on you sea level quickly becomes irrelevant.”

Insurance Commissioner J.P. Schmidt noted that workers’ comp rates have increased over the past several years. “I do believe that the cost of workers’ comp insurance is too high here in the state of Hawaii and I think that’s reflected in some of the reports that we’ve seen,” he said.

What’s behind Hawaii’s high premium rates? As in many states, the workers’ comp system is often riddled with inefficiencies. Hawaii is no exception. However, Hawaii’s major cost drivers are, in some ways, different than cost drivers in other states.

Major cost drivers

Hawaii received an “F” from the Work Loss Data Institute, an independent company that gives out “report cards” for workers’ comp systems based on how long workers stay off the job after a work-related injury. The report, titled “State Report Cards for Workers’ Comp 2004,” found that 22.6 percent of Hawaii employees missed work for more than 30 days following a work-related injury. In 2001, 20.2 percent of employees stayed out for more than 30 days, as opposed to 17.7 percent in 2000, according to Phil Denniston, a spokesperson at the Work Loss Data Institute. Cases lasting longer than 30 days usually end up costing employers more than $50,000, according to Hawaii’s Department of Labor.

Hawaii’s workers’ comp problems didn’t appear overnight either. The beleaguered system has long been a point of concern to the Work Loss Data Institute, who gave Hawaii a “D” and an “F” on workers’ comp report cards in 2000 and 2001, respectively. The “F” grade remained for ’02 and ’03.

“Hawaii did not do so well,” the 2004 report said. “Their results have gone from bad to worse, receiving an ‘F’ in 2002. The measures were bad across the board, but especially for prevention (incidence rates). Hawaii does not employ major common managed care strategies, and they do have their own treatment guidelines, but they do not use evidence based national guidelines. As expected, Hawaii’s poor outcomes are being reflected in their workers’ comp insurance costs, which increased about 24 percent annually in 2003, compared to 2002.”

“The problem today is that there are fewer insurance companies that are writing policies for small businesses, the premiums and accident reporting are extremely high,” said Hawaii State Sen. Sam Slom, who also serves as the president and executive director of Small Business Hawaii. “There is a subsidiary problem with classification and many small businesses claim that they have been over classified into higher costing categories.

“In addition to that, our big problem here for at least the past 20 years has been fraud. Yet virtually nothing has been done about fraud. And I draw the parallel between unemployment compensation and workers’ compensation in the state. I think people have learned to play the system because the state has not taken any action in the past.”

Dove agreed that fraud is a contributor to high workers’ comp costs. “Fraud is a factor,” he said. “But, at least for HEMIC, premium fraud (employer fraud) is a bigger problem than claim fraud. Where fraud ends and abuse begins is in the eyes of the beholder. Fraud is a factor, but not, in my judgment and experience, the major factor.”

Sam Sorich, vice president and western regional manager of Property Casualty Insurers Association of America (PCI), said that Hawaii’s provisions against fraud are not tough enough. “We have a tougher set of fraud provisions [in California] than are currently in place in Hawaii,” he said.

Tougher fraud provisions are essential to a healthy workers’ comp system, especially in Hawaii, where workers reportedly spent more time off the job than in other states. The amount of money paid to employees for time out of work is extremely high.

“I think the system is marked by an unusually high amount of money going to workers for lost time off the job for injuries and that aspect of the Hawaii system seems to be a little out of sync with what we see in the rest of the country,” Sorich said. “So, I think it’s that element more than any other that seems to be pushing Hawaii to have the higher costs.”

Dove also pointed to increasing medical costs as another factor that is driving up premiums. “Medical costs are escalating rapidly primarily because of increased utilization,” he said. “And pharmaceutical costs significantly outpace even general medical inflation.”

Sorich said that Hawaii patients make more trips to the doctor than patients in other states.

“On the medical side, the number of visits to medical providers is an element that I think needs some reform,” he said. “Also the vocational rehabilitation costs are out of line with what they are in other states.”

Dove mentioned other factors that are bearing down on the system. “Medical practice, lack of aggressive intervention by insurers, employers’ reluctance to provide alternative duty, slow administrative and judicial processes, and local culture are all factors,” he added. “There is no single cause, but virtually every stakeholder in the system bears some responsibility.”

Although medical costs, fraud and lost wages contribute greatly to overall workers’ comp costs, Sorich said that the problems go beyond those factors. “It seems to me that the primary reason seems to be the level of benefits and how those benefits are determined by the administrative agency,” Sorich said.

Commissioner Schmidt said that one of the factors contributing to rising premiums is the inefficiency of the system currently in place. “However, we have been able to achieve some stability in the system over the past couple of years,” he added. “Last year we had a loss cost filing of a negative 1 percent for workers’ comp. This year NCCI has made a loss cost filing of negative 3 percent which is currently under review.”

He also cited claims that take a long time to process and claims involving attorneys.

With all of the cost drivers bearing down on the system, Hawaii’s workers’ comp marketplace has certainly seen better days. But what are the effects on independent agents and brokers, and how are small businesses faring under Hawaii’s already tumultous economy? Find out in Part Two of our special report in the Oct. 25 issue of Insurance Journal West.

Topics California Fraud Workers' Compensation Hawaii