I would also personally like to thank the talented and dedicated editorial staff of Hawaii Business, Managing Editor Jacy L. Youn, Editor-at-Large David K. Choo, Editorial Assistant Lori A. Tomonari and Assistant Creative Director Wes Funai, for their continued drive for excellence in reader service. We must also acknowledge the wonderful editors, writers, photographers, artists and others who have helped to build and move thispublication forward. Thank you especially to all former editors, including Hawaii Engineer founder Joseph A. Murphy, Kim Jacobsen, Bill Wood, Michael Schmicker, Elyse Tanouye, Diane Chang, Mari Taketa, Floyd K. Takeuchi and Cathy S. Cruz, for their stewardship of Hawaii Business. Lastly, thank you to Pam Funai and Brian Niiya of Historyworks LLC for their help in finding many of the historical images for this issue. We hope you enjoy this issue as much as we enjoyed putting it together. Happy birthday, Hawaii Business. We invite you, our readers, to join us in working to make the next 50 years even better.
More than two years ago, Tina, a 39-year-old Waipahu convenience store manager, got hurt. She had been carrying a large coffee urn when she slipped on a small puddle of water. The heavy container spilled its contents on her and her shoulder hit the metal handles of several drawers as she fell to a jarring impact on the store’s hard floor.
Tina’s cuts and burns would eventually heal, but the pain wouldn’t leave her neck, back, shoulder and knee. In the next two years, she would see seven different doctors, the last of whom said that the pain was only in her head.
“I filed an accident report immediately. I’ve been in management for years, so I had lectured a lot of people on what to do if they are injured on the job,” says Tina, whose full name was withheld on her request. “I never thought it would happen to me.”
Early this year, Tina visited Dr. Scott McCaffrey, a former emergency room physician, who now specializes in chronic pain and industrial injury cases. McCaffrey ordered MRI (magnetic resonance image) scans of Tina’s shoulder, neck and back and was denied three times by her worker’s compensation insurance carrier. Working through her regular health insurance, Tina finally got her MRIs, almost two years to the day of her accident. The diagnostic scans revealed that she had a C-5 and C-6 disk herniation in her neck, a L-4 and L-5 lumbar herniation in her back as well as a deep tear of the labrum, the soft, fibrous tissue that surrounds the socket of the shoulder.
Her pain wasn’t only in her head.
“The reality is that if we don’t provide good medical care for injured people, you’re not going to get to the root of the problem,” says McCaffrey, who has treated more than 5,000 injured workers at his Ewa Beach clinic. “There is so much claims fighting going on that it’s detrimental not only to the system and the injured worker, but also to the insurance carrier’s best interest, which is to move cases forward and get the cases closed.”
Tina is a casualty of war of sorts. She is one of the walking wounded, an injured worker who is often under the suspicion of everyone, yet getting treatment from no one. Workers’ compensation cases like Tina’s strike at the very heart of the perpetual battle between labor and management, employer and employee, the haves and have nots.
Of course, there are many other casualties in these conflicts. They may not be in as much physical pain as Tina, but they are hurting nonetheless. Businesses, both large and small, have seen their workers’ compensation insurance premiums soar. According to the National Academy of Social Insurance, nationally, employer costs for workers’ comp insurance rose 13 percent from 2001 to 2002, from $64.5 billion to $72.9 billion. Relative to total wages of covered workers, employer costs increased to $1.58 per $100 of covered wages in 2002, up from $1.40 per $100 of covered wages in 2001.
The Great Trade-Off
Workers’ compensation is a sort of Faustian bargain in which employers automatically accept responsibility for helping their injured employees recover from work-place injuries, irrespective of whether the injury was the result of an unsafe workplace or worker negligence. In turn, employees agree not to sue. (Just who is the devil in this transaction depends on which side of the production line you’re standing.) Known as “the Great Trade-Off,” this early workers’ compensation system was adopted in the United States at the turn of the century, modeled after systems in Germany and England.
By 1948, every state in the union had some form of workers’ compensation laws, including the territories of Alaska and Hawaii, both of which adopted legislation in 1915. But something happened on the way to the job site. Economies grew wildly, the nature of work got more complicated, bureaucracies got more complex and the cost of medical care skyrocketed. In short, a system designed during the Industrial Age started to come apart at the seams during the Information Age.
The Great Trade-Off has turned into the Great Face-Off. “Workers’ comp was designed to take care of sudden, acute, traumatic injuries. It was designed to be a quick treatment and, when the worker is stable, he or she would receive a settlement for ongoing future medical care,” says Dr. Chuck Kelley, director of special markets for Outrigger Hotels, who also oversees the hotel company’s workers’ comp issues. “For those types of injuries the system works as it was intended. But the scope of workplace injuries has expanded. It now covers soft tissue, repetitive motion, ergonomic injuries as well as stress claims. There is never an accurate beginning date of these types of injuries. The treatment is vague, slow and there is never a stability reached. The system doesn’t work well for those injured at all.”
As a result, the system, which is based on a tenuous accord (and a lot of trust), has become increasingly hostile and adversarial. Permeating the system throughout is the fear of fraud – malingerers and miscreants getting something for nothing.
Unfortunately, many of the proposed reforms to Hawaii’s workers’ comp system are based on the quixotic quest of chasing after these cheaters, even though the numbers point to a much more complicated problem. According to a 2004 report by Lawrence Boyd, labor economist at the University of Hawaii West Oahu, total workers’ comp premiums in Hawaii rose 58 percent, from $157 million in 1999 to $269 million in 2002. However, benefit payments to those same companies increased by just 6 percent. Moreover, benefits payments per $100 of payroll experienced very limited growth from $1.51 in 1999 to $1.60 in 2002 and actually declined in 2003, to $1.57.
In other words, the money was going into the system, but it wasn’t coming out.
How much of the rise during this period is attributable to fraud? Not much.
According to the Department of Labor and Industrial Relations, the days lost due to injury rose by 10 percent between 1998 and 2002, from 1.16 million to 1.28 million, with a sharp increase in the later half of 2001. Boyd found that the number of back injuries, a haven for workers’ comp cheaters, decreased slightly from 8,734 to 8,725. Costs for these rose by a little more than 8 percent.
Boyd’s analysis found that the increase in lost days due to injury was driven by a rise in the number of severe injuries: days lost due to electrocution went up by 13 percent, concussions went up by 30 percent and amputations increased 54 percent. Boyd surmises that this increase can be attributed to Sept. 11, the subsequent shutting down of air service and long hours posted by first responders.
The increased costs weren’t because of lazy workers, but local heroes.
Blaming Beastly People, Not the Beast
For the past two years, Laurie Hamano had an accusatory finger pointed at her and her profession. Hamano has been a vocational counselor for more than 20 years, so she’s somewhat familiar with that position. She helps profoundly injured workers find and train for new professions. It’s a difficult, time-consuming and sometimes expensive process. Since the average cost of vocational rehabilitation cases has risen 31 percent, from $3,289 in 1995 to $4,335 in 2002, Hamano and others in her profession have found themselves in the workers’ comp reform cross hairs. In two consecutive sessions, the Lingle administration has proposed to limit vocational rehabilitation services to 104 weeks and eliminate the self-employment option from counselors’ menus of possible job opportunities.
Hamano argues that these measures will do little to cut costs, because the current average length of vocational plans is only 48 weeks long, well below the administration’s proposed cap. In addition, self-employment training, which often involves more education, is a rarely used option. Moreover, by her rough estimates, using DLIR statistics, vocational rehabilitation services cost approximately $2.9 million, so any savings that these measures might generate will be miniscule when compared to the $269 million in workers’ comp insurance premiums paid out in 2002.
Reform measures such as these are an example of an outdated mindset. Reformers battle the devil they know (or think they know): the shiftless worker. Hamano says that, instead of reforming the system, “nip-and-tuck” cost-containment measures like these will handcuff professionals like herself and, in the long run, slow down an already over-burdened system.
“We get it in the newspapers, we get it from the insurance industry. There is a presumption that the injured worker is guilty,” says Hamano. “In the last 10 years, the process has become more and more adversarial, to the point where every single case is fought tooth and nail. As a result, we are seeing truly injured people later, after they’ve been denied treatment numerous times. Therefore, their injuries have gotten worse, rehab takes longer and, big surprise, costs go up.”
But instead, reformers choose to fight beastly workers instead of fighting the beast itself. Little do people know, the beast was tamed once before in Hawaii. It was run over by TheBus.
The Next Great Trade-Off
In 1996, with the state’s economy in the dumpster and workers’ comp costs spinning out of control, Oahu Transit System (OTS) officials made a new great trade-off proposal to their colleagues in their union, Teamsters, Local 996: Help us save our workers’ comp system and we’ll help you save your other benefits.
Both parties agreed and, in March 1998, OTS’s Injured Worker’s Program (IWP) was born. A hybrid workers’ comp system, the IWP borrowed a coordinated medical care network from a new and progressive program in Oregon and married it to an alternative dispute resolution system with which California was experimenting. The IWP removed the adversarial nature from workers’ comp disagreements by making employee advocates part of the system. These union members helped injured workers navigate through the system and an independent ombudsman settled disputes when they arose.
The system replaced the state’s slow and cumbersome hearings and appeals process with one that put a premium on speed. The ombudsman’s decisions would have to be handed down within 10 days of hearing. If a satisfactory decision wasn’t reached, then mediation would begin within two weeks after the hearing. If that didn’t work, binding arbitration would have to be reached within six months of the initial complaint. While attorneys could counsel employees at any time, they were not allowed to represent either side until arbitration. Startup costs for the IWP were less than $50,000.
In 1998, of OTS’s 976 employees at the time, 868 chose coordinated care organizations, such as Straub Occupational Medicine and Kaiser on the Job. Participation remained at more than 80 percent for the four-year program. Of OTS’s 724 workers’ comp cases during that period, 67, or 9.2 percent, required an ombudsman’s hearing, 14, or 1.9 percent, involved a mediation hearing and only two, or 0.3 percent, reached binding arbitration.
With less adjudication (and fewer hard feelings), OTS saw time off per job go down from 4 percent to a little more than 2 percent. More significantly, workers’ comp costs for the company were cut in half, from nearly $8 per $100 payroll to $4, well below the rates of transportation companies in municipalities of similar sizes. Because of increased awareness and more active participation in the system, even injuries on the job dropped 12 percent.
“It IWP] was an unqualified success for the employees, the company and the union,” says Roger Morton, senior vice president, Oahu Transit Services. “The workers got quick treatment for their injuries, fair hearings to their disputes and the company saved money in the process. Also, because we took the adversarial nature out of the process, morale went up. It was a win-win situation.”
The IWP ended in October 2002, a casualty of a renegotiated union contract. Although both sides were satisfied with the results and the spirit of the agreement, union officials felt that the negotiating table was a little unbalanced: Not only were union employee advocates not compensated enough, but they lacked the training of their management counterparts.
According to Morton, without the IWP, OTS’s workers’ comp costs have returned to a little less than $8 per $100 of payroll.
Although contract negotiations don’t begin again until 2008, Morton is not ruling out the possibility that the IWP can be revisited sooner.
OTS’s grand experiment was on many people’s minds this past legislative session. Last October, Christine Camp Friedman, Chairwoman of the Chamber of Commerce of Hawaii approached various trade unions and proposed that they form a workers’ comp system built along IWP’s lines, only bigger. Camp helped draft a bill that would make OTS’s coordinated-care options and alternative dispute resolution process part of the state’s statutes. Instead of covering just one company, the new workers’ comp system would take care of a whole industry: construction.
She got officials from every trade union to sign off on HB 1636, just before the legislative deadline, but the bill wasn’t accepted by the House Labor and Public Employment Committee.
Although disappointed that her bill never made it to the house floor, Friedman is heartened by the huge strides that were made in a relatively short time. The cooperative effort between business and labor was without precedent in Hawaii and she plans to resubmit her bill in 2006, with clearer language and firmer agreements. “Every year, we [business and labor] go before the Legislature and perform our kabuki dance together. We know what we were going to say and we can anticipate what they’re going to say, and we do our respective performances,” says Friedman. “This time we sat down with everyone and came up with language that we can all agree upon. We aren’t happy that the bill didn’t get heard, but I’m pleased that we built some trust.”
According to Rep. Kirk Caldwell, the House Labor and Public Employment Committee Chairman, real reform of the workers’ comp system will take a lot of trust and compromise, concepts that may be a tougher sell in Hawaii, considering its contentious and painful labor history. “Some of them [union members] think immediately back to the plantation days and the plantation doctor, whose job it was to get you back in the fields as quickly as possible. So if there is anything that looks like we are trying to control [healthcare] choice, they act viscerally,” says Caldwell “Management needs to give up the adversarial nature that has pervaded workers’ comp laws.”
Caldwell believes that conflict, not fraud, is the main driver of costs in the workers’ comp system. The longer an injury is not treated, the more serious it gets and the longer the worker is off the job. If a worker is perpetuating fraud, a slow-moving system makes it harder, not easier, to uncover wrongdoing.
Caldwell would also like to see the OTS experiment become law. If successful, the resulting program could lay to rest much of management’s and labor’s fear and distrust of each other, but, he cautions, the law would have to be carefully crafted and include input from all stakeholders. “If you try and force something like this, shove it down someone’s throat, then it will be killed somewhere else. You may not get another chance,” says Caldwell. “Next year, it will get even further. And when it does become law and it does work, we can expand it to all businesses throughout the state.”
One of the stakeholders conspicuously absent from the discussion has been the insurance industry, which would have to surrender significant control if the alternative system reaches the rest of the state’s work force. “Baby steps, baby steps,” says Caldwell. “We’re crossing one bridge at a time. Once we have evidence that a system that replaces conflict with cooperation can work, then we can go to the insurance industry. They’re just baby steps at this point, but this is the furthest we’ve moved on this issue in a very long time.”
“I don’t think any program should be looked at in isolation,” says Janice Fukuda, assistant vice president for work comp claims at First Insurance of Hawaii. “OTS’s program worked. It proved it had value. It may also work for the construction industry, because of the support that they receive from their unions. However, it may not work for another company or industry with different people involved.”
According to Fukuda, for the insurance industry, which would have to administer the new system, what is good for some is not necessarily good for all. Consistency in policy, treatment and procedure ensures that people are treated fairly and efficiently. She believes that an ideal healthcare network would be a coordinated care organization that utilized specific treatment guidelines in its care of its patients. She also thinks that the insurance industry could back alternative conflict resolution for the rest of Hawaii’s workforce, if it were used as only an option to settling disputes.
“The employer and the employee might come to an agreement but they may find out that no one wants to underwrite their proposal, or it may be too difficult to underwrite,” says Fukuda. “When you’re working with an arbitrator, you’re usually dealing with generalists, people who aren’t familiar with all aspects of the law, as opposed to hearing officers who are. Some issues are complex, dealing with a multitude of issues and benefits. However, having said that, any effort to bring all the parties together and expedite the process is a win-win situation.”
The Biggest Obstacle of All
While the future of reform looks bright, no amount of negotiating and compromise will help workers’ comp reformers overcome arguably their most difficult obstacle: human nature. Even though both statistical and anecdotal evidence shows that employee fraud constitutes a very small percentage of the workers’ comp system, the mistrust of injured workers is pervasive, if not irresistible.
“There is just something about an injured worker getting something. It runs against human nature,” says O. Gary Whitney, a vocational counselor for the past 23 years. “In all my years of doing this work, I’ve never had someone promoted after an industrial accident, never. Even though they were legitimately hurt, even though they are qualified for a promotion, and even though it makes sense for them to have a less physical job. I’m not sure what it is. Maybe people feel they are getting something for nothing. Maybe it goes against the American way.”