Author: Jeremy Smerd

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A Workers’ Comp Scandal

Mark Teich, who runs a plumbing company near Union Square in New York that his father started 65 years ago, wanted to save money on the workers’ compensation insurance he is required to carry should any of his 25 employees get injured on the job. His broker mentioned Poughkeepsie-based Compensation Risk Managers, which administered insurance trusts catering to New York small businesses. CRM offered cheap premiums.

“We joined it because my insurance broker at the time said it would be a lot more economical for us,” says Teich, president of M&T Plumbing & Heating Co. “Had I known then what I know now, I never would have gotten involved.”

Over nearly three years, beginning in 2002, Teich paid more than $147,000 in premiums to CRM. But he was dissatisfied with the value he was getting: He had only one injured worker and one claim, for $2,136. He canceled his insurance with CRM and didn’t give the company another thought until last year, when he learned that the state was accusing its executives of fraud.

In a lawsuit, the state alleged that CRM executives enticed new business to maximize their management fees even at the expense of the trusts they were hired to safeguard, and maintained shadowy corporate structures that went unnoticed by the state workers’ compensation board charged with regulating a booming industry.

By the time the board caught on, it was too late. CRM’s eight trusts were insolvent.

Though this was not the first time a trust had gone bankrupt—seven run by other companies went belly-up in 2006 and 2007—the size of the CRM insolvency dwarfed anything that came before it.

Today, the state faces a crisis in its group self-insured workers’ compensation trusts, which have a shortfall of at least $800 million. Most of that deficit is attributable to CRM, whose sudden collapse left business owners feeling duped.

“I think it’s reasonable to expect our government—in exchange for considerable taxes—to protect us from scams and fraud such as that perpetrated by CRM,” says another affected business owner, Jerry Hahn, president of computer furniture maker TBC Consoles Inc. in Edgewood, New York.

Far from protecting the 4,500 New York-based small businesses in the CRM trusts—some 900 of which are located in New York City—the state is holding them responsible.

Teich thought he had washed his hands of CRM. But last year, he got a notice from the state saying he owed $87,000 to cover his share of the liabilities. Hahn’s bill came to $350,000. Business owners were told that if they failed to pay, they would face a 22 percent penalty and a lawsuit filed by the state attorney general’s office seeking to bar them from doing business in the state of New York.

The battle lines were drawn. Threats of countersuits quickly followed. A resolution in the near future is unlikely unless Gov. Andrew Cuomo steps in.

Audits and court filings reviewed by Workforce Management sister publication Crain’s New York Business tell the story of a good idea gone bad, one that led to the boom and bust of an industry and cast a pall over thousands of small businesses whose owners believe they’ve been victimized not once, but twice.

Promise gone sour

When CRM entered the workers’ compensation business in 1999, a total of 6,614 employers participated in group self-insured trusts statewide. The trusts, which have been around for decades, are not insurance in the classic sense. Employers do not pay an insurance company a premium to shoulder risk.

Instead, businesses within similar industries—such as transportation, health care, manufacturing, government, retail and even cemeteries—formed insurance funds out of which they would pay workers’ claims. Outside administrators, such as CRM, are responsible for making sure the companies they let into the trusts have similar workplace safety records. They are also responsible for setting premiums high enough to cover claims.

The trusts held the promise that if businesses could work together to improve safety conditions, they could lower their workers’ compensation costs. The danger, of course, was that the opposite could occur. If injuries increased, their costs would go up. Either way, the firms would all be responsible—a concept known as “joint and several liability,” which would come back to haunt every business that signed on with CRM.

Ripe for conflict

The men who launched CRM were themselves small businessmen enjoying comfortable suburban lives.

President Daniel Hickey Jr. previously worked at Hickey-Finn & Co., his father’s insurance agency in Poughkeepsie, New York. Chief executive Martin Rakoff was already in the insurance trust business. He had launched Consolidated Risk Services in 1996, and Hickey helped supply him with members, in exchange for a commission. In 1999, they teamed up to form CRM.

Like successful companies in any industry, CRM won business by underpricing competitors’ premiums.

For example, Frank Budwey, who owns two supermarkets in the Buffalo area, saved $40,000 in premiums over five years when he joined a CRM-managed trust. CRM earned management fees based on the number of employees in the trusts and the value of premiums. In an unusual twist, however, CRM’s fees were linked not to the premiums that employers paid, but to an industry benchmark. This meant that CRM could offer discounts to companies with poor safety records and heavy claims without affecting its revenue.

Says Christopher Rosetti, an accountant at BST Valuation, Forensic and Litigation Services, which would eventually review CRM’s operations, this practice put the trusts at risk.

“There’s no incentive to make sure worthy candidates join the trust,” Rosetti says.

CRM saw spectacular growth. From 2001 to 2007, the company collected at least $70 million in fees, according to the state’s lawsuit. The company completed an initial public offering on the Nasdaq in December 2005 that valued CRM at $175 million. But its lax membership requirements and the steep discounts it offered eventually meant that as workers got injured on the job, the fund did not have enough money to pay the claims that were projected to mount up.

Store operator Budwey realized that the savings he’d achieved were illusory when he got a letter from CRM in 2007 saying that he owed $17,000 to cover his share of the trust’s costs. The next year, CRM said he needed to pay $80,000.

“That’s when I was made aware that a lot of things didn’t make sense,” Budwey says.

As several independent reviews of CRM’s operations later showed, the company was fraught with conflicts and mismanagement that led to—and obscured—the insolvency of its trusts.

CRM engaged in practices that looked like those of a Ponzi scheme, according to accountants’ reviews. The company took cash paid by employers one year to cover deficits from the previous year. CRM avoided scrutiny by rarely—if ever—holding general membership meetings for trusts, though it was required to by law, and by controlling the trustees charged with overseeing management.

A review conducted in May 2010 by accounting firm Lumsden & McCormick showed that the trustees of the manufacturing industry trust, appointed to act as independent monitors, were handpicked by the very CRM managers they were supposed to oversee.

One of the trustees was Mark Bottini, an owner of CRM. Additionally, some individuals were named as trustees but were never told that they had been appointed.

The state’s lawsuit—in which the word “fraudulent” appears a dozen times—alleges that CRM used another firm owned by Rakoff and Hickey to provide claims management, independent medical evaluation and medical billing services to the trusts. The executives employed yet another company they owned to provide reinsurance to the trusts at above-market rates. CRM also used a brokerage company owned by one of its founders, Daniel Hickey Sr.

The state made annual reviews of whether each trust was adequately funded. But it did so based on the audited financial statements provided by CRM—statements that were based on “questionable data” that CRM gave its actuaries and accountants, a state report on the trusts says. It wasn’t until the workers’ compensation board conducted its own audits that it discovered that the CRM trusts were insolvent.

In 2006, seven years after CRM first showed up on the New York scene, state regulators took over the trusts and began shutting them down. Rakoff left the firm in December of that year, but not before collecting a $3.3 million severance package.

None of CRM’s current or former executives would comment for this story. Nor would representatives from the state’s attorney general’s office or the workers’ compensation board.

State comes calling

Soon after the state took over, it sent letters to members saying that because of joint and several liability, they—not the state—were responsible for making the trusts whole. Hahn’s share came to $40,000; Budwey’s was $88,000.

After the state asked independent auditors to review the bankrupt trusts, however, they concluded that the deficits were much larger than originally thought. What was initially suspected to be a $178 million deficit is now projected at $800 million—as a result of forensic audits conducted on both CRM and non-CRM trusts.

The figure represents the amount that the state will have to come up with to pay the medical claims and lost wages for workers injured on the job between 1999 and 2007, according to actuaries’ estimates. Meanwhile, Hahn’s and Budwey’s debts keep growing; Budwey is now expected to pay close to $400,000.

“We’re struggling with the recession and trying to keep things going, and then to get hit with a $350,000 bill?” Hahn says. “It’s devastating.”

Hahn sent the state $10,000 as a “good faith gesture.” Then he hired a lawyer. He has no plans to pay a penny more.

Meanwhile, the state is using its authority to collect money from solvent trusts. Scores of organizations have responded by shutting down their trusts and suing the state to make sure the trusts’ money is used to pay the claims of their workers.

The crisis has decimated the group-self-insured trusts industry. Today, only about 4,000 employers participate. And while there’s currently enough money to pay workers’ claims, as of last summer, only $33.8 million of the estimated shortfall had been collected.

New York’s missteps

John Giardino, a lawyer for 400 of the small businesses in the CRM trusts, says his clients shouldn’t be targeted by the state because of its inability to oversee an industry that nearly tripled in size in the eight years CRM operated.

“These programs were approved by the state, monitored by the state; the state published reports every year about the adequacy of funding for the trusts,” says Giardino, who is special counsel, Buffalo, at the law firm Phillips Lytle. “They were the regulators. And they failed.”

Giardino says the state made a number of bad decisions after it discovered the insolvencies. The first was revoking CRM’s state insurance license, rather than instituting better management controls. That would have allowed the funds needed for claims payments to keep flowing into the trusts, he notes.

Also, the state waited a year before suing CRM, losing valuable time to recoup money. New York sued for $405 million. But a proposed settlement announced last fall would yield just $41 million, of which only $11 million would be in cash. The company has changed its name to Majestic Insurance, but two men named in the state’s lawsuit remain with the firm.

So far, none of the executives at CRM has been charged with a crime. Hickey Jr. left the company in March 2009 with a severance deal worth $3.3 million, while business owners such as Hahn have been left holding the bill.

They had been told by the state that it will sue them and assess further penalties if they do not agree to pay 50 percdent of their assessments. Legislation proposed by Cuomo would hit the businesses with stop-work orders if they don’t pay. But the state has not yet put a cap on the size of the companies’ liabilities.

“Workers’ comp insurance is mandated and overseen by the state to protect workers and their companies against catastrophic loss,” Hahn says, “not create it.”

Workforce Management Online, February 2011 — Register Now!

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A Work-Site Approach to Medical Homes

A work-site approach to medical homes Not all companies need to change the health care system to create medical homes for their employees. In fact, the term “medical home” broadly refers to improvements in primary care and the coordination of specialty medical care through a team approach that engages patients to take control of their health. Work-site wellness clinics can embrace features of medical homes in hopes of improving the care of patients and reducing overall medical costs.


Most on-site clinics resemble a primary care office, with a doctor or nurse practitioner and other nurses or health care aides. With a small staff, an employer can begin to identify the sickest patients in a population through health risk assessments and screenings that objectively measure a person’s health.


“That’s cardinal rule No. 1,” says Arnold Milstein, chief physician for Mercer Health and Benefits. Once the sickest patients are identified, the hard part begins. This is when a patient’s “care team” works to get the patient to adhere to a health regimen that includes taking medicine and changing unhealthy behaviors. The team also coordinates care among specialists.


Milstein says that medical homes can exist in various settings, but, as he wrote in an article published in the journal Health Affairs last fall, successful medical homes share three important characteristics.


First, Milstein writes, they must offer “an exceptional form of individualized” care that is designed to prevent emergency room visits and unplanned hospitalizations for chronic illnesses.


Second, the care should be designed efficiently. This means that in most cases, a patient’s chronic care plan is designed by a doctor-led team. After that, the difficult task of getting patients to manage their care is left to lower-paid health care professionals such as nurses or licensed vocational nurses.


Third, a patient’s “care team” should carefully select specialists based on the cost and quality of their care and funnel most patients to those specialists.


Arguably, the first criterion is the most important—and hardest to achieve. In his research visiting primary care practices, Milstein concluded that the most successful practices boosted patient motivation to improve their own health by demonstrating that the practices were “so committed to their patients that they would go to extraordinary means to protect them from preventable health crises.”


Commitment in this case means spending enough time with patients to educate them about their illness and how to manage it; following up with patients between visits to give them help in managing their health; responding promptly when a patient seeks urgent help; and linking patients with a “carefully selected group of specialists.”


Work-site clinics may be better designed to achieve these goals if the clinicians are paid a management fee, rather than being paid for each service they perform, says Brian Klepper, a consultant to work-site clinics.


Building trust is key. Milstein says doctors have to convey with “passion and obvious belief” to patients the importance of managing their health. Milstein noticed that some of the most successful clinics had nurses who had backgrounds similar to those of their patients. By virtue of their income, education and culture, they were “much closer to the patient’s world,” he says.


Pranav Kothari, co-founder of medical consulting firm Renaissance Health Inc., says that medical practices—whether they exist at a work site or in a shopping mall—need to be designed to cater to the needs of the person, not just the person’s illness.


“At the beginning and end of the day, it’s all about relationships,” Kothari says. “The patient has to trust you. And that comes from this whole culture of transformation that has to happen in medical practices.”


Workforce Management, July 2010, p. 17-18 — Subscribe Now!

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Clocking CityTime, the Craziest Contract Ever

In March 2003, executives at software company Science Applications International Corp. were scrambling for a way out of a deal with New York City to build a timekeeping system for its 167,000 municipal employees.


The contract was worth $114 million. But SAIC executives realized soon after taking over the work from a previous contractor that there was no way they could build a system for that amount. The city’s workforce was too large, its union rules too complex.


“We should have killed the deal right there,” says Gerard Denault, vice president and operations manager of SAIC.


The company fired the employee who signed the contract, but the city didn’t let SAIC off the hook. Instead, lawyers at the Office of Payroll Administration, the agency overseeing the project, insisted that SAIC fulfill its end of the deal. With the remaining city funds plus $30 million of its own money, SAIC developed the framework for the software that would eventually be called CityTime.


But what started in 1998 as a $63 million project has ballooned today to more than $700 million and counting. Less than half the municipal workforce—about 77,000 employees—are expected to be on CityTime when SAIC’s contract with the city expires in September.


Delayed and over budget, CityTime has become an easy political target for unions expressing privacy concerns and politicians staring down budget cuts. Many of the delays and wasted dollars can be traced back to foot-dragging and internal politics within city agencies, as well as a failure by city administrators to grasp, at least initially, the technical complexity and political perils of the enormous project.


As the project nears its final phases, the completion of CityTime is in no way assured.


SAIC needs the board of the Office of Payroll Administration to approve a three-year contract extension worth $108 million to transfer all remaining workers to the system, and then transition the maintenance of the system over to city workers.


The two-person board that approves CityTime contracts is split, however. While the member representing the Bloomberg administration stands behind CityTime, recently elected City Comptroller John Liu and his board member do not. Liu says he will not approve any new contracts until the completion of an audit of the project by his office this fall.


The Office of Payroll Administration and its executive director, Joel Bondy, who has already come under attack for lax management of $200-an-hour CityTime engineers, have kept a low public profile. SAIC, angered over the way it has been portrayed in the media, broke its silence by speaking with Crain’s New York Business, a sister publication of Workforce Management.


 The private contractor
“I don’t think people understand the complexity of this system,” Denault says.


He then lists a number of reasons why CityTime took so much money to build and why it is an important step in modernizing the city’s operations. New York City employs 6,000 people solely to track the time of workers, and there are 4,000 different ways to classify “time” in the city workforce. Every month, the Police Department generates 1.5 million time sheets, and each one must be stored for 55 years by law. Timekeepers at the department have a 30 percent error rate, costing the city hundreds of millions of dollars annually in overpayments and miscalculated pensions. And underpaying workers leads to costly labor grievances.


An assistant to Denault opens a 2-foot-wide green metal binder. Inside are timekeeping sheets that look like box scores for a very long, very high-scoring Yankees game. This is how the Department of Sanitation used to keep time, Denault says. The time sheet’s bewildering system of marks and scratches reflects the complexity of union contracts, each one representing a different pay rate: regular shifts, Saturday shifts, plowing snow on Saturdays, plowing on a Tuesday, driving a garbage truck, driving a pickup truck.


CityTime has changed all that.


Now timekeepers use drop-down menus to take roll call. Employees report in when they arrive and leave work using electronic hand readers or a Web-based time-tracking system. CityTime translates the hours a person works into how much a person gets paid.


“Now, what took an hour takes 15 minutes,” Denault says of how CityTime has simplified the work of the city’s timekeepers.


 Bureaucratic roadblocks
Building the system was a technical challenge; implementing it has been a political one. The mayor’s OPA board member, Mark Page, urged SAIC to roll out the system at a pace each agency felt comfortable with, according to the company. “You can’t push this system onto agencies before they’re ready,” he told SAIC executives through an interlocutor, OPA executive director Bondy.


The Office of Payroll Administration says most requests to delay the implementation of CityTime “are usually granted, despite the fact that the agencies and their staff are already fully prepared.” Ensuring acceptance of the system by city employees was “deemed to be more important than simply implementing CityTime as quickly as possible.”


SAIC expected some pushback from agencies—and got it. One delay SAIC says has become emblematic of the pointless waste that has endangered the project came from the Human Resources Administration. SAIC says it was ready to bring the agency’s 15,000 employees onto the system three years ago, but Jane Roeder, a deputy commissioner who oversees AutoTime, its current time-management system, refused to cooperate.


It was only when Roeder announced her June 18 retirement that SAIC was able to schedule the transition. SAIC says it plans to bring 5,000 employees onto CityTime the weekend of July 18 and the rest of the department by the fall.


“This should have been done three years ago, and it cost the city millions of dollars,” Denault says.


Roeder declined to comment. A spokeswoman for HRA would not address whether Roeder’s departure cleared the way for bringing the agency onto CityTime, except to say that Roeder is one of several officials in charge of the agency’s time management system.


The Office of Payroll Administration said HRA was not brought over to CityTime sooner because it had a timekeeping system and “was already realizing some benefit.”


But SAIC rejects this logic. The AutoTime system was costing the city $3 million a year simply to license the software. Ending it would have been easy and would have brought immediate savings, in part because the maintenance of the entire CityTime system is more cost-effective. When fully rolled out to 167,000 employees, the system—including software, hardware and personnel—will cost the city $29 million a year to maintain. It would be even more cost-effective if the city eventually rolls out the system to the Department of Education’s 136,000 employees as well.


By next year, CityTime should start paying for itself in cost savings, SAIC says.


 Union opposition
One of the most vocal opponents of CityTime has been Local 375 of DC 37, the Civil Service Technical Guild, whose 6,800 members have a presence in 30 city agencies. Jon Forster, a union representative, says his members objected to having to place their hand on palm readers that he says are unsanitary. Having to “punch in” makes the employees, who are primarily engineers and architects, feel like “we’re on the factory floor,” all of which he calls bad for morale.


The union mounted a campaign to derail CityTime, outmaneuvering both the city and SAIC. Its protests outside the Parks Department and the Department of Design and Construction forced SAIC to develop a Web-based alternative to the palm scanners, at a cost of “several million dollars extra,” Denault says. In the end, many of the union members for whom the system was designed were not permitted by their managers to use it. Those managers, instead, preferred the original palm scanners.


One of the biggest grievances among union members is that CityTime may hit workers’ paychecks. “Now you’re going to turn around and nickel-and-dime us with these time clocks,” Forster says.


What unions call nickel-and-diming, city officials call accurately tracking labor costs. CityTime will ultimately help managers identify workers with high overtime costs or excessive sick-day absences. It can also be used during labor negotiations to gauge the cost of small changes in labor contracts.


 Comptroller’s control
Regardless, both SAIC and the city—which answered questions by e-mail and turned down requests for an interview with Bondy—say the delays should not come as a surprise to John Liu’s office. “The offices of both [OPA] directors reviewed and approved all contract amendments and encumbrances in their administrative roles,” OPA’s response reads. “The Comptroller’s Office registered all contract actions.”


Although Liu took over from his predecessor in January, he retains the same chief information officer, Michael Bott, who attended quarterly meetings that monitored CityTime’s progress and discussed its delays.


Liu is following up on concerns raised during his tenure on the City Council contracts committee that SAIC and its contractors were paid rates labeled exorbitant by at least one council member. SAIC billed the city $400,000 for about 2,000 hours of work by one of its contractors—a rate of around $200 an hour that covers salary, administrative and other SAIC expenses.


SAIC is desperate to complete the project, in part to sell the system to other municipalities under a proposed revenue-sharing deal with the city. CityTime, it says, is the only software of its kind that can manage the complexities of tracking a big, unionized government workforce.


If SAIC’s contract is not extended by the end of September, however, the system will be not only incomplete, but also worthless.


“If we walk out on September 30, the system shuts down,” Denault says. “The city cannot maintain the system without us. They have no staff to support it. The option is: Give us an extension, or carry the system out [yourself].”


Workforce Management Online, July 2010 — Register Now!

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Benefit a Burden for Home Health Care Aides

Employer health benefits used to be an attractive perk for home health care aides in Massachusetts. However, the high cost of complying with the state requirement that all individuals purchase health insurance has inspired some to work less in order to remain eligible for state-funded health care.


“Before health care reform it was attractive [to offer health insurance]. Now it’s not very attractive at all,” says Lisa Gurgone, executive director of the Massachusetts Council for Home Care Aide Services, a trade association.


Many in the industry hope that national health care reform efforts will reduce the cost of health insurance for low-wage workers who make $10 to $15 an hour. While the recession has made it easier for home health care companies to find workers willing to care for elderly patients, some worry that when the economy rebounds they won’t have enough workers to meet demand.


“We have seen a number of employees who cut hours back to no longer qualify for our plan and flip over to the state connector plan,” says Mike Trigilio, president of Associated Home Care in Beverly, Massachusetts. “In some cases it’s lesser cost, but it’s also a lesser plan. But they just want to comply with the requirement.”


Home health care workers face especially high insurance premiums because they tend to be older, female and prone to injury. Federal health care reform legislation could change insurance laws to narrow the cost gap between young, healthier workers and older, sicker ones, as well as provide subsidies. However, it has yet to be seen whether the actual cost of insurance will come down.


Some employer groups have proposed allowing people to buy catastrophic coverage as an affordable way to comply with the requirement that all workers have insurance. Unions and other groups believe a publicly run insurance plan would act as a low-cost alternative for workers.


Either way, affordable health insurance is essential to recruiting the next generation of home health care workers, says Carol Regan, director of government affairs for PHI, a research and advocacy organization for home health care workers. Nationally, there are 3 million home health care aides. As baby boomers age, a million more home health care aides will be needed within the next decade.


“We better figure out a way to make these good jobs, because they are going to be caring for our mothers, brothers, sisters and us,” Regan says.


Workforce Management, March 2010, p. 18 — Subscribe Now!

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Mandatory Health Care a Bitter Pill for Massachusetts Low-Wage Workers

Soon after Massachusetts state legislators passed a law in 2006 requiring full-time workers to buy health coverage from employers that offered it, Mirlene Desrosiers, a home health care worker, traded the state health insurance she could afford for an employer plan she could not.


Because her weekly gross income was a mere $500, she could have dropped insurance altogether and been exempt from paying a penalty. But with two small children and a physically demanding job that regularly entails lifting elderly patients, she felt that going without health coverage would have been irresponsible.


To pay her health insurance premium of $287 a week, she upped her hours, often working more than 120 hours a week at four different health care companies. She says she lives to work and works to pay for health insurance.


“Either way it’s a no-win situation. If you have insurance, you have to pay your life for it,” says Desrosiers, who is 41 and moved to the U.S. from Haiti 23 years ago. “If you don’t have it you still have to pay. So you might as well have it.”


Health care reform in Massachusetts was supposed to help those least likely to be able to afford health insurance. But that has not been the case for some low-wage workers, particularly home health care aides. While Desrosiers’ working life may seem extreme, owners of agencies say runaway health care costs mean that low-wage workers are purchasing insurance that is increasingly unaffordable.


“Most of our employee base does not want health insurance because they are living check to check, week to week,” says Mike Trigilio, president of Associated Home Care and Desrosiers’ employer. “They are barely able to muster enough money together for rent or food, let alone health insurance. In the past, a lot of employees would go without it. Now they are forced to take it, and it puts a strain on them and on our company.”


National health care reform efforts could have significantly improved the lives of low-wage workers like Desrosiers through generous federal subsidies that would help them pay for health coverage. But since the election of Massachusetts Republican Sen. Scott Brown in January to fill the seat vacated by the late Democratic Sen. Edward Kennedy, the passage of the Democrats’ health care plan appears unlikely.


If reforms do pass, they may include changes in insurance laws, including a requirement that all Americans purchase coverage without the subsidies to help them do so. If that happens, the federal government may do to low-wage workers across the country what Massachusetts did in 2006.


To this already complex situation, add an underlying and persistent threat to businesses and workers alike: growing health care costs. As the current impasse over federal health reform demonstrates, it’s easier for legislators—whether in D.C. or in Massachusetts–to extend coverage than to bring down costs.


“We were hoping there would be meaningful cost containment in federal legislation, but there doesn’t seem to be anything there,” says Rick Lord, president and chief executive of Associated Industries of Massachusetts, a business association. “That’s a huge challenge we face if we want to sustain this reform law.”


The lesson of Massachusetts

Lord knows the situation well. As a board member of the Commonwealth Connector, the organization created by Massachusetts to help residents purchase insurance, Lord has seen that expanding coverage in the state has been relatively simple. Massachusetts requires that individuals carry health insurance and makes most employers offer it. Today just 2.6 percent of the state’s residents are uninsured—the lowest percentage in the country.


But bringing down health care costs has been a much more complex and elusive goal.


“Reform’s been very costly to companies like us,” says Jonathan Morin, comptroller for Intercity Home Care in Salem, Massachusetts. “We’re getting no rate relief. We’ve incurred additional costs for our staff. In the end the workers pay for it.”


Much is made of the fact that an employer requirement in Massachusetts has increased the number of people who receive health insurance through work. Employers had predicted, as they do today, that any requirement to provide insurance harms an employer’s ability to tailor the scope and cost of health benefits to the needs of the business and its employees. They also predicted that employers faced with these costs would rather drop coverage.


But today, 96,000 more people in Massachusetts get their health insurance through their employer than before reform. The reason for this increase is that workers who are required to have insurance have few options. Most must take the health coverage they are offered, at the price offered.


If an employer with more than 50 full-time workers offers a health plan and pays for at least one-third of the premium, employees are no longer eligible for state-subsidized care, regardless of their income. They can forgo health insurance and pay a fine for flouting the law unless their premiums are deemed unaffordable. But if they want health insurance, they must take what is offered to them by their employer.


The insurance may not be affordable to workers, and though legislators could have required employers to pay more toward their workers’ insurance or pay heavier fines for not doing so, such a stance would have doomed the Massachusetts legislation to failure, Lord says.


“Clearly, putting higher spending contributions on employers would have been controversial,” he says.


The state has been hesitant to extend a helping hand beyond the assistance it already provides. This year, Massachusetts is providing subsidies to 180,000 residents who earn up to 300 percent of the federal poverty level, at a cost of $724 million, says Richard Powers, a spokesman for the state’s Commonwealth Connector. There are, however, 600,000 workers who get their health insurance from employers and who earn 300 percent of the poverty level. Had the state allowed into the program workers whose health care premiums were deemed too expensive, the cost would have been enormous, Lord says.


And while many workers presumably receive generously subsidized insurance from their employers, the cash-strapped state, facing a budget shortfall because of the recession, can barely afford to provide insurance assistance to those who are already eligible for it, Powers says.


Work less, get cheaper health care

Some workers nevertheless are trying to get state-subsidized care. To get around the requirement that they purchase their employer’s health insurance, some people have made themselves ineligible by working fewer hours. By becoming part-timers and earning less, they become eligible for state-subsidized health care.


Carol Regan, director of government affairs for PHI, a research and advocacy organization for home health care workers, calls this race to the bottom one of the “perverse employment outcomes” of the state’s health reform law. It creates what economists call “implicit marginal tax rates,” a situation in which subsidies create incentives for people to work less because working more would mean reduced benefits.


In a recent survey, PHI reported that 25 percent of home health care agencies said they reduced workers’ hours or made it harder to become a full-time employee to make the workers eligible for state-subsidized care.


“These disincentives to work are problematic in the home health care industry,” Regan says, adding that workers are in demand. “It’s a fast-growing industry. How do you get enough people to work there?”


While the recession has ensured a steady stream of job applicants, agencies nonetheless acknowledge that some health care aides work several part-time jobs so they don’t become full-time employees. Doing so allows them to become eligible for state-subsidized health care if they meet the income requirements.


“I think people will go where it’s least costly to them,” says Bob Dean, vice president of All Care Resources, a home health care agency in Wakefield, Massachusetts. “If they are working a full-time job, then they’re basically just working to pay for insurance.”


The lesson from Massachusetts is that national health care reform that requires all people to buy insurance coverage must not make it so onerous that working becomes a disincentive.


“If the cost of health care and the cost of living continue to go up, a lot of people are going to just stop working and go on welfare and get the health insurance that the government offers, if that would be in our benefit,” Desrosiers says, speaking a day after Scott Brown was sworn into office as the 41st Republican senator. “I just hope it doesn’t get to that point. I’d rather make my own money than wait for the government to give it to me, you know what I’m saying? I hope all parties get involved and come up with a solution that is best for everybody.”


Higher costs for older workers

Of course, Desrosiers is determined to work. For now, she prefers to pay higher health care costs by working harder and earning more. So too does Sandra Broughey, another home health care aide. Broughey, 58, could have gone without insurance rather than increase her hours in order to pay the $57 a week required for her insurance premium. And for many years, Broughey did go uninsured.


But a series of health problems—a tumor in her eye, a lump on her chest—changed her thinking. She was glad that reform forced her to get coverage, first through the state, then through her employer.


“I tell my company all the time that I’m so glad I had what I had,” she says.


Trigilio, president of the company that employs both Desrosiers and Broughey, says that three years ago, when the reform law went into effect, he spent 2 percent of his payroll on health care. Today he spends 8 percent. And next year he expects to pay 10 percent of his payroll on health care costs. Most home health care agencies have workers like Broughey—older women who are at risk for on-the-job injuries. The rate increases that the agencies have experienced have put health care further out of reach for their average workers.


“When we go out to get health insurance, we get [killed] on our rates because we have women, they’re mainly middle aged and they work in the health care industry—that alone adds 25 percent to the cost,” says Morin, comptroller of Intercity Home Care in Salem.


Stretched thin

Desrosiers works full time for one agency and part time for three other health care employers and makes $12 to $15 an hour. On a recent Friday afternoon, she was just finishing up a double shift that had begun at 11 p.m. the previous evening at an elderly client’s house. She was hoping to arrive home before her two youngest daughters returned from school.


“When I get home I will cook for my girls, then we’ll do some homework,” she says. After that, she’ll have a quick nap and be out the door before 6 for another overnight shift, which is often quiet enough to grab a snooze.


Since Desrosiers can work only when she is needed and gets paid only when she works, she works whenever she can. Her days off are few and far between. Her dreams of becoming a nurse are on hold.


“When I feel my body getting very tired, I just take the time off without pay,” she says. “Because my job does not have paid sick days, if you take the time off you don’t get paid.”


Democratic health care reform proposals, including the Obama administration’s, provide generous subsidies to workers whose premiums eat up a large chunk of their income. But employers have criticized those proposals for including penalties against businesses while not doing enough to bring down the cost of health insurance.


Trigilio is all for providing health insurance, “but companies like ours can only offer so much,” he says.


Americans wonder whether they will be able to afford health insurance if it is required by law. The same question worries employers as they consider their own financial viability. In Massachusetts, policymakers decided to put most of the burden on workers rather than employers. Federal reform could provide subsidies to low-income workers, but unless it also can bring down health care costs, reform will amount to cost-shifting to businesses and the federal government.


For low-wage workers, especially for home health care aides like Desrosiers and the businesses that hire them, national health reform represents a major test of the employer-based health care system. Desrosiers says she would measure the success of national reform by the size of her savings account. By that measure, reform in Massachusetts has fallen short.


“I thought it was going to help me,” Desrosiers says. “I thought it was a great opportunity for families like mine to have health insurance. We could pay less money for health insurance and have more money for savings. I have a checking and savings account and the savings has nothing. You can’t really save, my friend. You can’t really save.”


Workforce Management, March 2010, p. 17-20 — Subscribe Now!

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Work-Site Clinics Gain Favor as Retail Sites Lag

Last fall in New York, as employers sought to inoculate workers against swine flu, employees of Bloomberg, Random House and Sony Corp. who were at risk could simply walk down the hall, roll their sleeves up and get a shot.

While these companies each had a medical clinic in the workplace, they also shared a common health clinic provider: Take Care Health Systems, a subsidiary of Deerfield, Illinois-based Walgreens.

According to records from the New York City Department of Health and Mental Hygiene, nearly 50 employer-based medical clinics received the swine flu vaccine from the city. Take Care operated at least 20 of those clinics at employers that included Morgan Stanley, Goldman Sachs and the state-run Metro North Railroad.

The wide presence of Take Care’s clinics among employers in New York shows how Walgreens has aggressively tapped into the growing market for work-site medical clinics as part of its effort to rebrand itself as a health and wellness company. Analysts say the move makes sense.

Walgreens can steer employers to its mail-order pharmacy while patients can access its chain of 7,000 retail drugstores. More than 350 Walgreens stores contain a Take Care Health retail clinic that offers care for minor medical conditions such as earaches, sinus problems and the flu.

Walgreens further solidified its New York presence by acquiring the city’s largest drugstore chain in a $1.075 billion deal announced February 17. The deal will expand the network of pharmacies available to clients of Take Care clinics. There are 257 Duane Reade pharmacies in the city, compared with 70 Walgreens in the entire metropolitan area.

What is puzzling, says Tom Charland, CEO of Merchant Medicine, a research and consulting firm in Shoreview, Minnesota, is why Walgreens rival CVS Caremark has not followed Walgreens into the work-site medical clinic market.

“That has surprised some people in the financial analysis community given their large [pharmacy benefit manager] business, which caters to large self-insured employers,” Charland says of CVS Caremark, which merged in 2007. “It surprises me that there aren’t more MinuteClinics at work sites.”

After lagging behind its rival, CVS says it plans to change its approach to work-site wellness.

“We are committed to developing clinics in corporate settings and have some new sites we are working on,” wrote Andrew Sussman, president of MinuteClinic and senior vice president of CVS Caremark, in an e-mail. “Our main focus in the past has been on retail, but we are interested in corporate opportunities that are a good fit for our model of providing excellent, convenient and low-cost care. We also think these sites are an appropriate place for us to work with corporations on disease prevention and wellness.”

Several years ago, pharmacies embraced retail clinics over work-site clinics with the thinking that as more employers used high-deductible health plans, more employees would be interested in low-cost alternatives for basic health care such as flu shots.

That belief led pharmacies, in particular CVS and Walgreens, on an acquisition spree of retail-based health clinics at the expense of work-site clinics. CVS acquired MinuteClinic, the largest retail clinic, in 2006. Since being acquired, MinuteClinic has opened only three work-site-based clinics, including one at CVS headquarters in Woonsocket, Rhode Island.

Subsequently, supermarket chain Kroger Co. made a major investment in The Little Clinic. And Rediclinic, which began as a work-site clinic called Interfit and had AOL founder Steve Case as an investor, abandoned that approach for retail.

“Generally across the country, the work-site clinic is of more interest to employers [than retail clinics] as a way to bring costs down,” Charland says.

Retail clinics and work-site medical clinics are thought to be complementary, offering different services for different populations. Retail pharmacies are convenient for parents whose children are sick when doctors’ offices are closed.

But growth in retail clinics has stagnated. MinuteClinic closed 122 clinics last year, according to Charland, who tracks the industry. Wal-Mart, after cutting back, doubled its in-store clinics to 54 in the past year, though they are not owned or operated by the retail giant.

Walgreens, meanwhile, has been quick to focus on work-site clinics. In 2007, Walgreens bought Take Care Health Systems, then a retail-based clinic, and the next year acquired two of the largest work-site clinic companies in the country, CHD Meridian Healthcare and Whole Health Management.

Today, there are more than 375 Take Care Health clinics, though not all are branded as Take Care clinics, says company spokesman Gabriel Weissman.

“Both of those [acquisitions] were part of an overarching strategy to make an entrance into the health and wellness space,” Weissman says.

For now, Take Care remains the largest company in the fast-growing market for work-site medical clinics. The percentage of employers providing on-site health clinics increased tenfold from 1 percent in 2008 to 10 percent in 2009. Other providers include Charlotte, North Carolina-based HealthStat; Carehere in Brentwood, Tennessee; and clinics offered by some health plans.

Clinics make good business sense for diversified health care companies, says Brian Klepper, a health care analyst based in Atlantic Beach, Florida, and an advisor to WeCareTLC, an on-site clinic firm based in Lake Mary, Florida.

“Whoever owns primary care owns the rest of the continuum because you own the referral stream,” he says.

Clinics that own pharmacies or hospitals can translate this referral system into increased revenue. But Klepper says it can also present a conflict of interest. If an employer pays for each service provided, a clinic’s revenue comes at the cost of an employer. Klepper says clinics should simply charge their employer a management fee without marking up the cost of the services they provide.

Walgreens says it provides a $2 to $4 return on every dollar invested by an employer in a work-site clinic, though such numbers are not independently verified.

“The next evolution is going to be measuring the success of these things,” says Marne Bell, senior consultant in Atlanta with Towers Watson. “I think for the most part people have been very happy with their work-site clinics.”

Workforce Management Online, February 2010 — Subscribe!

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How the Health Care Reform Measures Compare

Having passed separate reform legislation at the end of 2009, the House and the Senate must now reconcile their differences and craft a final bill on which the two chambers will vote. Democrats hope to pass a bill and have it ready to be signed into law by President Barack Obama by the end of the first quarter.


The coming weeks are likely to feature heated arguments over which of the elements in each bill should be included in a final version. Expect to hear a lot of talk about whether to include the House’s public plan option or whether to expand Medicaid eligibility.


Parsing the nuances between the bills can be a full-time job. To help employers understand what is at stake for them in each bill, Workforce Management (with help from the Kaiser Family Foundation) has compiled a side-by-side comparison of the provisions in each bill that are likely to affect employers. A complete version of the differences between the two bills is available through the Kaiser Family Foundation here.


Both the House and Senate bills expand coverage by requiring most U.S. citizens and legal residents to have health insurance or pay a penalty. Individuals and families that make less than 400 percent of the poverty level will have access to tax credits to defray the cost of premiums and cost-sharing. (In 2009, the federal poverty level was $18,310 for a family of three.)


Individuals and small businesses—and large businesses in 2017—will be allowed to purchase insurance on newly created health insurance exchanges.


Here is how each bill will affect employers in these areas:


• Employer requirements


• Subsidies for employers


• New taxes on employers


• Other exemptions and subsidies



Employer requirements


 Senate Bill: Patient Protection and Affordable Care Act (H.R. 3590, passed December 24, 2009)House Bill: Affordable Health Care for America Act
(H.R. 3962, passed November 7, 2009)
Employers face
penalties if:		At least one employee uses government tax credits to purchase health insurance. An employer offers health benefits that do not meet minimum requirements.
Employer minimum benefit requirements:Employer health plan must pay at least 60 percent of total actuarial value. The bill limits annual cost sharing to the 2010 health savings account out-of-pocket maximums of $5,950 per individual and $11,900 per family.

Premiums cannot exceed 9.8 percent of income.

If these minimums are not met, employees who make less than 400 percent of the federal poverty level are eligible for tax credits to purchase health insurance through an insurance exchange, resulting in fines against employer.

Employers must provide vouchers to employees who make less than 400 percent of the federal poverty level and whose premium exceeds 8 percent of income but is less than 9.8 percent. Vouchers are equal to what the employer would have paid to provide coverage to the employee under the employer’s plan. Vouchers are to be used to purchase insurance on the exchange. Employers are not penalized, though, if employees who receive vouchers also receive tax credits to purchase insurance.		Health plans offered to full-time employees must pay at least 70 percent of total actuarial value. The bill limits cost sharing to $5,000 for individuals and $10,000 for families.

Employers must contribute at least 72.5 percent of the premium cost for individual coverage and 65 percent of the premium cost for family plans.
The penalties: $750 for every full-time employee, or $3,000 for every full-time employee who receives a tax credit to purchase insurance, whichever is less.

Employers that impose waiting periods before an employee can enroll in health coverage will pay $400 for every full-time employee in a 30- to 60-day waiting period; $600 for any employee in a 60- to 90-day waiting period.		Employers whose benefits do not meet the minimum standards face fines of up to 8 percent of payroll, with the following exceptions:

• Annual payroll less than $500,000: exempt
• Annual payroll between $500,000 and $585,000: 2 percent of payroll
• Annual payroll between $585,000 and $670,000: 4 percent of payroll
• Annual payroll between $670,000 and $750,000: 6 percent of payroll
Automatic enrollment:Employers with 200 or more workers must automatically enroll eligible employees into health plan. Employees may opt out. Employers that offer coverage must automatically enroll employees into health plan. Employees may opt out.


Back to list


Subsidies for employers


 Senate Bill: Patient Protection and Affordable Care Act (H.R. 3590, passed December 24, 2009)House Bill: Affordable Health Care for America Act
(H.R. 3962, passed November 7, 2009)
Premium subsidies for small employers:Small employers with no more than 25 full-time employees or average annual wages of $50,000 or less:

• for 2010 to 2013: provide a tax credit up to 35 percent of employer’s contribution to employee’s premium if employer covers half of the total premium cost.
• after 2014: small businesses that purchase coverage through an exchange can receive a tax credit up to 50 percent (35 percent for small, tax-exempt organizations) of the employer’s contribution to an employee’s premium if employer pays at least half the total premium cost. Credit is available for two years.


Small employers with 10 or fewer full-time employees and average wages of $20,000 or less can receive a tax credit equal to 50 percent of employee premium costs paid by employers. Credit is phased out as average wages reach $40,000 and firm size increases to 25 full-time employees. Credit is not available to employees earning more than $80,000 a year. Tax credit is available for up to two years and is effective January 1, 2013.
Retiree health care:Creates a $5 billion reinsurance pool to help cover health care costs of retirees older than 55. Pool would reimburse employers or insurers for 80 percent of claims between $15,000 and $90,000. Pool will be used to lower health care premiums for retirees in employer plan.Effective 90 days after enactment until January 1, 2014.Provides $10 billion over 10 years for reinsurance pool to cover health care costs of retirees older than 55. Pool would reimburse employers or insurers for 80 percent of claims between $15,000 and $90,000. Pool will be used to lower health care premiums for retirees in employer plan. Effective 90 days after enactment.


Back to list


New taxes on employers


 Senate Bill: Patient Protection and Affordable Care Act (H.R. 3590, passed December 24, 2009)House Bill: Affordable Health Care for America Act
(H.R. 3962, passed November 7, 2009)
Tax on employer-sponsored health plans:Imposes a 40 percent tax on employer-sponsored health plans with aggregate values that exceed $8,500 for individuals and $23,000 for family coverage.Exceptions: threshold amount for individuals 55 or older and workers engaged in so-called high risk professions is raised by $1,350 for individual plans and $3,000 for family plans. The threshold is increased 20 percent in the 17 states with the highest health costs.None.
Tax on income:Limits deductibility of executive and employee compensation to $500,000 for health insurance executives.Imposes a 5.4 percent tax on individuals with modified gross adjusted income exceeding $500,000 and on families with income exceeding $1 million.


Back to list


Other exemptions and subsidies


 Senate Bill: Patient Protection and Affordable Care Act (H.R. 3590, passed December 24, 2009)House Bill: Affordable Health Care for America Act
(H.R. 3962, passed November 7, 2009)
Exemptions for grandfathered plans:Existing employer-sponsored plans do not have to meet the new benefit standards. However, if the plans do not meet the minimum requirements, individuals enrolled in them do not satisfy the individual mandate.Employer plans have five-year grace period after which they must meet new coverage standards.
Wellness programs:• Provides grants for up to five years to small employers that establish wellness programs. (Funds appropriated for five years beginning in fiscal year 2011.)
• Provides technical assistance and other resources to evaluate employer-based wellness programs. Conducts a national survey of worksite health policies and programs to assess employer-based health policies and programs. (Study would be conducted within two years following enactment.)
• Permits employers to offer employees rewards—in the form of premium discounts, waivers of cost-sharing requirements, or benefits that would otherwise not be provided—of up to 30 percent of the cost of coverage for participating in a wellness program and meeting certain health-related standards. Employers must offer an alternative standard for individuals for whom it is unreasonably difficult or inadvisable to meet the standard.		Provides wellness grants for up to three years to small employers for up to 50 percent of costs incurred for a qualified wellness program. (Effective July 1, 2010.)


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Some Employers With Health Clinics Get Vaccine

A handful of large employers with work-site health clinics are beginning to get access to vaccine that would protect high-risk employees against swine flu, but the employers’ ability to offer inoculations depends largely on local vaccine supplies.


Public health officials are distributing the H1N1 vaccine to medical clinics, including those based at employer work sites. Employers that do not offer work-site medical care will not be able to get the shots for high-risk employees, health officials say.


In New York, Citigroup, Goldman Sachs and Time Inc. are among a small group of large employers that have received doses of the vaccine from the city’s health department, a New York City health department spokeswoman said. These employers either operate or contract for work-site health clinics. The clinics had registered with the health department to receive the vaccine.


Citigroup, which has about 23,000 employees in the city, received about 1,200 shots to give to high-risk employees such as pregnant women, women with children under 6 months old, and employees with chronic illnesses.


The shots were not available to employees’ dependents, a company spokeswoman said. Citigroup has “for many years partnered with the New York City Department of Health to act as a distribution site for flu vaccines through the company’s existing health clinics,” the company said in a statement.


The New York City Department of Health and Mental Hygiene said that as its supply of the H1N1 vaccine has grown in recent weeks, the department has given 5 percent of its vaccine supply to health providers serving adults.


Some of those clinics are employer-based. A spokeswoman said that unless the clinic carries the name of its employer, the department has no way of knowing whether they are providing vaccines to a private practice or a work-site clinic. The vaccines are being given on a first-come, first-served basis to facilities that serve adult clients, the spokeswoman said.


In Silver Spring, Maryland, media company Discovery Communications has received enough H1N1 vaccine to inoculate about 300 high-risk employees and their dependents, says Evelyne Steward, vice president of the employer-of-choice group at Discovery. The company was able to receive the vaccines through its work-site primary health clinic, which is managed by Take Care Health Systems, a division of Walgreens.


“We were extremely fortunate,” Steward says.


Take Care Health Systems provides on-site wellness and primary care to medium-size and large employers at about 375 sites around the country. Many of those sites registered to provide the vaccine, the distribution of which was determined by health officials in each locale, says a company spokesman, Gabriel Weissman.


Though federal officials control the distribution of the vaccine, health departments at the city, county and state levels are determining which facilities get the vaccine and how much they receive. Priority is given to hospitals, public health clinics, pediatricians and obstetricians/gynecologists. Medical providers who care for adults, including medical clinics within work sites, are lower priority, health officials say.


Caterpillar, based in Peoria, Illinois, operates a health clinic for employees and has told state and local health officials that it would like to make vaccinations at the clinic available to high-risk members of the public as well as its own high-risk employees. However, the company has not yet received any of the vaccine it asked for, according to a company source who asked not to be named. The source is not authorized to speak to the media.


The distribution has created something of a two-tiered system in which high-risk employees whose companies do not operate health clinics do not have immediate access to the vaccine. Such employees must ask their primary care doctors for the H1N1 shot, health officials say.

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A Shift in Union Relations

One of the biggest measures of how much has really changed between the old and the new General Motors will be its relationship with the United Auto Workers union, former employees say.


Changes to the union contracts have already helped close the “cost gap” between GM and its foreign rivals. The fast-tracked bankruptcy allowed GM to reduce funding for a UAW retiree health benefits fund, to eliminate a jobs bank that paid full salary to workers who had lost their jobs, and to cut programs and personnel at the UAW-GM Center for Human Resources, the company’s training and education program for union and salaried workers.


One thing GM could do to improve its relationship with labor is give HR representatives more authority to address concerns among workers at the plant level, enabling them to spend less time on grievances, says Dave Rinderer, a quality engineer with 37 years of experience in the auto industry.


Rinderer spent 13 years with Nissan, learning the efficiency methods that have put the Japanese automakers at the top of the global industry. Because of his experience with Nissan, GM recruited Rinderer, who spent 15 years with the company helping to build new plants around the globe.


“At Nissan we didn’t want to have a union, so we learned and actively worked at listening and solving people’s problems,” says Rinderer, a high-level manager whose job was eliminated recently.


The UAW did not respond to several requests for an interview for this article. GM also declined to make Diana Tremblay, vice president for labor relations, available for an interview. In a recent Web chat, Tremblay said GM and the UAW have established a joint team to work on reducing costs.


UAW members are not represented on GM’s recently created culture transformation team.


“The union would tell you, ‘It’s the responsibility of management to create a system we can contribute to,’ ” says Chris Oster, the company’s director of global change management and organizational development. “I think they have great hopes that the management team is putting that together.”


The focus for now is on changing the way the salaried workforce operates.


“We are starting with the salaried workforce in driving the cultural change,” says Katie McBride, executive director for global internal and executive communications and a member of the culture transformation team. “We’ve had some preliminary discussion with the UAW so they are aware of the cultural priorities, but at this time we are more focused on the salaried organization.”


Workforce Management, October 19, 2009, p. 32 — Subscribe Now!

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Back to the Drawing BoardCan a New Company Culture Save General Motors

By the time Fritz Henderson was named CEO of General Motors on March 30, he was already looking beyond the company’s restructuring. A finance guy with a knack for numbers, Henderson was talking intangibles—the kinds of things that are hard to articulate, harder yet to teach, but, in a successful company, as easy to spot as profit and loss. He was thinking about a company’s culture.


Shortly after he replaced Rick Wagoner as CEO, he turned to then-head of HR Katy Barclay. “Well, he came to my boss, Katy Barclay, and said, ‘You know, I want to start having a dialogue about culture,’ ” says Chris Oster, director of global change management and organizational development. “ ‘I think I know what I want the cultural priorities to be. I think I know what the organizational design needs to be, but I don’t want to do that alone.’ ”


The company entered Chapter 11 bankruptcy protection in June and emerged five weeks later, a couple months short of its 101st birthday. With the intervention of the U.S. government, the automaker has slashed headcount, eliminated vehicle brands, shuttered dealerships and reduced its debt and benefit obligations.


GM is running much leaner. It now operates with 101,000 employees in North America, of whom 27,000 are salaried workers. In 1998, GM employed 226,000 workers in North America.


Equally important, bankruptcy inspired radical change in the operations of the new GM. Out of about 15 bullet points scribbled on a piece of scrap paper, Henderson distilled his vision of the new GM’s culture to four precepts: risk-taking, accountability, speed and, at the heart of it all, customer and product focus.


Henderson immediately employed at least one of those values—speed. By the end of July, the top of the organization had been restructured and HR’s role in organizational change was defined: It would support culture change, but not drive it. Company leaders developed a process to put Henderson’s precepts into practice, including a new performance management system, an education series to explain the new culture, a communications drive to articulate the values, and a project called Building the Movement.


Building the Movement would infuse GM with its new culture without making it a top-down process. At this point, the new cultural initiatives have been limited to the salaried workforce.


Whether the company can put these new principles into widespread practice—and even whether these new values will lead GM back to profitability—are questions yet to be answered. The future of the company, and the $55 billion of taxpayer money that it has received, hangs in the balance.


A history of culture changes
While GM is fixated on the company’s future, any student of automotive history can tell you the company has tried before—with mixed success—to reinvent itself. The company’s past is littered with the buzzwords of culture change: GoFast, a program to reduce bureaucratic waste; Synchronous, a top-down process engineering program; and GMS, the company’s version of the lean production system that has made Toyota and other Japanese manufacturers ascendant. Current and former employees say that in all those cases, GM struggled to impose cultural change across the highly bureaucratic company in which brands, departments and regions operated like self-governing and competing states within a federation.


“GM is an organization that if you went to a psychiatrist he would have prescribed electroshock treatments. Bankruptcy is electroshock.”
—Gerald Meyers, a former CEO of American Motors Corp.

“I’m not sure that we didn’t have too much of segmentation,” Oster says. “That sometimes when we would have a corporate or enterprise-wide initiative, you know, you had to sell it to each space, get them on board. It’s very challenging. And people would say, ‘You know we already got something going on here.’ ”


The difference this time, GM executives say, is the bankruptcy and the simultaneous culling of leadership, an experience that has been both traumatic and salutary.


“GM is an organization that if you went to a psychiatrist he would have prescribed electroshock treatments,” says Gerald Meyers, a former CEO of American Motors Corp. and now a professor at the Ross School of Business at the University of Michigan. “Bankruptcy is electroshock.” Sitting in a conference room overlooking the Detroit River at GM’s Renaissance Center headquarters one morning in August, Oster variously described bankruptcy as a “tonic,” an “enabler” for change and a “gift.” Like other executives who have survived the upheaval, Oster has embraced GM’s new cultural priorities with the fervor of a convert after a near-death experience.


Oster says that as early as November 2007, GM executives began to say, “We need to work on culture.” But executives clearly did not have the stomach or wherewithal to make the necessary changes despite workforce reductions and bureaucratic streamlining that had been under way for at least five years. The Obama administration’s rejection of GM’s restructuring plan in March made clear that anything short of a complete overhaul would be insufficient. Katie McBride, executive director for global internal and executive communications, says that bankruptcy forced executives and the entire salaried workforce to change or leave the company.


“In the 26 years I’ve been here there have been times when senior managers have pushed cultural change and there was resistance from the workforce. Then there have been times when the workforce wants to change and resistance comes from senior management,” she says. “Now there’s been a significant emotional event. And senior managers are changing. At every level people realize we cannot do things like we formerly did. There’s tremendous opportunity to do it this time because there’s not the resistance that there was … because we went through the bankruptcy.” Henderson has told employees not to let this crisis pass without taking advantage of it. Without the usual resistance to change, the company has been able to make organizational changes at speeds previously unknown at GM.


Embedding four core values
Shortly after Henderson became CEO, he asked Oster, GM’s soft-spoken culture guru, to figure out how to embed those four core values—customer/product focus, speed, risk-taking and accountability—into the company’s fabric and the mind-set of its workforce. Oster helped to assemble two teams: an operating model team and a culture transformation team.


The company removed other layers of bureaucracy, most notably eliminating the company’s automotive product board and automotive strategy board. On July 23, GM announced that both boards had been replaced with a single eight-person executive committee to “speed day-to-day decision-making.” The board reports to Henderson and meets twice a week to discuss business and product issues, McBride says.


Intentionally, no HR executives were appointed to either team—though the culture transformation team did include Mary Barra, a manufacturing executive who would later be named global head of HR.


“We’re stewards of the system,” Oster says. “The system of culture is the responsibility of the leaders. It’s our job to cajole and provide supportive ideas and mechanisms and help to hold them accountable and keep it in front of their face—but no, no HR people on these teams.”


Nor was the head of HR appointed to the new executive committee. Previously, the head of HR was part of the company’s automotive strategy board; now the head of HR reports directly to the CEO.


“At the end of the day, everybody had an excuse for why results were not as promised. Everything became a compromise to all parties.”
—Rob Kleinbaum, GM executive-turned-consultant

“People can focus on it to mean HR doesn’t have a seat at the table. That can be a pretty obvious observation,” Oster says. But, she explains, Henderson believes that employees in the past spent too much time in meetings and preparing for meetings that were unproductive. In his quest for transparency, Henderson has established something of an open-door policy and, Oster says, encourages HR executives to simply bring issues directly to him.


“I think Fritz’s concept as I’ve heard him discuss it is, we don’t need everybody sitting around this table all the time, taking up a lot of productive work time. Whenever you need to, just bring it on in. And so that’s what we’re doing.” The operating model team, comprising 10 executives from various divisions worldwide, overhauled the company’s bureaucracy and the decision-making process at the top levels. Notably, Oster says, it dismantled GM’s bureaucratic “matrix” structure.


Criticized by some as byzantine, the matrix was intended to foster collaboration by having workers report to various managers in different departments simultaneously. Rob Kleinbaum, a GM executive-turned-consultant, said the matrix made it difficult to hold managers accountable because responsibility for decisions was diffused among multiple supervisors.


“At the end of the day, everybody had an excuse for why results were not as promised,” Kleinbaum says.


“Everything became a compromise to all parties,” says Kleinbaum, who wrote a paper in January, “Retooling GM’s Culture,” that was well-received by both the U.S. Treasury’s Automotive Task Force and GM. The paper said changing “structural” costs would not save GM. It needed to change its culture. Executives needed to be held accountable for results and performance; employee education needed to include exposure to how other industries and companies operate; promotions needed to be based on merit, not patronage; and meetings could not remain “exercises in procrastination, rubber stamping or idea killing, without anything that would pass for genuine debate and dialogue,” Kleinbaum wrote.


Henderson, who is known to be plain-spoken, accessible and unpretentious—as CFO he would travel in economy class while commuting to Detroit from his home in Miami—read Kleinbaum’s report and sent him an e-mail on May 9 praising the report and saying it had “touched on a number of important points as we look forward regarding culture.”


Paraphrasing Albert Einstein, Henderson wrote that “the definition of insanity is doing the same thing over and over again and expecting a different result. This is especially and directly relevant with regard to culture.”


Shifting the culture
On July 30, GM announced its “simplified leadership team” and the retirement of Barclay, who had worked in human resources at GM since 1978. That Mary Barra, her replacement, is an engineer was a fact that pleased many current and former engineers at the company. They felt that HR did not reflect the manufacturing ethos of efficiency and continuous improvement.


GM declined to make Barra or Barclay available for this article.


Having an engineer as the head of HR will be “a major adjustment for those [in HR],” says Matthew Beatty, a process-improvement coach who was laid off after 28 years at the company, including eight years in HR. “And I’m not sure that’s a bad thing.”


At the end of July, with the structural changes in place, GM disbanded the operating model team and focused squarely on changing its culture. That task fell to the 12-member culture transformation team, led by Oster and supported by HR.


Meeting Tuesday nights, the culture team came up with four ways it felt it could embed the new culture in the company’s day-to-day operations: The company would replace its performance management system; it would create an education series to explain what the new culture is and what is expected of leaders; it would use internal and external communications to communicate the company’s new values; and finally, it would launch Building the Movement.


Perhaps more than anything else, Building the Movement reflects GM’s new approach toward helping the salaried workforce live the company’s new values of customer/product focus, speed, risk-taking and accountability. The company has set out to identify employees who already exhibit the new values and turn them into models for others to emulate. The change reflects the company’s move away from hierarchical decision-making, Oster says.


“I think in the past … our culture-change efforts were way too top-down. They were rollout-oriented,” Oster says. “So now we’ve got efforts at the base, at the middle, at the top and all throughout.”


To help, GM has hired workforce leadership consultants Jon Katzenbach and Niko Canner, of Booz & Co. Katzenbach’s book Why Pride Matters More Than Money sits on Oster’s desk. Published in 2003, the book has a chapter about General Motors in which Katzenbach acknowledges how large, globally diffuse organizations like GM have trouble exporting cultural change from one niche across the company. The antidote, Oster says, is the Building the Movement concept. Oster credits Katzenbach, whose company declined requests for an interview, for taking complex ideas and making them “actionable.”


The goal is to democratize decision-making, not for its own sake, but so that employees who are closer to a product, a customer or a problem can act quickly and decisively to ever-changing market conditions.


At its heart, the movement appears to be an attempt to implement the new cultural values by teaching workers at any level that they can make decisions in their areas of expertise, rather than go up the chain of command as they did in the past. Doing so would clearly allow the company to move quickly to respond to the needs of customers and products. With individuals making decisions, the company would also have an easier time identifying who is accountable. But all of this requires a certain amount of risk-taking, and as Oster says, “Risk-taking is probably going to be one of the toughest of the cultural priorities.”


The Aztek lesson
In the past, current and former GM employees say, no decision was made without meeting on it first. Given that GM was a company full of engineers and finance managers, every decision required reams of data. With entrenched hierarchies and bloated executive ranks, no one wanted to criticize a project that wasn’t working for fear of a boss’s reprisal, current and former midlevel managers say. Decisions were made slowly and often to the detriment of a product. A classic example is the Pontiac Aztek, a midsize sport utility vehicle.


Brenda Peinado, a global supply chain manager who was laid off in April after 25 years with the company, said she worked with engineers on the Aztek, which had gotten bad reviews from internal focus groups before it was launched in 2001.


“Nobody had the guts to say ‘Stop,’ ” Peinado says. “We know for a fact that they were getting bad feedback.” The homely Aztek was widely criticized as being designed by committee. Rated the ugliest vehicle ever by readers of the Daily Telegraph in London and one of the worst cars of all time by Time magazine, the Aztek was discontinued in 2005.


“I think in the past … our culture-change efforts were way too top-down. They were rollout-oriented. So now we’ve got efforts at the base, at the middle, at the top and all throughout.”
—Chris Oster, director of global change management and organizational development, GM

By contrast, the new GM has moved swiftly to kill products deemed unpalatable by focus groups. Characteristic of the zeal radiating from the new GM, an executive announced on a GM blog that the new executive committee had decided to kill a Buick model days after it was unveiled to customers and the media.


“And what we decided to do in response is a good example of the essence of the new General Motors … acting quickly, and boldly, and listening to feedback from customers, employees, dealers, media and just about anyone else with an opinion,” wrote vice chairman Tom Stephens.


On whiteboards in one of GM’s conference rooms is the culture team’s suggestions for how to institute—through processes and policies—their new cultural priorities: “zero tolerance” for leaders who do not demonstrate the new cultural priorities; design leadership forums; create an induction to the new GM principles; build trust; help people make better decisions on their own.


“That’s a lot of what Fritz is after,” Oster says. “Take out layers, take out junk. Trust me to do my job.”


Real change this time?
Will the appetite for change and for risk remain once the effects of bankruptcy wear off? GM has a history of trying to change its culture. No effort ever went far enough. The company’s internal Web site contains the remnants of past efforts. Headings of old mission statements sound eerily familiar. “Cultural Priorities,” one reads. “Enhance our product and customer focus; embrace stretch targets; move with a sense of urgency.”


“It is easier to take risks when you have no choice. Like a quarterback with one second left in the game, it’s easy to throw a Hail Mary pass.”
—Sreedhar Bharath, assistant professor of finance, Ross School of Business

As if to repudiate the similarities between past culture efforts and the current one, Henderson wrote during a June Web chat with employees and the public that speed is not “a sense of urgency, it is speed.”


But if bankruptcy spurs change, success after bankruptcy can lead back to complacency, says Sreedhar Bharath, assistant professor of finance at the Ross School of Business at the University of Michigan. The closest example is Chrysler in the 1980s. After emerging from near-bankruptcy in 1978, Chrysler had a hit with the invention of the minivan. The company then hoarded cash and, fearful of taking missteps that might lead to ruin, returned to risk aversion, Bharath says.


“It is easier to take risks when you have no choice. Like a quarterback with one second left in the game, it’s easy to throw a Hail Mary pass,” Bharath says. “But then once you get a lead, many teams play conservatively to cling to their lead. Then they end up losing. That is exactly when they don’t take the positions they should take. I think that analogy applies to business.”


So far, in the immediate aftermath of bankruptcy, the company is living the new culture. And employees are noting a difference. Risk-taking is encouraged. Communication is better, they say. The company is more transparent.


“This is going to be a great company to work for,” says Michelle Valentine, an engineer who retired this month. “I can see it already.”


During the June Web chat, Henderson got a pointed question from one participant, who asked bluntly why he thought GM would succeed. Henderson replied that until now he had spent 95 percent of his time on the company’s “massive problems.”


He also wrote in his reply: “We have a once in a lifetime opportunity to get these problems solved permanently so we can get back to how to truly win, which is being obsessed as a company with fantastic products and delighting customers.”


Workforce Management, October 19, 2009, p. 1, 25-34 — Subscribe Now!