State lawmakers are exploring structural changes to the Hawai'i Health Systems Corp., the state's public hospital system, to prevent it from collapsing under the weight of high labor expenses, a stack of unpaid bills to vendors, and reimbursement payments that fail to cover the costs of healthcare.

With no additional state money available to subsidize public hospitals because of the economic downturn, the structural changes may be the only options to stabilize a system many lawmakers see as a healthcare safety net in rural areas and on the Neighbor Islands.

The system is limping through the fiscal year while overcoming a $62 million deficit. Even after layoffs and spending restrictions to get through this fiscal year, system administrators predict a $35 million deficit in fiscal year 2010 and a $31 million deficit in fiscal year 2011.

"We've become a hollow, fragile organization," Thomas Dris- kill, the system's chief executive officer, told lawmakers on Friday.

The possible changes include:

• Authorizing public hospitals, such as Maui Memorial Medical Center, to become nonprofit or for-profit corporations to help attract private investment, expand service lines and reduce civil-service expenses.

• Creating a dual workforce in which existing public hospital workers would keep their state benefits but newly hired workers would be subject to new salary, work hours, health plan and retirement benefits negotiated with the Hawai'i Government Employees Association and the United Public Workers. System administrators believe that, due to attrition, more than half the workforce would be covered under the new rules after eight years.

• Allowing services such as housekeeping, maintenance and billing to be outsourced to the private sector to reduce civil-service costs.

• Giving the semiautonomous regional boards that help govern the system — instead of the Legislature — the authority to reduce hospital services subject to ratification by the system's board. The Legislature would still retain the option to reverse cuts in services.

Wesley Lo, the chief executive officer of the system's Maui region, said Maui Memorial has already attracted private investment and has had discussions with potential Mainland partners. Other public hospitals could follow Maui's example.

Driskill told lawmakers that labor costs at public hospitals — at about 65 percent of expenses — are substantially higher than at private hospitals. He said relatively modest changes, such as flex staffing to match staffing levels with patient demand, would save millions. He said administrators are working with the HGEA and UPW to try to resolve some of the labor issues through collective bargaining rather than legislation.

CHANGES THIS SESSION?

System administrators, lawmakers and union leaders met privately on Saturday at the state Capitol to discuss the structural changes. One participant in the meeting, speaking on condition of anonymity, described the talks as constructive.

State Sen. David Ige, D-16th (Pearl City, 'Aiea), the chairman of the Senate Health Committee, said lawmakers are interested in making the changes this session.

"The goal at the end of session is to have the Hawai'i Health Systems Corp. restructured to the point that they can be independent and not see the state subsidy increasing," he said.

The system oversees 13 public hospitals and has 4,200 workers and 800 affiliated doctors. It is the fourth-largest public-hospital system in the United States and is governed, in part, by five semiautonomous regional boards.

"If we are smart about restructuring the public-hospital system, it would mean that each region would fit into their community in the right way," said state Sen. Josh Green, D-3rd (Kohala, Kona, Ka'u), a Big Island doctor.

Lawmakers created the regional board system in 2007 to give public hospitals more freedom. At the time, several lawmakers were critical of Driskill's leadership and the management at system headquarters, and hoped the regional boards would be more responsive to hospital and community concerns.

But the regional boards took over as the economy fell into recession, which increased the financial squeeze on public hospitals already struggling with reimbursement payments from government and private health insurers that do not cover healthcare services.

DEMOCRATS' PROPOSALS

The state House and Senate have passed a resolution backing President Obama's economic stimulus package, which Hawai'i and other states hope will reduce their share of costs in Medicaid, the federal health insurance program for the poor and disabled. But, given the lagging economy, lawmakers and hospital administrators doubt the reimbursement picture will improve dramatically.

Senate Democrats have included a bill in their majority package to restructure public hospitals, a signal of their seriousness. In the House, majority Democrats are looking to provide incentives for doctors to practice in rural areas and to preserve healthcare for children.

State Rep. Ryan Yamane, D-37th (Waipahu, Mililani), the chairman of the House Health Committee, has a bill that would establish a loan repayment program for University of Hawai'i medical school graduates who practice in rural areas. The bill is a variation of a proposal last session from Green.

Yamane also wants to extend a pilot program on children's healthcare for another three years and require that children receive primary care through the program at federally qualified health centers.

Keiki Care, a previous partnership between the state and the Hawai'i Medical Service Association to provide basic healthcare for children who do not qualify for state insurance and are not in private care, was canceled by the Lingle administration last year.

State Rep. Jon Riki Karamatsu, D-41st (Waipahu, Village Park, Waikele), the chairman of the House Judiciary Committee, has proposed a package of bills designed to recruit and retain doctors and reduce their medical-malpractice insurance liability.

Karamatsu suggests a state patient compensation fund, similar to one that ended in the 1980s, that would help cover medical malpractice claims against doctors. The fund would be built through an annual surcharge on healthcare providers and administered by the insurance commissioner.

Karamatsu also proposed a $750,000 aggregate cap and a $250,000 individual cap on non-economic damages in malpractice claims, such as for emotional distress and loss of companionship. The state already has a $375,000 cap on pain and suffering. Another proposal would set a $1 million cap on noneconomic damages for specialists such as neurologists and neurosurgeons.

Karamatsu also suggests the creation of a Health Court to review malpractice claims by changing the composition and duties of the state's Medical Claims Conciliation Panel. He also proposes tax credits to offset malpractice insurance premiums for doctors who practice in rural or underserved areas.

House and Senate Democratic leaders, however, said there is significant resistance to the proposals. Doctors, some lawmakers believe, have not conclusively shown that caps on noneconomic damages would lower malpractice insurance premiums, convince doctors to practice in rural areas, or keep doctors from leaving for other states.

According to the claims panel, the number of malpractice claims in Hawai'i has been declining over the past decade.