Factors Influencing Competition Among Health Plan Providers2 was the first of a two part study requested by the 1994 regular session of the Legislature in H.R. No. 200, H.D. 3. The resolution requested that the Legislative Reference Bureau examine competition among the organizations that offer group health plans in Hawaii and that the first part of the study address the general environment within which health plan providers operate and the features of that environment that influence competition among plan providers.
Specifically, H.R. No. 200, H.D. 3 (1994), requested that Part I:
The resolution reflects concerns about the relationships between the organizations that administer health plans and health plan providers, the competitive environment and practices of the organizations and businesses that offer health plans, and the impact and level of state oversight of the different aspects of the industry.
Part I Study Parameters and Approach
Part I of the study examined the issues raised in the context of a simple product-producer-consumer economic model where health plans are "products", the entities that offer plans are "producers", and employers constitute the largest group of "consumers". The product and producer elements of the model were examined, identifying the key state statutory and regulatory provisions that influence the business environment, the characteristics of the health plan marketplace, and the structure of the organizations active in that marketplace. In order to simplify one set of variables in the product-producer-consumer model, the report focused on employer-sponsored prepaid health plans. The approach allowed the issues of competition to be examined in a situation where producers are marketing comparable products. The approach is continued in the current report.
Hawaii's Prepaid Health Care Act3 (PHCA), chapters 431 and 432 of the Hawaii Insurance Code (Code), and their implementing rules form the basic statutory environment within which health plan providers operate. The PHCA sets minimum coverage requirements, and defines the employees and employers subject to its provisions. It is administered by the Department of Labor and Industrial Relations. The Code regulates the financial practices of organizations that offer health plans that indemnify insured individuals. Commercial insurers, mutual insurers, mutual benefit societies, and fraternal benefit societies are subject to the Code. (Beginning January 1, 1996, health maintenance organizations (HMOs) are similarly regulated by the Insurance Commissioner.4 )
A discussion of the indemnity and HMO methods of delivering health plans, and the three basic rate setting methodologies are also covered in the Part I report.
The report describes the market for health plans and the contractors active in that market, including the organizational structure, finances, operations, and rate-setting methodologies of a sampling of health plan providers.
The Part I interim findings are as follows:
Most health plan providers are organized as groups of affiliated corporations with the parent corporation being: (1) a regulated commercial insurance company, (2) a nonprofit mutual benefit society, or (3) a hospital-based profit or nonprofit corporation. The importance of health plans relative to other activities of the organization is reflected in the way the affiliated group is structured. For example, Kaiser Permanente's activities center on administering and operating its health maintenance organization (HMO) health plans. Two of the three corporations that comprise Kaiser Permanente share the same board of directors and the third contracts exclusively with the Health Plan organization to provide the professional health care services to its members.
At the other extreme, the commercial insurance companies are generally affiliations of numerous corporate entities that offer a variety of financial products. Their health plans are only one of those products and, in Hawaii, do not represent a major segment of their financial base.
It is not uncommon for a health plan provider to contract with another for certain services that are outside its area of expertise. The Queen's Health Services' preferred provider organization is used by several regulated insurers, and Straub Hospital and Clinic's plan is administered by the Hawaii Medical Service Association (HMSA). At the same time, both Queen's and Straub are among the hospitals that are participating providers for a number of health plans in addition to those offered by their parent organizations. Tension both within an organization and among the plan providers may arise in this type of environment.
Health Plan Benefits and Coverage
For the purposes of this study, the health plan industry is examined using a simple producer-product-consumer economic model. Under this model, a standardized or uniform product facilitates identification of the competitive factors at play by eliminating one set of variables. The study, therefore, focuses on health plan benefits required under Hawaii's Prepaid Health Care Act. This is a comprehensive package of health care and hospitalization benefits offered as an employee benefit to most private sector employees. Employers are required to offer PHCA qualified plans to employees. PHCA also defines the maximum amount of cost-share with employees.
In 1992, an estimated 955,000 persons in Hawaii were covered by a health plan, in most cases, through an employer as active workers or retirees, or the immediate members of their families. Kaiser Permanente and HMSA accounted for some seventy-five percent of this coverage. Commercial carriers, The Queen's Plan, HDS-Medical, and Hawaii Management Alliance Association (HMAA) each cover under ten percent of the total.
Financial Requirements and Taxes
Mutual benefit societies and commercial insurers must, by state law, maintain reserves to protect their members and policyholders. Reserve provisions do not apply to other types of organizations. For-profit organizations are taxed at both the state and federal levels, and also strive to generate acceptable profits for their owners and stockholders. Tax-exempt groups must return all revenues to the activities for which the exemption is granted. For plan providers that are organized as affiliations of more than one corporate entity, the tax status of each corporate unit is determined independently. Thus, it is not uncommon for a health plan provider to have both taxable and exempt components.
Providers not subject to the federal rate-setting provisions for HMOs generally blend experience, demographic, and community rating methodologies. Under experience rating a group's previous and projected claims experience is used to establish its rates for the contract period and different groups may have different rates. With community rating, the experience and projected requirements of all groups covered by the provider are combined and the same rates apply to all groups. Adjusted community rating allows some variation among groups based on group size and costs of administration. Demographic rating uses key characteristics such as age, sex, and industry for each group to determine its rate.
In order to be competitive, health plan providers must offer rates and benefits that compare favorably with Kaiser Permanente, which follows the federally established methodology, and HMSA, which uses different methodologies depending upon the size of the group and the type of plan involved.
Size of Provider Organizations
There appears to be little, if any, correlation between the organizational size of health plan providers and the size of their operations in Hawaii. Organizationally and financially, the regulated commercial insurers are the largest entities offering health plans in the State. However, they currently provide coverage for less than ten percent of the civilian population. Factors other than gross financial resources that characterize Hawaii's two major plan providers are:
Oversight of the financial and operational aspects of health plans in Hawaii is not centralized or uniform. The Insurance Commissioner monitors certain financial elements of regulated insurers and mutual benefit societies. However, HMOs are not subject to financial examination by the State.5 Neither the amounts of health plan rates nor the methods used to develop them are regulated by the State. (Federally qualified HMOs must comply with certain requirements regarding their finances, rate- setting practices, and plan benefits.)
The Department of Labor and Industrial Relations (DLIR) administers the Hawaii Prepaid Health Care Act which mandates the benefits package that must be offered to most private sector employees. Plans covering the self-employed and government workers are not subject to PHCA. Oversight of the financial capacity of self-insured employers is the responsibility of DLIR.
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