Hawaii Health Care-Chapter 3


Chapter 3


Part I of this study, entitled Factors Influencing Competition Among Health Plan Providers,6 was completed in late 1994. The following items update the material presented in that report.

Chapters 2 and 3--State Law; Health Maintenance Organizations

Chapter 2 examined the exiting state laws that address health plan content and the organizations that offer plans. Chapter 3 described the operational characteristics of health maintenance organization (HMO) plans as distinguished from traditional indemnity coverage.

Health Maintenance Organization Act

House Bill No. 1918, H.D. 2, S.D. 1, was passed during the 1995 regular session of the Legislature and enacted as Act 179. This measure established a new chapter of the Hawaii Revised Statutes providing for the regulation of health maintenance organizations to become effective January 1, 1996. The measure, as passed, is substantially similar to part 1 of H.B. No. 3430, H.D. 2, S.D. 2, passed during the 1994 regular session but subsequently vetoed by the Governor.7

Section 1 of Act 179 defines an HMO as "...any person that undertakes to provide or arrange for the delivery of basic health care services to enrollees on a prepaid basis, except for enrollee responsibility for copayments, deductibles, or both."

The key provisions of Act 179:

As noted in the interim findings of Part I of this study, the financial and organizational elements of HMOs were not subject to state regulation prior to enactment of this measure. By defining HMOs, establishing financial standards, and giving the Insurance Commissioner regulatory authority over their basic financial practices, the new law establishes comparable requirements for all health plan providers regardless of their business structure or method of service delivery.

While the HMO Act takes effect January 1, 1996, administrative rules to implement its provisions have not yet been adopted.

Chapter 6--Health Plan Providers

This chapter described the organization, operations, rate setting methodology, and finances of a sampling of the State's health plan providers. Developments during the past year in this area include the following.

Hawaii Medical Service Association (HMSA)


A new plan, HealthLink, was developed in cooperation with the Hawaii Business Health Council.8 It is an HMO that includes a "point-of-service" option. This allows members to receive benefits outside the plan's health center, in effect, adding an indemnity type option to the basic HMO service package.9 HealthLink took effect January 1, 1995 and is currently offered by Outrigger Hotels, four Hawaiian Electric Industries, Inc. subsidiaries, and four other companies.10

In April, a cap of 75,000 (with minor exceptions) on the number of QUEST clients that HMSA can enroll for the islands of Oahu, Kauai, and the Big Island, except for Ka'u. This, in effect, froze HMSA's QUEST enrollees at the current level.11


In 1994, HMSA's operating revenues exceeded $1 billion and its investments were valued at $354 million. Net investment income dropped from $30 million in 1993 to $3 million in 1994.12 This was the result of changes in the overall market and, according to the Insurance Commissioner, losses from its investments in volatile mortgage-based derivatives. Prior to release of the Commissioner's findings, the HMSA board of directors reviewed and revised its investment policies. Current policy limits investments in these types of securities to twenty- five percent of fixed income investments and prohibits investment in certain types of complex derivatives.13 It should be noted that although HMSA's 1994 earnings from investments dropped, it still achieved a net gain of $3 million. The Insurance Commissioner and HMSA's board of directors agree that the organization is financially sound.14

HMSA's federal tax liability increased from $6 million in 1993 to $9 million in 1994.15

Hawaii Dental Services-Medical (HDS-Medical)

According to the 1994 Report of the Insurance Commissioner of Hawaii, HDS-Medical paid claims of $10.7 million and wrote direct premiums totalling $14.8 million as of December 31, 1993. They represent increases over the previous year. The Commissioner's report also indicates a net loss of $1 million for HDS-Medical for 1993.

HDS-Medical declined requests for interviews for this study.

Pacific Group Medical Association (PGMA)

PGMA became operational in September 1993. The Insurance Commissioner's 1994 Report reflects that in PGMA's first full year of operation it had assets of $1 million, premiums written of $882,000 and benefits paid of $52,000. PGMA had a net gain for the year of $60,000.

Hawaii Management Alliance Association (HMAA)

The Insurance Commissioner's examination of HMAA in 1995 identified potential self-dealing as the result of fees and commissions paid to for-profit corporations controlled by HMAA's directors and officers. As of December 31, 1994, HMAA, a nonprofit mutual benefit society, provided health insurance coverage to approximately 13,000 members through 1,200 employers.16

On December 31, 1993, HMAA's financial condition reflected a net loss of $1 million according to the Insurance Commissioner's 1994 annual report.

HMAA did not respond to the requests for an interview for this study.

Kaiser Permanente


Kaiser Permanente's Hawaii operations added two clinics for a total of fourteen and now serves all four counties. It now markets its plans both directly and through agents.17 Previously Kaiser Permanente did not use agents in its marketing strategy.

In 1994, Kaiser Permanente began a two-year "point-of- service" pilot program for members whose employers belong to Small Business Hawaii. Under the new option, the patient pays for services of non-Kaiser care and is reimbursed by Kaiser for a percentage of the cost.18 Like HMSA's HealthLink, this is a product that combines HMO and indemnity coverage.

In September 1995, Kaiser Permanente and Queen's Medical Center joined to contract with the Hana Medical Center to provide physician administrative services in Hana, Maui. HMSA and HDS- Medical agreed to honor billings from Kaiser Permanente for services provided under this agreement.19

Kaiser Permanente has started issuing annual reports on quality of medical care. The reports compare key indicators of quality of care provided by Kaiser with care provided generally in Hawaii and nationally. Reports of this type are increasingly used on the mainland to help consumers evaluate different health plans.20


Nationally, Kaiser Permanente's assets exceeded $10 billion, with cash and marketable securities amounting to $2 billion and revenues of $12.3 billion in 1994. These figures all represent increases over those for 1993. Similarly, the Hawaii Region's 1994 revenues of $367 million, member dues of $276 million and expenses of $334 million were all greater than the figures for 1993.21

Straub Clinic and Hospital


Straub has ten clinics in addition to its main hospital and offers two HMO plans one of which was approved in 1995 and offers lower copayments than that provided under their original HMO plan. Membership in the original plan remains at an estimated 3,500. Straub is a QUEST provider serving some 5,000 members.

The Queen's Health Systems (QHS)


QHS formed a new HMO, Queen's Hawaii Care, to serve Department of Human Services clients under the State's QUEST program. The new HMO has some 29,000 members as of December 1995.22

As noted in the preceding discussion of Kaiser Permanente, Queen's and Kaiser have joined to provide medical and administrative services for the Hana Medical Center.


AlohaCare is a new Hawaii-based HMO organized to serve QUEST clients. It contracts with 400 participating physicians and has two main service centers in Waimanalo and Waianae. AlohaCare has more than 20,000 members on Oahu, Kauai, and the Big Island.23

Chapter 7--The Competitive Environment

This chapter discussed the national and local factors that characterize and help shape today's health plan marketplace.

National Factors

Insurers and Managed Care

Hawaii's health plan market place continues to be dominated by HMSA and Kaiser Permanente, both of which are nonprofit organizations. Commercial insurers and for-profit HMOs are not significant factors in the State. This is the reverse of national trends which reflect dominance by commercial insurers and for-profit HMOs, and market consolidation through mergers between the two types of plan providers.

In 1994, the nation's largest HMO organization, United Healthcare Corporation, purchased Metrahealth, a traditional indemnity insurer. The merger created America's largest provider of health plans. (Metrahealth was only one year old having been formed by an earlier merger of health insurance elements from Metropolitan Life and Travelers. It has one plan approved by the Department of Labor and Industrial Relations under the Prepaid Health Care Act.) When combined, the two organizations have revenues of $2 billion, net income of $129 million and membership of 14 million. By comparison, at the end of 1994, Cigna and Aetna, which are also large, publicly traded for-profit health plan providers, had 3.3 and 3.0 million members respectively.24 While these national companies all operate preferred provider networks in Hawaii, their market shares are less than two percent.25


The Civilian Health and Medical Plan for the Uniformed Services (CHAMPUS) is the federally controlled health plan for some 82,000 military family members in Hawaii. The award, in 1994, of the contract to Aetna Government Health Plans in association with HMSA was challenged by an unsuccessful bidder. The challenge was upheld and the Hawaii subcontract is now with the Queen's Health Systems.26

Local Factors

State Oversight

Act 179, Session Laws of Hawaii 1995, the Health Maintenance Organization Act is to become fully effective January 1, 1996. The new law will give the Insurance Commissioner regulatory authority over the financial activities of HMOs similar to that currently in effect for commercial insurers and mutual benefit societies.

Provider Practices

The distinction between traditional indemnity coverage and the HMO capitated payment system becomes less clear as insurers develop HMO products and HMOs include indemnity coverage in their plans. Some Blue Cross/Blue Shield organizations on the mainland are developing Integrated Delivery Network (IDN) alliances each of which is designed somewhat differently in response to local conditions.27 The focus of IDNs is the delivery of managed care within a structured network that can offer plan members a broad choice of care providers. Ideally, physicians and other care providers, hospitals, and plan administrators, are all equal players in the system. IDN is a flexible concept and administrative participation for an individual network is reflected in the membership of its board of directors.28 Locally, the Hawaii Business Health Council, HMSA, and some Honolulu hospitals are currently exploring the possibility of developing IDNs. An organization's affiliation with an IDN is not exclusive and members may participate in several networks.

Kaiser Permanente's new "point-of-service" pilot plan and HMSA's HealthLink are further examples where the once clear line between HMO and indemnity plans is starting to blur.

Vision 200029

On September 8, 1995 a conference was held to identify key issues in the area of health, and develop strategies to address those issues. The conference was an initiative of the private sector and was a collaborative effort of the business community and the health care industry. The conference resulted from the work of task forces focusing on efficiency, the medical/legal environment, cost shifting, human resources, consumer education, and implementation. They had met during the prescribing year to develop reference and recommendations. The Hawaii Health Council was formed as a result of the conference.

Legislative Proposals

Senate Bill No. 1233, as introduced during the 1995 Regular Session, provided for the regulation of HMOs and also included provisions requiring mutual benefit societies to file either schedules of rate premiums or the rate setting methodology with the Insurance Commissioner. It also gave the Commissioner authority to disapprove the filings if the result would be excessive, inadequate or unfairly discriminatory. The HMO regulation section of the bill was enacted as Act 179, Session Laws of Hawaii 1995. Senate Bill No. 1233, S.D. 2, H.D. 2, was pending conference committee referral at the close of the 1995 Special Session. In that form both the rate and HMO regulation sections had been deleted from the bill, leaving it vehicle for other regulatory items. It may be further amended to re-visit the issues of rate regulation during the 1996 regular session.

The House Committees on Consumer Protection and Judiciary deleted the rate regulation provisions from the Senate bill, noting in House Standing Committee Report No. 1150, dated March 23, 1995, that HMSA had testified that it was not fair to impose these requirements on only one segment of the health plan industry.

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