IN HAWAII'S HEALTH
PERSPECTIVES ON COMPETITION
Opinions about competition in the health plan marketplace
reflect the observer's position in the industry. Regulators'
concerns center on the ability to enforce existing law and
whether the laws adequately protect the public interest.
Employers look for value for their premium dollar, an affordable
product, and a marketplace that is responsive to their needs.
Health plan providers want a "level playing field", the
flexibility to design and deliver a product that is responsive to
market demands, and a minimum of government regulation.
The characteristics of the marketplace itself also influence
these views. As discussed in Part I of this study,34 they
- Coverage for more that half the population is provided
by a single plan provider, Hawaii Medical Service
Association (HMSA). In addition, HMSA contracts with
some other providers to administer their plans including
actuarial analysis services. It is the fiscal
intermediary for the federal Medicare program in Hawaii.
- More than ninety percent of health plan coverage is
provided by or through tax exempt nonprofit entities.
These providers are in direct competition with taxable
commercial insurers and for-profit health maintenance
- Hawaii's Prepaid Health Care Act (PHCA) requires that
virtually all private sector employers provide
comprehensive health care coverage for their employees,
and defines the maximum amount of cost-sharing with
- State programs offer comprehensive coverage to state and
county workers, public assistance recipients, and low
- State regulation of the industry is fragmented.
Oversight in the area of health plan coverage provisions
may be the responsibility of the Department of Labor and
Industrial Relations, the Department of Human Services,
or the Hawaii Public Employees Health Fund, depending
upon the population served. Financial oversight is the
responsibility of the state Insurance Commissioner in
the case of mutual benefit societies, commercial
insurers, and, as of January 1, 1996, health maintenance
organizations. Determination of an organization's tax
status is made by the Department of Taxation.
The Regulators' Perspective
The Insurance Commissioner is charged with licensing and
monitoring the financial practices of commercial insurers,
nonprofit mutual benefit societies and, as of January 1, 1996,
HMOs. Issues raised in interviews with the Commissioner and key
- HMSA's dominance of the marketplace can be compared to
that of a public utility and may justify similar rate
review and approval.
- The Insurance Commissioner's authority to monitor
financial practices such as investment of reserves,
maintenance of adequate reserves and unfair competitive
practices varies, based upon whether the plan provider
is a commercial insurer, HMO, or mutual benefit society.
This authority does not extend to affiliated groups that
may, in fact, be essential elements of a health plan
provider's administration and service delivery. This
limited authority is not sufficient to prevent or
respond to possible failure of a plan provider due to
poor financial management.
- The Insurance Commissioner has no authority to review
rate setting methods or practices of health plan
providers. Since health plan premiums are the primary
source of providers operating revenues a key element of
their financial picture is exempt from state oversight.
Department of Labor and Industrial Relations (DLIR)36
The federal Employees Retirement Income Security Act of 1974
(ERISA) had the effect of freezing Hawaii's Prepaid Health Care
Act in its original form except as to nonsubstantive
administrative amendments. This has prevented the State from
statutorily updating its provisions. Thus, the Department is
limited in its ability to respond to changing conditions.
However, DLIR's Prepaid Health Care Advisory Council has
supported and the Director has authorized a variety of plans
which they have determined are comparable to the coverage set
forth in PHCA.
The Health Plan Providers' Perspective
The perspectives of plan providers, including independent
agents, reflect a highly competitive environment that, at the
same time, involves affiliations and alliances among competing
entities. The following issues were raised by the health plan
providers who agreed to be interviewed for this study. Due to
the sensitive nature of some of the issues raised, the comments
have been consolidated and specific sources are not identified.
However, a draft of this material was circulated for comment to
all who participated in the study, and this section reflects
- Some plan providers find it unnecessarily difficult (as
they see it) to get new plans approved by DLIR. Some
believe that DLIR staff recommendations have an undue
influence on the decisions of the Prepaid Health Care
Council. There is concern that a provider's membership
on the Council gives them an unfair advantage with
regard to recommendations for approval or denial of
- While commercial insurers declined to participate in
this study, it was suggested that their small share of
the market could be attributed to the fact that they are
subject to the state 4.265 percent gross premiums tax
and cannot profitably compete in a market dominated by
tax-exempt providers. Reluctance to market plans in
compliance with PHCA was also mentioned. Neither of
these views has been confirmed by a representative of
- HMSA's large database of clients and service utilization
gives it an unfair competitive edge in both rate and
- As administrator for some competing health plans, HMSA
has access to proprietary information that could be used
- Some health plan providers avoid covering high risk
groups in order to limit their exposure to costly
claims. Plan providers that are new to the market or
cover a small number of clients are more likely to
practice this type of "skimming".
- While inadequate reserves could result in a provider
being unable to meet its obligations, it is also
possible for providers to accumulate excessive reserves
and use them to subsidize or underprice their plans in
order to drive out competition.
The Employers' Perspective
In a survey conducted for this study, small businesses were
asked about their views regarding state regulation of health plan
providers. The number of responses was disappointingly small.
Of approximately sixty surveys distributed, only twelve responded
(see Appendix B). The respondents were, with one exception,
located on Oahu. Most had fewer than ten employees. However,
four had more than ten. Three reported having an employee
assigned full-time to human resource/personnel management tasks.
The type of business of the respondents was quite diverse
including manufacturing, retailing, construction, and
professional service. None were unionized. The health plan
providers serving the respondents were (in alphabetical order)
HMAA, HMSA, Kaiser Permanente, PGMA, and Washington National
Ins., and two reported that their plans were provided through a
parent organization or business affiliation.
Generally, those who responded were satisfied with the level
and impact of competition in the health plan marketplace, and
they did not support state regulation of the industry. It is
impossible to say whether the lack of response by the majority of
those surveyed indicates a similar level of satisfaction. It is
noteworthy, however, that given an opportunity to express their
satisfaction or lack thereof with the health plan marketplace,
few felt moved to complain. Specifically, the twelve responses
received reflect the following positions.
- Nine believe that they have a good choice of plans and
prices under existing conditions, that excessive
competition is not a problem, and that competition among
health plan providers has increased in the past five
- Only two felt that there is not real competition in the
area of prices, while five felt that competitive benefit
packages are not available.
- Seven supported a suggestion that more health plan
providers be encouraged to enter the Hawaii marketplace.
- None believed that health plan premiums should be
regulated by the State.
- Only two supported regulation of rate setting
methodologies, three were for regulation of plan
providers' financial practices, with one respondent
indicating a "maybe" on these issues.
- Ten respondents opposed setting a cap on the portion of
the labor force that any one provider could cover.
- Eight felt that the State should encourage the formation
of health plan purchasing alliances or cooperatives for
small businesses and sole proprietorships.
- The respondents were split evenly on the question of the
State defining and monitoring unfair competitive
practices for health plan providers.
One-half of those responding had changed plan providers
because of unacceptable rate increases and the
provider's refusal to negotiate critical issues.
Four indicated a change influenced by the availability
of a competitive package offered by another provider.
One had had a plan canceled and two changed providers
because of poor plan administration.
Plan Selection Factors
- The three factors that most respondents considered most
important in selecting a health plan were (1) the amount
of premium, (2) plan benefits, and (3) the geographic
- The factor of least importance in plan selection was the
providers willingness to negotiate, with one respondent
noting that providers refuse to negotiate.
Large Businesses 37
Many of Hawaii's large employers have operated in the State
for several decades and have long standing relationships with
established health plan providers. They find that health plan
providers are generally willing to negotiate on key issues. The
larger enterprises are more likely to offer a variety of plans
administered by different providers as well as a choice of plans
from an individual provider. They are more likely to have a
unionized labor force and include health benefits among
collectively bargained items, and have full-time professional
staff to develop and administer their employee benefits programs.
Dramatically rising health plan premiums in the late 1980s
and early 1990s prompted formation of the Hawaii Business Health
Council to examine the causes and possible solutions to the
problem. Most of the State's large employers are represented on
the Council. It provides a forum for its members to identify
areas of common interest with regard to employee health issues,
and to explore innovative options with health plan providers.
The HMSA HealthLink plan was developed in cooperation with
the Council. It has also been active in discussions with HMSA
and a number of health care providers relating to the possibility
of forming Integrated Delivery Networks (see chapter 3). In
these activities it functions as a purchasing alliance or
The large employers share with their smaller colleagues the
- Further state regulation of health plan providers is not
- Competition among health plan providers generates a good
choice of health plans.
- Competition has increased significantly over the past
They are concerned that:
- The Prepaid Health Care Council may be too conservative
in its consideration of proposed new plans and coverage,
and that conflicts of interest may occur in some
- As employers, they do not have access to sufficient
health care utilization data to permit them to evaluate
whether their health plan coverage is appropriate to the
needs of their labor force. (It should be noted that
HMSA will provide detailed peer utilization reports to
its large, experience-rated accounts.)38
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