Hawaii Health Care-Chapter 6


Chapter 6


The structure of an organization reflects its primary function or purpose, the relative importance the activities in which it is engaged, and the financial and professional assets available to its various enterprises. Its ability to respond to competitive forces in the marketplace is also shaped by its basic structure. Hawaii's health plan providers operate under a variety of organizational structures ranging from Kaiser Permanente's closely held vertically integrated health maintenance organization (HMO) to the multi-state commercial insurers for which Hawaii health plans are just one of a myriad of their financial products.

Internal Organization

As discussed in the interim findings for this study (see chapter 2), the State's health plan providers are organized as groups of affiliated corporations with the parent corporation being a regulated insurer, mutual benefit society, or hospital- based organization. The focus of the parent corporation, rather than organizational size, appears to be a principal factor in its ability to capture and retain a major share of the health plan market. The corporate focus guides the allocation of resources to support and promote its health plan products. Organizations that are involved in a variety of activities must resolve competing demands within the organization as well as face competition from other providers.

The fact the Hawaii Medical Service Association (HMSA) and Kaiser Permanente continue their historical domination of the market supports this assessment. HMSA's constitution and bylaws provide that it shall operate as a nonprofit medical indemnity and hospital service association and its resources are directed to that end.39 Kaiser Permanente is organized to support its group practice prepayment system of comprehensive medical and hospital services.40 In contrast, the Queen's Health System developed from the Queen's Hospital Corporation and the Queen Emma Trust established to support hospital and health care for Hawaiians. Its prepaid health plan and preferred provider network are not principal functions of the organization.41 Commercial insurers are affiliations of numerous corporate entities organized to generate profits for their stockholders by marketing a variety of financial products. In Hawaii, health plans generally are not priority products for commercial insurers.

Contractual Relationships

All health plan providers in Hawaii contract with other plans or care providers, or both, for some aspects of their programs. These relationships are shaped by the areas of expertise and corporate focus of each organization and the types of health plan involved.

In general, the commercial insurers and mutual benefit societies' strength is plan administration, billing and account maintenance, marketing and investment activities. Some mutual benefit societies provide administrative and actuarial services to competing organizations and may lease their preferred provider networks (PPNs) to other plan providers. At least one hospital- based provider contracts out for plan administration while also participating in the PPN and HMOs of other health plans.

Only Kaiser Permanente uses exclusive contracts among its plan, hospital and physicians group to support its HMO. It does not administer other plans; the physicians group does not participate in other health plans; and the hospital and clinics serve only Kaiser Permanente members.42 Its "stand alone" system appears to have a competitive advantage in the HMO market due to the fact that essential information can flow freely within the organization and is not accessible to its competitors. However, vertical integration based on exclusive relationships is costly in that it must support its own service delivery system. The capital investment needed reflects a long term commitment to the program.

Contracting out elements of a plan that are beyond the provider's basic expertise and resources is the more common practice and allows programs to develop and change in response to market conditions.

Hawaii's existing network of changing contractual relationships among plan providers leaves the providers simultaneously cooperating and competing. Tensions exist in this environment where one party may be suspected of looking to its own interests first and its contractual obligations second.

Tax Status

The taxes imposed upon a plan provider are cost elements of their plans and the ability to take advantage of tax exemptions clearly gives a competitive advantage to an organization. The tax status of plan providers depends upon the statutory provision under which it is formally organized.

With the exception of Straub Clinic and Hospital, Hawaii's health plan providers are organized as affiliated groups of both taxable and nontaxable organizations. Hawaii Medical Service Association (HMSA) is a state tax-exempt mutual benefit society with taxable subsidiaries. Kaiser Permanente is an affiliation of three corporations one of which is taxable. Queen's Health Systems is a hospital-based system of some twenty taxable and non-taxable privately held corporations associated with the Queen Emma Trust. The Straub Clinic and Hospital is a privately held for-profit corporation. Hawaii Dental Services - Medical, Hawaii Management Alliance Associations, and Pacific Group Medical are mutual benefit societies.46

HMOs and Indemnity Plans

Under the HMO capitated payment system there are direct contractual obligations between the policy holder and the plan, and between the plan and specific health care providers. Efficiencies are possible in the area of administration because a much simpler billing and claims system is possible. Also, under HMO plans, incentives for over utilization of services or facilities are minimized. (Critics of the HMO system claim that its organizational incentive is to provide less care than may be medically appropriate.)


In an effort to realize comparable efficiencies, indemnity plans have developed refinements to the historic system under which the policy holder is reimbursed a set amount for each covered event and the insurer merely confirms that the service was provided. PPNs are a major innovation in this regard. The indemnity plan contracts with networks of care providers and facilities to provide services to policy holders at reduced rates, and encourages its policy holders to use their preferred providers. Usually, preferred providers bill the plan directly for services. This speeds payment processing to the provider and relieves plan members of the responsibility for filing claims. (This also serves as an incentive to care providers to join a plan's provider network.)

Indemnity plan providers are exploring other approaches to better control costs and care utilization. Integrated Delivery Networks (IDNs) (see chapter 3) reflect a growing interest in developing formal organizational relationships among insurers, health care professionals and facilities and plan purchasers. IDNs generally seek to achieve the efficiencies of HMOs without the capitated payment system.

A provider may offer both indemnity and HMO health plans and a variety of either type so long as they are properly licensed by the insurance commissioner. Employer-sponsored plans must be approved by the Hawaii Department of Labor and Industrial Relations pursuant to the Prepaid Health Care Act.

Regulation of Organizations

Prior the enactment of Act 179, Session Laws of Hawaii 1995, the 1995 HMO Regulation Act, HMOs were not subject to state regulatory oversight with regard to their operations or financial practices. With passage of Act 179, indemnity providers and HMO providers are subject to comparable regulatory oversight by the state Insurance Commissioner under the State Insurance Code (Code).47 The Code and Act 179 establish organizational requirements and provide for State oversight of the financial practices of health plan providers.

Under the Code, mutual benefit societies are allowed to invest in the same instruments (or, put another way, have their investments subject to the same restrictions) as commercial insurers.48 Act 179 requires the state Insurance Commissioner to establish rules for investments by HMOs.49 The administrative rules implementing Act 179 have not been adopted as of this writing. In addition, annual audits are required of HMOs and commercial insurers50 while mutual benefit societies need only file certain financial exhibits.51

With passage of Act 179, there does not appear to be a significant competitive advantage for one type of provider over another with regard to regulatory matters.

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