Health insurance in Hawaii: paradise lost or found? - includes article on small business in Hawaii

Health insurance in Hawaii: paradise lost or found?

Some people think Hawaii is the worst environment in the United States to do business. They charge that the state is crippled by over-regulation, skyrocketing health insurance costs, demanding unions, inflexible limitations on health benefits configuration, and its legislature's tendency to mandate exotic benefits.

Despite all this, the state's health department calls Hawaii "The Health State" and points out that Hawaiians have the highest average longevity in the nation and the lowest rates of death from many major diseases such as cancer, emphysema, and arteriosclerosis.

Hawaii is also the only state that can legally require all employers - even those who are self-insured - to provide health coverage to most of their workers.

In addition, this year Hawaii became the first state to fund and fully implement a universal health insurance program. There are lessons for mainland employers in Hawaii's approach to health benefits.

An odd insurance market

Hawaii has an unusual health insurance market. It has no Blue Cross plan, but the Hawaii Medical Service Association - the state's consumer-controlled Blue Shield plan - insures about half the state's residents through traditional indemnity, HMO, or PPO plans. The Kaiser Foundation Health Plan insures another 15 percent of the population. Medicare is the third largest insurer. A variety of smaller private and public plans cover the rest of the state's residents. There is little commercial insurance in Hawaii. According to state health director John Lewin, M.D., the commercial insurers' presence is limited as a result of a tax on premiums and the fact that Kaiser and HMSA do not use waiting periods, medical testing, or experience rating.

With so few insurers controlling the market, many businessmen, including Samuel Slom, president of the advocacy group Small Business Hawaii, Honolulu, think that market is hopelessly uncompetitive. He reports that insurance premiums have doubled in the past five years.

State-defined universal package

In 1974, the legislature passed the Prepaid Health Care Act, which requires employers to offer coverage the meets or exceeds a state-defined package of benefits.

That package includes 120 days of hospital inpatient care; outpatient surgical, medical and emergency care; home, office, and hospital physician visits; medical and surgical consultations; most common diagnostic services; and maternity benefits for women enrolled in the plan for nine months prior to delivery. The employee's premium contribution cannot exceed 1.5 percent of his or her gross income; the employers pays the rest. The levels of copayments and deductibles are controlled.

PHCA covers most employees working 20 hours a week or more - excluding seasonal agricultural workers, the self-employed, those working on commission, and uninsured dependents of workers, including children. However, there are fewer uninsured dependents in Hawaii than in many other states; the high cost of living has produced a high percentage of working spouses.

Few workers added

Although much has been made of the effects of the Prepaid Health Care Act, it does not appear to have enfranchised all that many uninsured workers. For example, a 1978 study by Martin E. Segal Co., a consulting firm, estimated that only 46,000 people - less than 5 percent of the state's current population - joined the ranks of the insured as a result of the law.

However, Marvin Hall, president of Hawaii Medical Service Association, Honolulu, says, "Our estimates indicate that the number of insured workers did not increase by more than 5,000. We think that between 10,000 and 30,000 people saw their coverage improve" as a result of the standard minimum package the state required. The state health department estimates that about 95 percent of the population has coverage of some kind.

Enriched package

The original package of benefits was quite basic, but the state legislature soon enriched it.

In 1976, the Prepaid Health Care Act was amended to include mandatory coverage of some substance abuse treatment. Standard Oil of California sued the state over that amendment; the company claimed that the Employee Retirement Income and Security Act prevented states from regulating the insurance activities of self-insured employers, and that, as a result, such employers were exempt from the act.

After several years of litigation, the U.S. Supreme Court upheld Standard Oil's position, and the Prepaid Health Care Act was declared invalid. However, the Hawaii congressional delegation began seeking an exemption from ERISA for PHCA, and was ultimately successful. On Jan. 14, 1983, President Reagan signed a law putting PHCA back into business through what remains the only exemption ever granted from ERISA for health insurance purposes.

A case of rigidity

The ERISA waiver created a few problems of its own. For one thing, it froze PHCA in its 1974 form, allowing for no amendments or changes other than those that would enhance "effective administration."

That built-in rigidity has since been upheld in the courts. As a result, neither the state, nor employers, nor insurers, nor anyone else can substantially change what was put in place in 1974.

However, the minimum benefit package has been enriched several times - not through amendment of PHCA, but indirectly, through amendment of state insurance statutes. Over the years, the legislature has mandated coverage of child health supervision services; in vitro fertilization; broader mental health, alcohol, and drug abuse treatment; psychological services; and the following services for those employers providing optional dependent insurance (which is not mandated by PHCA): well-baby care and certain services for newborn and children who are mentally retarded or mentally or physically handicapped.

According to Honolulu attorney Jeffrey Harris, who is chairman of the Human Resources Council of the Hawaii Chamber of Commerce, Honolulu, the 1988 legislative session considered additional mandated substance abuse and chiropractic services, which were defeated. State health director Lewin reports that mandated chiropractic services were proposed again in 1990, but did not pass; however, mandated mammography was approved in the 1990 legislative session.

These benefits, and the way in which they were passed, have angered many employers. "My favorite is in vitro fertilization," Slom of Small Business Hawaii says sarcastically. "There is one in vitro program in Hawaii. It was a fantastic lobbying job; it took them three years. With unemployment so low, employers are told to hire older workers. What can I offer them? In vitro and well-baby care. What they want is long term care insurance." But with only a limited amount to spend on health insurance, most employers cannot afford to offer such additional coverage, he says.

Difficult for employers

Jack Terry, owner and CEO of several printing and graphics concerns in Honolulu, agrees that this inflexibility makes life harder for employers. But he questions the usefulness of even the basic law in a labor market as competitive for employers as Hawaii.

"Competition will force employers to provide certain benefits, such as health insurance. That's appropriate," Terry says. "But I don't want to be forced to do it. If some employers don't care enough about their employees to offer it, let them try to keep them without offering benefits!"

The Prepaid Health Care Act limitation on employee premium contributions of 1.5 percent of gross income is also frozen, much to the dismay of employers and insurers alike. Hawaii Medical Service Association President Hall says, "I won't say if this limit is right or wrong. But in 1974, HMSA's average monthly premium was $24. And 1.5 percent of the state's minimum wage at the time was $12 a month. So the idea was that employers and employees would split the cost of the premium. But health care costs have increased far more than wages; the contribution by a minimum-wage employee today is about $15 a month. If we're charging $100 a month, the entire balance of $85 is paid by employers. That's a problem for them."

In fact, Slom says most employers don't even bother to collect the 1.5 percent payment. He adds that it's also common to offer a richer program than the state requires. Hall agrees, adding that "there's little limit to what can be [added to] a policy. And our richer plans sell better: 65 percent of our group market have optional drug coverage, and 35 percent have a dental plan."

Adding to the basic package

Improving on the state minimum may be something of a necessity. Indeed, John McGuire, vice president for government affairs for the Chamber of Commerce, doesn't think much of the basic package: "The health benefits offered by many employers here are the worst of any state I've seen. As soon as a minimum is set, it becomes a maximum; in insurance, floors become ceilings."

And despite the desire for a level health benefits playing field that underlies PHCA, there is still discrimination against the small employer, according to Slom. "Small business continually has had to fight to get any level of parity in insurance. PHCA did not produce a level playing field for us." Although all businesses are required to provide the same minimum health insurance benefits, small businesses have a limited number of policies to choose from, and they are often more expensive than those purchased by larger employers, he says.

Attorney Harris believes there is non-compliance with the act, probably unintentional, because "there is some confusion about what constitutes a qualifying plan." He also thinks a legal challenge to mandates passed since 1974 could succeed; in fact, he argues that employers need not offer anything more than what was required at the time of the original law. "No employer has had the guts to take that position," he says.

Slom is unsure about the legal issue, but agrees that "self-insured employers have gone along with the mandates mainly because they're afraid not to."

Despite their frustrations, employers do not find the situation completely bleak. For one thing, says Harris, PHCA did create a high degree of parity among employers. "There is no microeconomic effect," he says.

And despite broad coverage, mandated benefits, and the longevity of the population, a recent study by Professor Alan Sager, Ph.D., of Boston University found that Hawaii's 1988 per capita hospital costs were only $506.32 compared to $960.09 in Massachusetts. There are several possible reasons that Hawaii's costs are lower: lower wages (including those for hospital workers), higher hospital occupancy rates, lower physician income, and a healthier population based on common health indicators.

Also, as Carolyn Richardson, vice president of the Healthcare Association of Hawaii, Honolulu (which represents hospitals and some nursing homes), points out, inpatient hospital losses on uncompensated care in Hawaii are relatively low. Further, Hawaiians' excellent health status can probably be attributed in part to their access to care.

If things were different...

If PHCA disappeared, would employers drop coverage for workers? Tim Lyons, executive vice president of the Hawaii Business League, a small-business lobby based in Honolulu, says that when PHCA was vacated in 1981, very few employers considered dropping coverage; he believes they were used to offering it by then.

Slom adds, "Employers had already made the adjustment and were providing coverage. There was also never really an opportunity to bail out; we were always told that it was still in litigation, and we all thought that the state would be upheld." Since most employers were offering coverage before PHCA was even passed, it is unlikely that its temporary demise would have led them to abandon the practice.

But what would employers do today if PHCA were repealed or modified? The Chamber of Commerce's McGuire says that "with our labor shortage, I know of no employer who would refuse to offer coverage." That does not answer the question of what might happen in a time of high unemployment, although such a prospect is extremely unlikely any time soon in Hawaii.(See box.)

Could PHCA be improved? Opinions differ. Hall says that his group, HMSA, as the major insurer - and thus the major beneficiary - of PHCA, is reasonably content. "We have learned to live with the law's problems, which are not insurmountable." But Terry, the printing and graphics business owner, thinks that "employees should be asked to pay half the cost," as in the original idea. He also yearns to offer cafeteria-style benefits and plans tailored to his work force. He questions whether employers should be responsible for every possible benefit: "Basic health care is all that any business should have to cover."

The Chamber of Commerce has a mixed opinion. McGuire says, "We oppose employer mandates of all kinds, so we oppose the PHCA mandate. But do we oppose it so that something else that is not as good, and not as appropriate to Hawaii, can be imposed? No."

Adds Sandra Miyoshi, the Chamber's director of governmental affairs, "In that case, we'd rather keep our ERISA waiver."

Slom sums up his wish list in one word: "Choice." He wants to be able to choose among more benefits plans, as well as to self-insure, which is extremely difficult for small employers. He also wants an insurance market "that recognizes differences among employers and employees."

Is the past prologue?

It is unlikely that any of these wishes will be granted soon. But if the past is prologue to the future, what might be ahead? With retirees flocking to Hawaii, there are already rumblings about long term care insurance; HMSA will begin to offer a product this year. But Hall concedes that the market will remain limited until large groups start buying such policies, especially for younger employees. At some point, the idea of mandating this coverage could attract the attention of the legislature.

The state has already taken the step of expanding access to coverage for all residents; on April 16, the new State Health Insurance Plan began signing up the uninsured. SHIP, which is state-funded, will purchase coverage from private insurers for a package of basic benefits, mostly outpatient and preventive, with some inpatient services such as baby delivery and short-stay surgery.

Although SHIP is government-funded, employers have some concerns. Right now, as in 1989, the state has a budget surplus, which made it politically easy for the legislature to appropriate the $14 million that thus far has been designated for the program. But, Lyons of the Hawaii Business League says, "We are concerned that they'll find a way to shift the cost to employers, eventually, perhaps by requiring us to subsidize insurance for part-time employees." Slom agrees: "This is a foot in the door."

It seems clear that mandated employee coverage for Hawaii could have been done better; but it also could have been designed much worse. It grew out of a culture in which employers had long accepted that they have a role in ensuring access to care for their workers. Despite the bickering, that beliefs holds.

Slom argues, "Health is a concern for everyone. Employees need to have peace of mind and to be healthy. It helps the business; it feeds the bottom line. It's a win win situation. And ensuring access for employees is the right thing to do. Few employers would fight the idea of providing insurance; we have to, and we should. But it's what we must provide and how it is configured - that's what we chafe under here."

What has he learned that should be heeded by employers elsewhere? Sloms says there's one lesson, above all: Business that doesn't get involved in making health policy when there's an activist legislature does so at its own peril. His advice: "Rather than waiting for a government proposal, be pro-active in offering your own program for the 1990s and beyond."

Why small business reigns in Hawaii

Hawaii's old plantation economy has given way to one in which 98.4 percent of all businesses in Hawaii have fewer than 100 workers, according to Tim Lyons, executive director of the Hawaii Business League, a small-business lobby. Samuel Slom, president of Small Business Hawaii, estimates that 85 percent of Hawaiian employers have fewer than 20 employees, and half have fewer than five.

A history of access

The agricultural past still casts a long shadow. Much of Hawaii's present-day population is descended from agricultural workers recruited from the Pacific Rim beginning in the 1800s. The large plantations provided health care to these workers; they often operated hospitals and employed physicians on salary.

The hospitals lasted until the 1930s; salaried plantation physicians were evident as late as the 1960s. There was thus a long tradition of employment-based health care, which in this century gradually evolved into employment-based health insurance. This was aided by a high rate of unionization; Hawaii is among the nation's most unionized states.

All this has, in recent years, been accompanied by a booming economy - and some concomitant problems. Hawaii today has a population of 1.1 million people, divided among several ethnic groups: white (25 to 30 percent), Japanese (25 to 30 percent), Filipino (18 percent), ethnic Hawaian (18 percent), Chinese (6 percent), and others (3 percent). The U.S. Census Bureau expects Hawaii to have the highest population growth (16 percent) of any state during the first decade of the 21st century.

Hawaii has also undergone an economic transformation in the past 30 years. Once based on agriculture (chiefly sugar cane and pineapple), the economy is now led by tourism and health care, with the military, construction, and agriculture also important. In fact, the health care sector is three times the size of the sugar and pineapple industries combined, according to a 1988 report by the state's legislative auditor.

Low unemployment

As of early 1989, Hawaii's unemployment rate was less than 1 percent. Predicted continuing growth in tourism makes it likely that the rate will stay low. Thus workers are, and will probably continue to be, in short supply.

However, low unemployment has not necessarily produced high pay. According to Slom, "In Hawaii, despite the unemployment rate, wages are low and the cost of living is high." A particular area of concern is housing, which has become very costly and is in short supply in bloom areas such as Honolulu and Maui. And, of course, it is no simple matter for Hawaiian employers to recruit new workers from out of state.

Emily Friedman is a Chicago-based writer and health policy analyst.

COPYRIGHT 1990 A Thomson Healthcare Company
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