The hegemony of the Hawaii Medical Service Association is nearly complete. For better or worse, it touches almost every facet of healthcare in the state. It has cowed some of the largest insurance companies in the world, and humbled its tiny local competitors. It has given Hawaii’s consumers the lowest average health insurance costs in the nation, and burdened our healthcare providers with some of the country’s lowest reimbursement rates. It is one of the most influential institutions in the state. And it’s not going anywhere.

Nearly a monopoly

Most people are well aware of the company’s near monopoly as the largest supplier of health insurance in the state. According to J.P. Schmidt, the state insurance commissioner, HMSA controls nearly 70 percent of the market. Even that number understates its dominance. Kaiser Permanente, with roughly 22 percent of the state’s health insurance market, is usually thought of as HMSA’s largest competitor. But it’s not entirely clear that health maintenance organizations like Kaiser compete directly with preferred-provider organizations like HMSA. Consumers seem to clearly prefer one business model or the other, a fact reflected in the two companies’ stable market shares. Among the companies offering PPOs — by far the more popular form of health insurance — HMSA’s market share climbs to nearly 85 percent.

But the company’s dominance on the demand side is more remarkable. That’s because, in order to stay in business, nearly every doctor, hospital and clinic in the state has to sell their services to HMSA. Economists call this a monopsony — a market situation in which many sellers compete for a single buyer — and just like a monopoly, it concentrates enormous power in a single player. And this aggregation of power may be irreversible. A 2003 American Medical Association report to the U.S. Department of Justice noted: “There may well exist a ‘tipping point’ in health insurance markets, where an incumbent’s market share is so large that new entry is impossible.” In fact, HMSA’s market share really hasn’t changed in decades.

Government’s role

That hasn’t stopped J.P. Schmidt from trying. Since taking office in 2003, one of the insurance commissioner’s primary focuses has been to lure new insurers to Hawaii. Part of that is simply creating a regulatory climate more conducive to doing business. “One of the things that helps attract insurers is the approach of the regulators,” Schmidt says. “Some states take an adversarial attitude; I think that actually works to the detriment of the state. Insurance companies are less interested in working in that environment. They also employ more gamesmanship — hiding and dodging and weaving to avoid sanctions from the regulator.”

Schmidt has also tried to address specific regulatory and market conditions that deter new insurers from coming to Hawaii. He’s looked into regulating the size of HMSA’s burgeoning surplus (nearly $500 million), which competitors view as an obstacle to competition. They fear HMSA can use the surplus to subsidize unfair rates, under-pricing possible competitors. For the past several years, Schmidt has also unsuccessfully pushed for the Legislature to remove the existing 4.5 percent premium tax exemption. “Nonprofit companies, like HMSA, are exempt from the premium tax,” Schmidt says. “That’s an immediate 4.5 percent handicap for for-profit companies. That’s simply too high a hurdle for most of them to overcome.”

J.P. Schmidt, Hawaii state insurance commissioner

So far, Schmidt’s main accomplishment has been reintroducing rate regulation, after a two-year hiatus. This means insurance companies again have to submit rate changes to the insurance commissioner for approval. “We review them to make sure that the assumptions in the rate are properly supported,” Schmidt says. “Then, we approve the rate if it’s not excessive and it’s not inadequate or unfairly discriminatory.” Although the regulation prevents overcharging, its main purpose seems to be protecting competitors from unrealistically low rates. It’s a backhanded way to prevent HMSA from using its enormous reserves in a price war with competitors.

Still, rate regulation certainly hasn’t noticeably troubled HMSA. In fact, HMSA and Kaiser, which both opposed its reintroduction, now say they favor rate regulation and competition in general. “People should have a choice,” says Steve van Ribbink, HMSA’s CFO. “And we’re encouraged by the fact that about 700,000 people have chosen HMSA. We appreciate their business. As for rate regulation, I think it’s fine. I think it gives people comfort to know somebody’s looking at the rates, that no one’s being dealt with unfairly.” Even so, he’s quick to add, “But it hasn’t changed how we go about doing things.”

Big deal for Summerlin

Perhaps the most promising sign for rate regulation occurred this winter, when Summerlin Insurance, a Nevada-based company, outbid HMSA to insure the 600-plus employees at The Honolulu Advertiser. Schmidt had been courting Summerlin for some time. “We began to talk to Summerlin my first year on the job,” Schmidt says. “They had been doing some business in the state as a third-party administrator for union plans, so they had some networks built up, and that provided them some comfort coming into the market.” Nevertheless, Summerlin — which declined to comment for this story — remains a small player in Hawaii and its arrival hardly represents a dramatic change.

Bill Donahue, executive director of the 700-member Hawaii Independent Physicians Association, says there isn’t any new competition resulting from the return of rate regulation “and there never will be.”

Bill Donahue, executive director of Hawaii Independent Physicians Association

“During the 1970s, we passed a statute called the Prepaid Healthcare Act,” he says. The first of its kind in the United States, the PHCA requires that all employers provide health insurance for their employees. It placed a tremendous economic burden on the state’s employers, but Hawaii has the highest rate of health insurance coverage in the country. “It was a wonderful and tremendously progressive piece of legislation,” Donahue says.

As do most revolutionary changes, this one came with unintended consequences. Requiring employers to provide coverage is meaningless without establishing what must be covered, so PHCA required that any health insurance company had to offer coverage equivalent to “the prevailing plan.” Since HMSA controlled the majority of the market, that meant any new insurer’s plan had to match what HMSA offered. (Moreover, both HMSA and Kaiser have representatives on the commission that decides whether new entrants to the marketplace meet these standards.) The result is that HMSA determines what constitutes health insurance coverage in the state.

“Let’s say you were Aetna or United Health,” Donahue says, referring to two of the largest medical insurers on the Mainland. “If you came here, you would be coming into a marketplace where your competitor dictates the rules.

“And that’s in addition to the problem of the premium tax,” he says. “You’re already operating at a 4.5 percent disadvantage.”

Furthermore, Donahue, like many other industry observers, says there’s no large population in Hawaii to entice large, national insurers. “We’re a small marketplace in the middle of the ocean,” he says. “What are there, like 1.3 million people here? That’s like Boston, but without Rhode Island or New Hampshire or the rest of Massachusetts nearby.”

Niche players

Commissioner Schmidt, of course, also has hopes for the so-called “little sisters”—companies like Summerlin, the Hawaii Medical Assurance Association and the University Health Alliance. He points out that UHA is increasing membership, and HMAA, which once operated almost like a closely held corporation, is creating an independent board and seems eager to grow. “The additional competition is, I think, a very good thing for the people of Hawaii,” Schmidt says. Donahue demurs. “They’re just niche players,” he says. “They have relationships with certain employers, but they’re not in a position to make a break-out move.”

It’s an opinion confirmed in conversations with executives at the little sisters. Rodney Park, CFO of HMAA, points out, “We never try to take on 300- or 400-employee companies; we focus on mom-and-pops. They’re looking for service. They don’t have an HR department or know all the nuances of insurance. A lot of the time, we deal directly with the proprietor.” Although this approach has garnered HMAA a consistent share of the market, that share has always been less than 5 percent.

UHA COO Howard Lee notes that, with more than 50,000 members, UHA is probably the third-largest commercial insurer in the state; but it’s still dwarfed by the 700,000-plus membership of HMSA. “If we continue to be successful, we would like to expand our market share,” he says. “But we have to make sure that we’re prudent so we can be here for the long run.” Modest ambitions like these reflect a kind of fatalism about the dominance of HMSA.

John McComas, CEO of AlohaCare and a respected observer of the health insurance industry, points to another HMSA advantage. “They have the vast majority of the employers in the state,” he says. This “utilization experience” — the actuarial data that comes from handling so many groups for so long — is the lifeblood of the insurance industry. “It allows you to predict with a great deal of accuracy what your expenses are going to look like. Other groups don’t know that.” This means other insurers — especially newcomers like Summerlin — lack the basic information to make long-term pricing decisions. And yet, for the employers who purchase insurance, price is typically the major consideration.

McComas notes, “In order for me to take a group away from HMSA, I have to offer better benefits or lower premiums. And it can’t be 2, 3 or 4 percent lower — that wouldn’t be worth the trouble. Employers are saying, ‘Come to me with a 15, 20, 25 percent decrease in my healthcare costs.’ ” But the truth is, other insurers will never be able to compete with HMSA on price. “Because HMSA is such a large buyer, they have much more leverage in negotiations with hospitals and physicians,” McComas says. “Consequently, HMSA is probably going to have the best hospital rates out there.” This is the value of a monopsony.

Of course, neither monopolies or monopsonies are all bad. Even Bill Donahue, who describes himself as “one of the biggest critics of HMSA,” is quick to point out some of its saving graces: lower rates for consumers, financial assistance for doctors and hospitals to modernize their record-keeping, and online care for those unable to visit their physician.

Hawaii has the Lowest Premiums

Average Single Premium Per Enrolled Employee (Employer-Based Health Insurance, 2006)