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HMSA Will Remain Goliath

Little local Davids and even Mainland Goliaths have very little chance of beating it

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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.”


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