Health care in paradise: Hawaii is the only U.S. state to require employers to offer health insurance to their employees. The mandate has proven to be both a blessing and a curse.

The Aloha state is a lush paradise of exotic flora and fauna, hibiscus and sea turtles. The 50th state is the only state to be completely surrounded by water and the only one to be completely situated in the tropics.

It's also the only U.S. state that mandates employers offer health insurance to their employees. The mandate has brought both benefits and challenges to the state, its residents, businesses and insurers. The mandate is credited with giving Hawaii a low uninsured rate, once the lowest in the nation. But the rising cost of health care is one factor driving an increase in the number of uninsured people. Also, small businesses say that providing the coverage is expensive, and the law isn't flexible enough to allow much competition in the marketplace. Insurers say they like the notion of having a large pool of participants to insure, but also wish there was more flexibility to allow new products, such as health savings accounts.

The Aloha Way

What makes Hawaii's health-care system unique is its Prepaid Health Care Act, which requires employers to offer health insurance to employees who work more than 20 hours a week, said J.P. Schmidt, Hawaii insurance commissioner. "It's worked well here. We have one of the lowest uninsured rotes in the nation," Schmidt said.

In fact, Hawaii ranks as No. 1 in the country in the percentage of employees offered health insurance, according to America's Health Insurance Plans. While only 56% of private sector employers in the United States offered health insurance to employees in 2003, 86% of Hawaiian companies offered coverage, according to the Kaiser Family Foundation.

"The act has done a good thing," said Cliff Cisco, senior vice president of Hawaii Medical Service Association, a Blue Cross and Blue Shield plan and the state's largest health insurer. "The health status is much higher because of the access to health care. It's served the state very well by creating a stable, predictable market."

Hawaii residents also enjoy good coverage. Most plans offer first-dollar coverage--there's no deductible, Cisco said.

Christopher G. Pablo, director of government and community affairs for Kaiser Foundation Health Plan, the state's second-largest insurer, said the good news is the law gives insurers "a mandatory pool, rather than a voluntary pool. That helps in terms of pricing. The original intent of the law was to have health-care costs shared equally by all."

Hawaii has lower than average health-insurance premiums. But because of the Prepaid Health Care Act provisions, Hawaii employers pay the highest percentage of health-insurance premium costs in the United States. According to the Medical Expenditure Panel Survey, a national survey of health-care use, the average Hawaii health-care insurance premium in 2000 was $184 per month, of which the average employee contribution was $16, about 8.6%. Nationally, the average total premium was $221 per month, with employees paying an average of $37, about 17%.

"The employer contribution is significantly higher, but average premiums are a little bit lower. It has to do with the pooling. We have a large, natural pool because of the health-care act," said Laurel Johnston, executive director of the Hawaii Uninsured Project, a nonprofit organization funded in part by the HMSA Foundation and Kaiser Foundation.

In the 1980s, the Aloha state boasted the lowest uninsured rate in the nation, about 5%. That figure has been rising in recent years, recently to close to 10%.

Outdated Law

The health-care law has been on the books since 1974 and reflects the culture and history of the islands. (See "Hawaii Health-Care History" on page 36.) But because Congress gave Hawaii a special exemption from the Employee Retirement Income Security Act of 1974, the law cannot be substantially changed without requiring the state to go back and ask for a second exemption. Now, more than 30 years later, there are some aspects of the law that seem out of date, but there's not much political desire to tinker with it and risk losing the ERISA exemption, and the law, altogether, Schmidt said.

"There's no free lunch. There are significant downsides" Schmidt said.

One downside is employees' contribution is capped at 1.5% of their gross earnings. With the increase in healthcare costs in recent years, employers have been forced to pay most of the premium.

"That's one area we'd like to take a look at," Schmidt said.

The 1.5% was originally intended to be tied to inflation, Pablo said. "But it can't be changed now."

Changing the 1.5% rule would be substantial, and would require another trip to Congress for a new ERISA exemption, Johnston said. "We haven't found a large group of people willing to do that," she said.

Also, insurers would like to offer more affordable types of plans, such as consumer-driven health plans and medical savings accounts, but they are not allowed under the law.

"We'd like to give more alternatives for consumers, such as consumer-driven health plans. But they are so different from the law's prevailing plan," Schmidt said.

The act also mandates that the health care offered be equal to the "prevailing plan." About 60% of the market is controlled by HMSA, the lead preferred-provider organization. Kaiser, the lead HMO, has about a 20% share of the market.

Even in the cat bird's seat as the prevailing plan, HMSA would like the freedom to offer new products. "We'd love to create other products, but the act defines the benefits," Cisco said.

Heavy Burden

Rising health-care costs have increased the burden on employers, especially smaller ones. "We've seen some erosion in the marketplace, mainly because health-care costs have been rising, especially on small businesses, which are the majority of businesses in Hawaii. Some businesses have dropped family coverage that they were providing voluntarily," Johnston said.

Also, Hawaii is seeing growth in the number of part-time workers, Johnston said. "It seems to indicate that people are shifting to a part-time work force so they don't have to pay for health insurance," she said.

Schmidt said that while some point to the island's heavy tourism and service industry as the reason behind the higher than average number of part-time workers, he didn't think that was the root of the issue. Nevada, also a state known for attracting tourists, doesn't have as high a rate of part-time workers, Schmidt said.

To take some of the pressure off small employers, Hawaii allows association health plans. Nineteen trade associations have been allowed to provide health insurance to their members, Schmidt said.

Lack of Competition?

With the prevailing plan standard, a new health plan coming into the market would have to offer substantially the same PPO that HMSA offers or the same HMO plan that Kaiser offers.

Both are so well established that it's hard for a newcomer to unseat them.

HMSA was founded as a mutual benefit society in 1938. Kaiser is a nonprofit established on the islands in 1958.

"It's a small-town atmosphere," Cisco said. "People join your father's or your mother's health plan."

Also, it's not the easiest market to enter. The population of just 1.2 million is spread out on several islands that are some of the most remote places in the world--Hawaii is 2,300 miles from the mainland.

"Often, insurers will spend money in another state to gain more numbers in a neighboring state. That doesn't work here. It is difficult for competitors to come into Hawaii. Aetnas and Cignas have come and gone," Cisco said.

Both HMSA and Kaiser are also nonprofit companies, not subject to the 4% premium tax in the state, Schmidt noted. He suggested the legislature might consider applying a premium tax to the nonprofit companies as well as public companies as a way to level the playing field. Johnston said the Hawaii Uninsured Project had suggested cutting the 4% premium tax in half, then applying it to all insurers equally.

"But the business community didn't like it. They thought insurers would pass the cost hike along," Johnston said.

Still, a lack of competition is a concern.

"That's one reason we have health insurance rate regulation in law," Schmidt said in April. "It helps level the playing field, so a big player can't undercut a new entry into the marketplace."

But the law allowing the insurance commissioner to regulate rates will sunset July 1 after the state legislature failed to act in May to extend it.

Schmidt said while he's in favor of free markets, that only works if the market is competitive. He said Hawaii's health insurance market is 60% controlled by HMSA, 20% by Kaiser Group and by three other companies that each have no more than 6% of the market share. In addition, the state mandates all employers to provide health insurance to fulltime employees.

"Now, insurers can set whatever rates they will," Schmidt said. "I generally am very much in favor of that. But when you don't have a competitive market, and when you have the state government requiring that people buy this product, I believe the government has the duty to oversee pricing."

Pablo of Kaiser said premiums need to be raised.

"The good news is premiums are low. The bad news is they are too low," Pablo said. Health plans have not been able to raise enough money to make significant investment in facilities. "Our population is aging; we need to be building different types of facilities. If we can't afford to do that, we are heading for a crisis."

Learn More

Hawaii Medical Service Association

A.M. Best Company # 64035

Distribution: Employee agents

Kaiser Foundation Health Plan Inc.

A.M. Best Company # 64585

Distribution: Staff agents and select consultants and brokers.

For ratings and other financial strength information about these companies, visit www.ambest.com

Hawaii Health-Care History

1835: First sugar cane plantation is established on Kauai Island.

Mid-1880s-1890s: Sugar cane plantations actively recruit workers from other countries, including the Philippines. China and Japan. Many workers are promised a free passage Sandwich Islands (what Hawaii was called then), plus room, board and medical care. Many large plantations provided an on-site doctor to tend to workers.

1893: A revolution overthrows the ruling queen and establishes the Republic of Hawaii.

1900: Hawaii becomes a U.S. territory. Individual indentured contracting became illegal under U.S. law; however, group contracting continued for some time.

1395: Territorial Conference of Social Workers conceive of creating a prepaid medical plan.

1938: Territorial legislature grants a charter for a mutual benefit association to provide medical, surgical and hospital benefit. Hawaii Medical Service Association the state's largest insurer, is born.

1946: Hawaiian workers stage a massive strike. Workers demanded a choice in health care, and employer-provided on-site health care morphed into employers paying for health insurance premiums.

1958 Henry J. Kaiser builds a hospital in Honolulu and establishes a prepaid group practice. It's Kaiser Permanente's fourth region.

1959: Hawaii becomes the 50th state of the United States.

1974: Prepaid Health Care Act passes June 12, effective Jan. 1, 1975. Lawmakers considered a single-payer "British model" system, as well as expanding Medicaid, before deciding to adopt the Act.

ERISA passes, effective Sept. 2, pre-empting all state laws governing employee benefits.

1976: Standard Oil sues to invalidate the Prepaid Health Care Act as violation of ERISA.

1977: Federal district court rules in favor of Standard Oil.

1982: Congress grants Hawaii an ERISA waiver; Prepaid Health Care Act stands.

Key Points

* Hawaii is the only state that mandates employers provide health insurance to employees.

* Hawaii has one of the lowest uninsured rates in the country.

* The state's employers pay a higher percentage of insurance premiums, compared with employers in the rest of the United States.

Hawaii Prepaid Health Care Act

* Enacted Sept. 2, 1974.

* Requires all employers to offer prepaid health insurance to employees who work more than 20 hours a week for more than four consecutive weeks.

* Caps the employees' share of the premium costs at the lesser amount of 1.5% of their gross monthly wages or 50% of the premium.

* Coverage must include benefits for inpatient and outpatient hospital care; surgical care, including anesthesia and post-surgical services; home, office and hospital physician visits; diagnostic laboratory services and X-ray services; and maternity care.

* The required coverage must meet the coverage offered by the plan with the highest penetration in the state.

* Coverage for dependents is not required, unless the employer provides a health plan that is not as rich as the prevailing plan. With state approval, the employer can then offer the less-rich plan as long as it pays 50% of the cost of dependent coverage.

* Two types of plans must be covered: fee-for-service or health maintenance organization plans.

Other States Seek Answers

Hawaii was one inspiration for California's Proposition 72, the 2004 referendum that would have imposed a similar mandate on businesses with at least 50 workers to provide health insurance. Prop 72 would have required employers to either pay for health insurance or pay into a state fund to provide health insurance to the uninsured. The referendum was narrowly defeated.

Massachusetts recently tackled the uninsured issue with a new approach. It passed a law putting the mandate on individuals rather than employers. Beginning with an open-enrollment period that starts in March 2007 and will conclude by July 2007, every resident will be required to purchase health insurance. The mandate is to be enforced by requiring individuals to report their policy number on their annual state income taxes. Nearly 40% of the state's uninsured earn at least three times the federal poverty level, and half of those earn more than $75,000 a year.

In May, Vermont Gov. James Douglas signed into law a health-care reform package that requires employers to pay a $365 annual assessment for each frill-time employee if the employer doesn't offer insurance to employees, if it offers insurance only to some employees or if it offers insurance, but some employees remain uninsured. The law includes language instructing the Legislature to consider an individual insurance mandate in 2011 if less than 96% of Vermonters have coverage in 2010.

How Hawaii Measures Up

More Coverage Through Employers

Percentage of private sector
employers offering health
insurance in 2003

U.S.      56.0%
Hawaii    86.0%

Source: Kaiser Family Foundation

Lower Premiums

Average individual premium for
employer-sponsored plans in 2003

U.S.      $3,481
Hawaii    $3,020

Average family premium for
employer-sponsored plans in 2003

U.S.      $9,249
Hawaii    $7,887

Source: U.S. Health Resources and Services
Administration and the University of Hawaii

More Burden on Employers

Employer's share of the average
monthly premium of employees
in 2000

U.S.      83.0%
Hawaii    91.4%

Source: Medical Expenditure Panel Survey,
Hawaii Uninsured Project

Note: Table made from bar graph.

Uninsured by State

Hawaii, which mandates employers
offer health insurance to
employees who work 20 hours or
more a week, used to boast uninsured
rates of 5% in the 1980s.
While increases in the costs of
health care have doubled that figure,
Hawaii still has among the
lowest rates of uninsured, according
to the following three-year
averages from 2002 to 2004.

State                   Uninsured Rate (%)

Minnesota                              8.5
Hawaii                                 9.9
Iowa                                  10.1
Wisconsin                             10.4
Rhode Island                          10.5
Vermont                               10.5
Maine                                 10.6
New Hampshire                         10.6
Kansas                                10.8
Massachusetts                         10.8
Connecticut                           10.9
Nebraska                              11.0
North Dakota                          11.0
Michigan                              11.4
Pennsylvania                          11.5
Missouri                              11.7
Delaware                              11.8
Ohio                                  11.8
South Dakota                          11.9
Tennessee                             12.7
Utah                                  13.4
Alabama                               13.5
District of Columbia                  13.5
Virginia                              13.6
Indiana                               13.7
South Carolina                        13.8
Kentucky                              13.9
Maryland                              14.0
Illinois                              14.2
Washington                            14.2
New Jersey                            14.4
New York                              15.0
West Virginia                         15.9
Wyoming                               15.9
Oregon                                16.1
Georgia                               16.6
North Carolina                        16.6
Arkansas                              16.7
Colorado                              16.8
Arizona                               17.0
Mississippi                           17.2
Idaho                                 17.3
Montana                               17.9
Alaska                                18.2
California                            18.4
Florida                               18.5
Louisiana                             18.8
Nevada                                19.1
Oklahoma                              19.2
New Mexico                            21.4
Texas                                 25.1

Source: U.S. Census Bureau