Health Care in Hawaii: Implications for National Reform (Letter Report, 02/11/94, GAO/HEHS-94-68). For nearly 20, years, Hawaii has been a leader in the effort to achieve universal access to health insurance. It is the only state that requires employers to provide a minimum level of health insurance benefits to employees, and its public programs cover many residents lacking employment-based insurance. GAO makes several points. First, Hawaii's employer mandate did not have a harmful effect on small businesses. Second, although Hawaii's system of near-universal access has lowered health premiums, its per capita health care costs have risen at a rate similar to the national average. Third, Hawaii's experience suggests that an employer mandate by itself will not necessarily result in universal access to health care. GAO summarized this report in testimony before Congress; see: Health Care in Hawaii: Implications for National Reform, by Mark V. Nadel, Associate Director for National and Public Health Issues, before the House Committee on Small Business. GAO/T-HEHS-94-123, Mar. 16, 1994 (11 pages). --------------------------- Indexing Terms ----------------------------- REPORTNUM: HEHS-94-68 TITLE: Health Care in Hawaii: Implications for National Reform DATE: 02/11/94 SUBJECT: Health insurance Insurance premiums Health care cost control Health care services Physicians Health insurance cost control State-administered programs Comparative analysis National policies Health statistics IDENTIFIER: Hawaii Medicaid Program Hawaii State Health Insurance Program National Health Care Reform Initiative Clinton Health Care Plan Health Security Act ************************************************************************** * This file contains an ASCII representation of the text of a GAO * * report. Delineations within the text indicating chapter titles, * * headings, and bullets are preserved. 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We are unable to accept electronic orders * * for printed documents at this time. * ************************************************************************** Cover ================================================================ COVER Report to the Chairman, Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, House of Representatives February 1994 HEALTH CARE IN HAWAII - IMPLICATIONS FOR NATIONAL REFORM GAO/HEHS-94-68 Health Care in Hawaii Abbreviations =============================================================== ABBREV COBRA - Consolidated Omnibus Budget Reconciliation Act of 1985 CPI - consumer price index CPS - Current Population Survey DSH - disproportionate share hospital program ERISA - Employee Retirement Income Security Act of 1974 HCFA - Health Care Financing Administration HMSA - Hawaii Medical Service Association PHCA - Prepaid Health Care Act SHIP - State Health Insurance Program QUEST - Quality care, ensuring Universal access, encouraging Efficient utilization, Stabilizing costs, and Transforming the way health care is provided to public clients SSI - Supplemental Security Income Letter =============================================================== LETTER B-256320 February 11, 1994 The Honorable John D. Dingell Chairman, Subcommittee on Oversight and Investigations Committee on Energy and Commerce House of Representatives Dear Mr. Chairman: Health care reform has risen to the top of the national domestic policy agenda and many observers have cited Hawaii's health insurance system as a possible model for the nation. For almost 20 years Hawaii has been a leader in the effort to achieve universal access to health insurance. It is the only state that requires employers to provide health insurance for their employees, and it has public programs to provide coverage to residents not insured through the employer mandate. You asked us to provide information about Hawaii's experience on topics central to the current debate on national health care reform. In response to your request, this report describes Hawaii's experience with providing access to health insurance and health services, its experience with health care costs, and the effects of Hawaii's system on the state's small businesses and health care providers.\1 -------------------- \1 You also asked us to provide information on the Medicaid disproportionate share hospital (DSH) program in Hawaii. The DSH program was established in 1981 to provide for additional Medicaid payments to hospitals that serve large numbers of Medicaid and other low-income patients. This information is in appendix V. RESULTS IN BRIEF ------------------------------------------------------------ Letter :1 Hawaii has the highest level of insurance coverage of any state in the nation. Estimates of the percentage of Hawaii's residents lacking health insurance in 1991 ranged from 3.75 to 7.0 percent in comparison to the national average of about 14 percent. Nevertheless, Hawaii's employer mandate and government programs do not ensure coverage for everyone in the state. Further, even some residents with insurance encounter problems obtaining access to health services and need community health centers and other safety net programs. For example, private providers are not always willing to serve Medicaid patients. Hawaii has experienced the same trend of rising costs as the rest of the nation. From 1972 to 1991, Hawaii's annual per capita health care expenditure generally matched the national average. However, health insurance premiums are lower than in the nation as a whole and in the last decade have risen more slowly in Hawaii than nationally. We identified two factors that contribute to lower premiums in Hawaii: reduced cost shifting and insurance companies' use of modified community rating for small businesses. Hawaii's requirement that employers provide health insurance has not resulted in large disruptions in Hawaii's small business sector. Business owners, however, have expressed concern about the cost and inflexibility of the employer mandate. Hawaii's successful implementation of employer-based health coverage may have been helped by a set of favorable circumstances, such as the large number of employers already providing health insurance at the time the mandate took effect. Thus, if a national employer mandate is adopted, Hawaii's experience might not be replicated throughout the country. BACKGROUND ------------------------------------------------------------ Letter :2 REQUIREMENT FOR EMPLOYER-SPONSORED HEALTH INSURANCE IS UNIQUE TO HAWAII ---------------------------------------------------------- Letter :2.1 Hawaii is the only state to require employers to provide health insurance to their workers. Its expansion of health insurance coverage through the 1974 Prepaid Health Care Act (PHCA) was built on a tradition of employer-based health benefits. This tradition was due partly to the strong role of labor unions in the work force and partly to Hawaii's history of plantation medicine, when large plantations employed physicians to provide free health care to their workers. Hawaii can require employers, including those that self-insure, to provide a minimum level of health care benefits to employees because it has a limited exemption from the federal Employee Retirement Income Security Act of 1974 (ERISA). ERISA preempts state authority to regulate certain self-insured employer health plans. Hawaii is the only state with this exemption. Under PHCA, employers and employees share financing of premiums for employee coverage, with the employee contribution limited to the lesser of half the premium cost or l.5 percent of the employee's gross wages. In 1991, a worker earning the average annual wage of $24,128 would have paid at most $30 per month, roughly one-third of the premium cost for individual coverage under a small business policy. Employees must elect the insurance unless they have comparable coverage from another source.\2 PHCA outlines two broad categories of benefit plans that employers may provide. The first is an extensive package of medical, hospital, and laboratory services that meets standards specified in the law.\3 Employers offering such a plan are not required to contribute to the cost of coverage for dependents. Employers have a second option of providing a more limited state-approved benefits package,\4 but employers must then pay at least half the cost of dependent coverage. (See app. I for a reproduction of parts I-V and chapter 12, title 12 of PHCA.) -------------------- \2 Employees may also waive coverage for religious reasons. \3 The benefit package is defined as being equivalent to the most prevalent plan provided by the major fee-for-service insurance provider in the state, which is Hawaii Medical Service Association (HMSA)--the Blue Cross and Blue Shield Plan of Hawaii--or that provided by the major health maintenance organization, which is Kaiser Foundation Health Plan, a nonprofit health maintenance organization. In December 1992, HMSA and Kaiser provided health insurance for about two-thirds and one-fifth, respectively, of Hawaii's insured employees. \4 These plans must still provide basic hospital, medical, surgical, and other benefits, but are likely to require higher copayments or deductibles or have preexisting-condition exclusions for a limited period. GOVERNMENT PROGRAMS SUPPLEMENT EMPLOYER MANDATE ---------------------------------------------------------- Letter :2.2 Individuals in Hawaii without employer-sponsored health insurance may be eligible for either Medicaid or a state-subsidized insurance program. Hawaii's Medicaid program generally accepts people with incomes up to 62.5 percent of the federal poverty level, while most states set income eligibility at or below 50 percent of poverty,\5 and the program provides several optional Medicaid benefits.\6 The State Health Insurance Program (SHIP) was established in 1989 to provide health care coverage to the "gap group" of low-income residents who are not covered by employer-sponsored health insurance and are not eligible for Medicaid. SHIP accepts people with incomes up to 300 percent of the federal poverty level. SHIP members with incomes between 100 and 300 percent of poverty pay a share of the monthly premium that is determined using a sliding scale; the state pays the entire premium for members whose income is under 100 percent of poverty. Enrollment in SHIP is voluntary. Hawaii's average Medicaid-eligible population for fiscal year 1993 was about 101,000, about 9 percent of the population.\7 Because of expanded federal eligibility for pregnant women, children, the elderly, and the disabled, and because SHIP outreach activities identified additional people eligible for Medicaid, about 22,000 enrollees were added to the Hawaii Medicaid program between 1988 and 1992. In December 1992, SHIP covered about 20,000 residents, roughly 2 percent of the population. For most enrollees, SHIP provides minimal and fairly restrictive health benefits that primarily cover preventive care services such as well baby care. SHIP covers 12 physician office visits per calendar year and in most cases limits hospitalization coverage to 5 days. Vision and dental services and prescription drugs are generally not covered.\8 In July 1993, Hawaii received a waiver from the U.S. Department of Health and Human Services to conduct a 5-year public health care demonstration project, the Hawaii Health QUEST\9 project, involving a part of the Medicaid population and the entire SHIP population.\10 QUEST, scheduled to begin in April 1994, will combine these populations under a managed care delivery system offering comprehensive benefits similar to Medicaid benefits.\11 -------------------- \5 Hawaii's poverty level is $16,500 for a family of four; for all other states, except Alaska, it is $14,350. \6 The options that Hawaii provides include programs for pregnant women and infants whose family income is up to 185 percent of the federal poverty level, and the elderly and disabled whose income is up to 100 percent of the federal poverty level. \7 Percentage calculated using the July 1992 nonmilitary population. \8 HMSA and Kaiser both participate in SHIP. Kaiser chose to provide the full range of benefits of a federally qualified health maintenance organization but limits SHIP enrollment to 3,500. \9 Quality care, ensuring Universal access, encouraging Efficient utilization, Stabilizing costs, and Transforming the way health care is provided to public clients. \10 QUEST will include the SHIP population and the Medicaid population except those individuals currently in the aged, blind, and disabled-related Supplemental Security Income (SSI) programs; refugee cash and medical assistance programs; and medical payments for pensioners programs. Individuals in these categories will continue to be eligible for and receive Medicaid services under the current rules. Under QUEST, the SHIP program, with the possible exception of a small group, will be eliminated. \11 According to state officials, participants whose incomes are up to 133 percent of the federal poverty level will not have to pay any part of the monthly premiums. Participants with higher incomes will pay a portion of the premium according to a sliding scale, with exceptions for pregnant women and infants under 1 year. There will be no copayments for children. SCOPE AND METHODOLOGY ------------------------------------------------------------ Letter :3 We interviewed officials from four Hawaii government departments--Health, Labor and Industrial Relations, Human Services, and Commerce and Consumer Affairs--and the state's two major health insurers--Hawaii Medical Service Association (HMSA) and Kaiser Foundation Health Plan. We also interviewed health care experts, representatives of Hawaii's business community,\12 health care providers, and officials from the U.S. Bureau of the Census and the U.S. Department of Labor's Bureau of Labor Statistics. We examined the most recent data available from the state of Hawaii, HMSA, Kaiser, the Bureau of the Census, the Bureau of Labor Statistics, the Health Care Financing Administration (HCFA), and other sources. -------------------- \12 These included representatives of the Chamber of Commerce of Hawaii, Small Business Hawaii, Hawaii Employers Council, and Hawaii Business Health Council. HIGHEST RATE OF COVERAGE, BUT NOT UNIVERSAL CARE ------------------------------------------------------------ Letter :4 Hawaii has the highest rate of health insurance coverage of any state in the nation, but it does not have universal coverage. This widespread coverage is the result of the state's employer mandate, the Medicaid program, and SHIP coverage for the gap group. Estimates of Hawaii's uninsured rate range from 3.75 percent in a 1991 survey by the Hawaii Department of Health, to 7.0 percent in 1991, determined from data from the Current Population Survey (CPS). In contrast, 14.1 percent of the nation's population was uninsured in 1991. INSURANCE COVERAGE IS NOT UNIVERSAL ---------------------------------------------------------- Letter :4.1 Hawaii's employer mandate, even when combined with public programs, does not ensure that all residents have health insurance. The employer mandate does not cover several categories of employees, including part-time workers--those working fewer than 20 hours per week--government employees, the self-employed, and low-wage earners.\13 These individuals may choose not to purchase health insurance. In addition, waiting or enrollment periods\14 leave some employed individuals temporarily without health insurance coverage. Hawaii's health care system also has gaps in insurance coverage for the recently unemployed. These individuals may be eligible to purchase insurance through their prior employer under federal statute\15 or through SHIP. However, some unemployed individuals elect not to participate because of the financial burden of paying the premiums or because they expect to be re-employed shortly. Other individuals qualify for but do not take advantage of public programs. These individuals include some recent immigrants and homeless people. In addition, employed persons' dependents who do not qualify for public programs may not be included in an employer-sponsored health insurance plan.\16 A Deputy Director of the Hawaii Department of Health told us that he would like to see PHCA modified to require dependent coverage, but the limitation in the state's ERISA exemption prevents the state from doing so.\17 -------------------- \13 Employers are not required to provide health insurance coverage for workers whose monthly earnings are less than 86.67 times the hourly minimum wage; that is, less than $456 per month in 1993. Other excluded categories are seasonal agricultural workers, insurance and real estate salespeople working on commission, individual proprietorship members in small family-run businesses, and beneficiaries of government assistance programs. \14 The act does not require employer-sponsored insurance for newly hired employees, those employed fewer than 4 consecutive weeks. With certain exceptions, people may enroll in SHIP during only one week each quarter. \15 For firms with 20 or more employees, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) (P.L. 99-272) requires that employers offering health insurance benefits provide former participants and beneficiaries with an opportunity to elect continued coverage when they would otherwise lose such coverage because of "qualifying events" such as death, divorce, termination of employment, or reduced hours. The continuation period varies from 18 to 36 months, depending on the event. The employee may be required to pay for the premium, which may be no higher than 102 percent of the group rate. \16 We could not obtain specific figures on the number of dependents without this coverage. Kaiser estimated that roughly two-thirds of its groups pay all or part of dependent coverage for their employees and HMSA told us that almost half of its group plan members, excluding state and federal groups, are dependents. In addition, a 1992 survey of 235 Hawaii businesses by the Hawaii Employers Council reported that about three-fourths of these businesses pay at least some portion of full-time employees' dependents' health insurance premiums. Preliminary results from a Kaiser Family Foundation survey of small businesses indicate that dependents of full-time employees were eligible for insurance coverage at slightly more than half of the small businesses surveyed. \17 Hawaii's ERISA exemption applies only to PHCA as it was enacted in 1974, thus precluding Hawaii from substantively amending it. SOME HAWAII RESIDENTS HAVE LIMITED ACCESS TO CARE ---------------------------------------------------------- Letter :4.2 Despite having health insurance, some residents in Hawaii have difficulty obtaining health care services. Reasons for this access problem include a limited number of providers in certain areas of the state and a limited willingness on the part of private providers to serve Medicaid patients. Although Hawaii has more physicians per capita than the national average,\18 state officials and providers told us that these physicians are not adequately distributed throughout the state,\19 a problem shared with other states with rural populations. This problem is more complicated in Hawaii, however, because some Hawaii residents require expensive air transport to another island to receive necessary care.\20 For example, residents of Molokai and Lanai must travel to another island for kidney dialysis. Comprehensive trauma facilities are also unavailable on these islands. Residents covered by Medicaid face limited access to care in some areas, even though providers are located in the vicinity. Officials from health care provider associations told us that private providers generally limit the number of Medicaid patients they serve because of Medicaid's low reimbursement rates. State officials said that they hope the new Hawaii Health QUEST project will improve this population's access to care by increasing the compensation for providing care and improving the availability of care on all the islands. Under QUEST, the state will contract with managed care health plans to provide a full complement of health care services to QUEST enrollees in all geographic areas. People who cannot obtain care from private providers may receive care from community health centers.\21 These state and federally supported nonprofit centers are designed to provide direct services to hard-to-reach populations, such as the homeless, and those without the ability to pay. The preliminary results of a state survey of uninsured seeking care from the centers reported that about 20 percent came to the centers because they did not have health insurance and about 24 percent came to the centers because of their low costs. Primary care centers also provide some services, such as language capabilities and outreach to the homeless, that are generally not available from private providers.\22 Representatives of community health centers are concerned that the new QUEST project could have a negative impact on the centers' ability to provide needed services to their clients. These centers generally serve people living in the community and are run by community-based boards of directors. The representatives are concerned that in the event the community health centers participate as subcontractors of large managed care plans under QUEST\23 the centers will lose some of the local control that allows them to adapt their services to the unique cultural and demographic characteristics of the communities they serve. In addition, the representatives are concerned about the centers' financial viability under QUEST. Center representatives believe that some of these problems would be alleviated if an individual or a group of community health centers could successfully bid to become a QUEST managed care plan administrator. However, they believe QUEST performance-bond and geographic-coverage requirements are significant barriers to successful center bids.\24 -------------------- \18 In 1991, Hawaii had 17.9 doctors of medicine and doctors of osteopathy per 10,000 resident population, compared to the U.S. average of 15.7 per 10,000. \19 The federal government has recognized seven areas on five of the state's six major islands as having a shortage of primary health care professionals. \20 In emergency cases, Medicaid will pay for air transportation for Medicaid patients. \21 State hospitals are also part of this safety net. They are required to accept all patients regardless of their level of insurance coverage. \22 The state will require managed care plans under the Hawaii Health QUEST project to contract with federally qualified health centers unless the plan can demonstrate that it has both adequate capacity and an appropriate range of services for vulnerable populations. \23 Center representatives said that they would like to bid directly for QUEST as administrators of one or more managed care plans, but cited financial and geographic coverage requirements as possible barriers to health centers administering primary managed care plans. \24 The QUEST request for proposals requires successful bidders to obtain a $1 million performance bond for the state to hold as security against the proper performance of the contract. The bond will be adjusted according to the number of recipients enrolled. After adjustment, the bond must be sufficient to cover approximately 2 months of capitated payments. A center representative estimated that this would require a $2 million to $3 million bond. Regarding geographic coverage, successful bidders must accept recipients from all geographic areas on a particular island, except on the island of Hawaii, which due to its size is divided into two geographic regions. OVERALL COSTS PARALLEL NATIONAL TREND BUT PREMIUMS ARE LOWER ------------------------------------------------------------ Letter :5 The cost experience in Hawaii is seemingly anomalous because, while per capita health care costs are similar in Hawaii and the nation, insurance premiums are lower in Hawaii. PHCA was intended to expand access to coverage, but it did not include explicit efforts to control health care costs.\25 Per capita expenditures in Hawaii have been very similar to the national average since 1974, and both have increased more rapidly than the overall rate of inflation. The same factors in the health care economy have influenced this trend in Hawaii and the rest of the nation. At the same time, however, health insurance premiums are generally lower in Hawaii than in the nation as a whole and have risen at a slightly slower rate than nationally. -------------------- \25 Hawaii, however, does have certificate-of-need requirements for hospital construction; changes in service; and major capital equipment purchases, such as magnetic resonance imaging machines. HAWAII PER CAPITA EXPENDITURES TRACK NATIONAL AVERAGE ---------------------------------------------------------- Letter :5.1 Hawaii's per capita health care expenditures continue to be similar to national levels. We reported earlier that Hawaii's per capita health care expenditures from 1974 to 1982 tracked the national average at the same time the state widened access to coverage through its employer mandate.\26 Similarly, from 1980 to 1991, Hawaii's per capita expenditures for hospitals, physicians, and prescription drugs tracked the national average (see fig. 1). Between 1980 and 1991, those expenditures increased at an average annual rate of 9.8 percent in Hawaii and 9.4 percent in the nation. Figure 1: Hawaii and U.S. Per Capita Expenditures for Hospitals, Physicians, and Prescription Drugs (1980-91) (See figure in printed edition.) Source: Health Care Financing Administration. -------------------- \26 Access to Health Care: States Respond to Growing Crisis (GAO/HRD-92-70, June 16, 1992). SAME FACTORS DRIVE UP HEALTH CARE COSTS IN HAWAII AND THE UNITED STATES ---------------------------------------------------------- Letter :5.2 In both Hawaii and the nation as a whole, health care costs have been rising more rapidly than the average rate of inflation for other goods and services (see fig. 2).\27 State officials, insurers, and health care providers told us that Hawaii is not immune to the factors that have driven up health care costs nationally. These officials said that administrative costs are high and rising; wages for health care professionals, particularly nurses and some technical specialists, have risen significantly in recent years; and medical equipment costs are rising due to advances in technology.\28 Figure 2: Consumer Price Index (CPI) Medical Care Component for Honolulu and the United States Compared to Overall CPI (1975-93) (See figure in printed edition.) Note: The 1993 data are based on the first 6 months of the year. With 75 percent of Hawaii's population, Honolulu is representative of the entire state. -------------------- \27 Figure 2 uses the rate of inflation for Honolulu because statewide data are not available. The Honolulu data are representative of Hawaii's experience because 75 percent of Hawaii's population resides there. \28 We reported on the roles of technological advances and administrative costs in the growth of hospital costs nationwide in Hospital Costs: Adoption of Technologies Drives Cost Growth (GAO/HRD-92-120, Sept. 9, 1992). COST OF MEDICAID PROGRAM HAS ESCALATED ---------------------------------------------------------- Letter :5.3 The cost of Hawaii's Medicaid program has increased significantly in the past few years. During this period, Medicaid expenditures nationwide also rose dramatically (see table 1).\29 Table 1 Growth in Hawaii and U.S. Medicaid Expenditures 1990 1991 1992 ------------------------------------ ------ ------ ------ Hawaii 17% 10% 32% U.S. 18% 27% 30% ------------------------------------------------------------ Source: Hawaii State Department of Human Resources; Health Care Financing Administration (HCFA). In fiscal year 1992, Hawaii experienced a shortfall in its Medicaid budget, requiring the state legislature to appropriate an additional $64 million to cover costs. Most of the upsurge in Hawaii's Medicaid costs occurred because of increased enrollment prompted by expanded federal program eligibility, Hawaii's recent economic downturn, and the SHIP outreach program, which enrolled additional eligible people in the Medicaid program. The cost per Medicaid beneficiary also increased; from fiscal year 1989 to fiscal year 1991, Hawaii's average cost per recipient rose between 7 and 9 percent each year,\30 primarily due to the escalating cost of health care. (See app. II for additional information on the costs of Hawaii's Medicaid program.) -------------------- \29 Nationwide, Medicaid enrollment increased by 2.7 million beneficiaries from fiscal year 1990 to fiscal year 1991; the largest single-year increase in the program since the mid-1970s. \30 From 1988 to 1991, nationwide Medicaid expenditures per capita grew at an average annual rate of 12.3 percent. HEALTH INSURANCE PREMIUMS LOWER IN HAWAII ---------------------------------------------------------- Letter :5.4 Health insurance premiums are lower and have been rising less rapidly in Hawaii than in the nation as a whole (see fig. 3). In 1991, annual premiums for three of the most prevalent health plans in Hawaii--one large-business plan and two small-business plans--were lower than the U.S. average cost of $1,604 for comparable coverage by $358 to $396 (see fig. 4). Because the figure for the national average includes costs for both large and small companies--and premiums for large companies typically cost less than those for small companies--the lower cost for the two Hawaii small-business plans is especially notable. Moreover, insurance officials in Hawaii told us that premiums for small businesses in Hawaii are not much different from those for large businesses. Figure 3: Average Annual Increases in Kaiser Hawaii and HMSA Premiums Compared to the United States (1984-92) (See figure in printed edition.) Note: Data for Hawaii are based on annualized changes for single coverage plans for 1984-92. Sources: Kaiser Foundation of Hawaii, HMSA, and Foster Higgins Health Care Benefits Survey for 1984-92. Figure 4: Annual Medical Plan Costs for Single Coverage in Hawaii Compared to the United States in 1991 (See figure in printed edition.) Source: Kaiser Foundation of Hawaii, HMSA, and 1991 Wyatt COMPARE Data Base. Several factors may contribute to Hawaii's lower premium costs. One is the reduced amount of cost shifting in Hawaii. In general, health care providers pass on the cost of providing uncompensated care to patients with private insurance coverage. Because relatively few Hawaii residents are uninsured, the need for people with insurance to cover such extra costs is minimized. As a result of the state's requirement that all eligible employees accept health insurance, healthy people cannot opt out of the system. Total health care costs, therefore, are spread over wider risk pools that include both healthy and less healthy people. An additional factor that lowers costs for many small businesses is the major insurers' use of modified community rating for small businesses.\31 (See app. III for detailed information on health insurance premiums in Hawaii.) -------------------- \31 When insurers use community rating, they base premiums on the anticipated health care utilization of all subscribers in a particular geographic area or other broad grouping. This contrasts with the more common practice of experience rating, in which insurers base premium rates on the medical experience of each insured group. The major fee-for-service insurer in Hawaii uses a system of modified community rating for businesses with fewer than 100 employees. Small businesses are placed in one large risk pool, but their premiums may be adjusted up or down by up to 20 percent, depending on their utilization. For large businesses, however, Hawaii's major insurers determine rates from a company's experience. This results in a wider range of insurance premiums for large companies, with some large businesses paying higher premiums than small ones. SMALL BUSINESSES REPORT LITTLE ADVERSE IMPACT FROM EMPLOYER MANDATE ------------------------------------------------------------ Letter :6 Most small businesses in Hawaii expressed general satisfaction with the Hawaii health insurance system, but they regard the mandatory provision of insurance as a burden. We found no evidence that the employer mandate resulted in large disruptions in Hawaii's small business sector.\32 Preliminary results from a Louis Harris and Associates, Inc. survey of small businesses\33 in Hawaii conducted for the Kaiser Family Foundation\34 found that taxes and health insurance are viewed as the top two problems facing small business. Fifty-six percent of small businesses that were surveyed considered the cost of health insurance to be a major problem--more than any other government requirement.\35 However, more small businesses in Hawaii considered the inflation of their health care costs to be under control (54 percent) rather than out of control (41 percent).\36 This is a more favorable view than the view of small businesses in the rest of the country, 62 percent of which characterized the inflation of their health care costs as somewhat or totally out of control. -------------------- \32 State officials point to the limited use of a State Premium Supplementation Fund as evidence that Hawaii's employer mandate has not overburdened small businesses. PHCA established the fund to subsidize employers with fewer than eight employees, and to pay health care benefits for employees of bankrupt or noncompliant employers. Since July 1975, the state has paid less than $110,000 from this fund. However, business leaders told us that few businesses knew of the existence of the fund until recently, and state officials said that the limitations on the use of the fund are very restrictive. Consequently, the use of the fund may not be a good indicator of the effect of the mandate on small businesses. \33 These were businesses with 100 or fewer employees; firms of this size employ over half of the state's work force. \34 Kaiser/Harris Survey of Small Business Owners in Hawaii, 1993 (preliminary findings). \35 Other requirements include worker's compensation, unemployment compensation, and occupational safety and health requirements. \36 Forty-six percent of the companies surveyed in Hawaii considered health care cost inflation to be somewhat under control and 8 percent considered these costs to be completely under control. BUSINESSES DISLIKE SYSTEM INFLEXIBILITY ---------------------------------------------------------- Letter :6.1 Business leaders we interviewed had two complaints related to the inflexibility of the health insurance mandate. First, they were unhappy about the current cap on required employee contributions. Because the level of the cap is 1.5 percent of gross pay, employers pay most of the health insurance premiums. Some employers opt to pay the entire premium. Second, since the passage of the 1974 act, five new mandated benefits have been included in the state insurance code,\37 and businesses are concerned about what they regard as an escalating trend of new mandated benefits. Business leaders we interviewed disliked the inflexibility of the mandated benefits--they would prefer to tailor health benefits to the needs of their particular employees. For example, employers cannot delete a mandated benefit, such as well-baby care, that may not suit their employees, in order to provide additional benefits, such as dental care. -------------------- \37 These benefits are well-baby care, in vitro fertilization, mammogram screenings, mental health and substance abuse treatment, and newborn adoptee coverage. INSURANCE MANDATE HAS LITTLE EFFECT ON EMPLOYMENT PRACTICES ---------------------------------------------------------- Letter :6.2 Policymakers and business representatives often express concerns about the effect of an employer mandate on employment practices, including possible reliance on part-time workers, overall employment levels, and effects on salary and other benefits. Because mandatory insurance is required only for employees who work at least 20 hours a week, Hawaii's mandate could cause firms to hire more part-time workers. Three of 10 businesses questioned by the Louis Harris survey reported that in the past 2 years they have hired people for fewer than 20 hours a week primarily to avoid the cost of providing health insurance. However, business leaders told us that hiring part-time workers causes additional administrative burdens and, therefore, has not become a prevalent practice in most industries. The Bureau of Labor Statistics reports that the percentage of part-time workers in Hawaii (which it defines as those working fewer than 35 hours per week) has been lower than or comparable to the average for the rest of the country over the past several years. In 1992, 18.2 percent of Hawaii's work force was employed part-time, compared to 19.2 percent nationwide.\38 More than three-fourths of small businesses surveyed by Louis Harris reported that the mandate has had little to no effect on employment levels, salaries, or other benefits. Nonetheless, about one-fifth of small businesses said that they hired workers who already had insurance through a spouse or another employer, in order to avoid the cost of insuring that worker. Many economists have argued that mandated employer-based benefits do cause a change in wage structures: a higher portion of worker compensation will be in the form of benefits and a smaller portion in the form of take-home wages.\39 Average wages in Hawaii are below the national average, but whether this is attributable to the health care mandate or to other variables is not known. (See app. IV for additional information on economic trends in Hawaii.) Business leaders we interviewed said that because of Hawaii's low unemployment rate--below 5 percent in July 1993--employers would offer health insurance without the employer mandate to compete for qualified workers. Indeed, when the employer mandate took effect, neither HMSA nor Kaiser experienced unusually large enrollment increases, according to HMSA and Kaiser officials. However, the business leaders acknowledged that the mandate may be preventing some employers from dropping health insurance coverage, particularly during economic downturns. -------------------- \38 Because neither the State of Hawaii nor federal agencies report data on the percentage of workers who are employed fewer than 20 hours per week, data were not readily available to independently determine if a change in the percentage of workers employed fewer than 20 hours a week has occurred since PHCA took effect. \39 Victor R. Fuchs, "National Health Insurance Revisited," National Bureau of Economic Research Working Paper #3884 (1991); Lawrence H. Summers, "What Can Economics Contribute to Social Policy? Some Simple Economics of Mandated Benefits," AEA Papers and Proceedings, Vol. 79, No. 2 (1989), pp. 177-183; and Economic Implications of Rising Health Care Costs, Congressional Budget Office (1992), pp. 34-39. PROVIDERS GENERALLY SATISFIED ------------------------------------------------------------ Letter :7 Health care providers we interviewed were generally satisfied with Hawaii's health care system because the widespread insurance coverage has decreased the amount of uncompensated medical care. However, providers were concerned about the effect of low compensation from public programs, such as Medicaid, which results in their shifting costs to patients with private insurance. The president of one provider association said that he is hopeful that the new Hawaii Health QUEST project will address this problem but was cautious about expecting the problem to be solved. IMPLICATIONS FOR HEALTH CARE REFORM ------------------------------------------------------------ Letter :8 Hawaii's experience offers three lessons: Hawaii's experience indicates that an employer mandate by itself will not necessarily result in universal access to health care. Other publicly sponsored programs are necessary to reach residents who are not able to obtain health insurance at work or who are unemployed. Even if everyone has insurance, special programs may be necessary to assure that all residents have adequate access to health services. Hawaii's system of near-universal access has resulted in lower health insurance premiums, particularly for small businesses. However, Hawaii's PHCA did not have explicit cost-control provisions, and Hawaii's health care costs have risen at a rate similar to the national average. In Hawaii, the one state with an employer mandate, the mandate has not created large dislocations in the small business sector. However, factors unique to Hawaii may have contributed to this outcome. For example, Hawaii's tradition of employer-provided benefits means that Hawaii may have started with a higher percentage of insured individuals than the United States has now. Additionally, at the time Hawaii introduced its employer mandate, the cost of providing health insurance was significantly lower than it is today. ---------------------------------------------------------- Letter :8.1 We discussed the results of this review with officials in the Hawaii Departments of Human Services and Health, as well as officials from the major insurers and representatives of primary care centers. They generally agreed with the information presented. We have incorporated their comments where appropriate. Additionally we sent a draft of this report to the Director of the Hawaii Department of Health for review; however, we did not receive any further comments. We carried out our work from July to November 1993 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its content earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Director, Office of Management and Budget, and interested congressional committees. We will also make copies available to others on request. Please call me on (202) 512-7119 if you or your staff have any questions about this report. Major contributors are listed in appendix VI. Sincerely yours, Mark V. Nadel Associate Director, National and Public Health Issues (See figure in printed edition.)Appendix I HAWAII PREPAID HEALTH CARE ACT ============================================================== Letter (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) HAWAII'S MEDICAID PROGRAM ========================================================== Appendix II Hawaii established its Medicaid program in 1966 under title XIX of the Social Security Act. Initially, the state used government salaried physicians, hospital outpatient clinics at nonprofit hospitals, and state-owned facilities to serve Medicaid recipients. Later in the 1960s, the program moved from exclusively using government health care providers to giving recipients a choice of public and private providers. The State Department of Human Services oversees Hawaii's Medicaid program and the Hawaii Medical Services Association serves as the program's fiscal agent--the agency that administers the program's claims processing functions. The greatest number of Medicaid recipients live on the island of Oahu; however, the islands of Molokai and Hawaii have the highest percentage of Medicaid recipients when compared to their total populations. In fiscal year 1992, nearly 24 percent of Molokai's residents were covered by Medicaid and approximately 14 percent of the island of Hawaii's residents were on Medicaid.\1 The island of Lanai has both the lowest number of Medicaid recipients and the lowest percentage of recipients (4 percent). HAWAII'S MEDICAID-ELIGIBLE POPULATION IS RISING Hawaii's Medicaid-eligible population grew significantly over the past few years. Hawaii's average monthly Medicaid-eligible population rose from 72,070 in fiscal year 1989 to about 101,000 in fiscal year 1993. The expansion in eligibility, combined with outreach activities for the State Health Insurance Program, contributed significantly to the increase in the number of residents identified as eligible for Medicaid.\2 Table II.1 shows the average monthly Medicaid-eligible population for fiscal years 1989 through 1993. Table II.1 Hawaii Average Monthly Medicaid- Eligible Population (Fiscal Years 1989- 93) 1989 1990 1991 1992 1993 -------------------- ------ ------ ------ ------ ------ Average monthly 72,070 73,364 74,573 88,260 101,00 eligible population 0\a ------------------------------------------------------------ \a State of Hawaii Department of Human Services estimate. Source: State of Hawaii Department of Human Services and annual Medicaid Report for the State of Hawaii. With the rise in the number of Hawaii residents eligible for Medicaid came an increase in Medicaid expenditures and the total amount of Medicaid benefits paid to providers. While providers consider Medicaid reimbursement rates to be low in Hawaii, the rates are slightly higher in the state than they are nationally. Table II.2 compares the fees paid to providers by Medicaid in Hawaii to the average fees paid by Medicaid in the nation as a whole. Table II.2 Ratio of Medicaid Maximum Fees to Private Fee Levels, 1990 United Hawaii States -------------------------------------- -------- ---------- Primary care 0.58 0.62 Hospital visits 0.57 0.49 Surgery 0.61 0.49 OB-Gyn 0.63 0.57 Laboratory 0.66 0.52 Imaging 1.02 0.58 All services 0.63 0.59 ------------------------------------------------------------ Source: The Urban Institute, State-Level Data Book on Health Care Access and Financing (1993). Hawaii experienced increases in expenditures for all types of services for Medicaid recipients from fiscal year 1990 to fiscal year 1992. The largest increase in actual cash payments occurred for hospital outpatient services--a 54.7 percent increase from fiscal year 1991 to fiscal year 1992. HMSA attributed this increase to the greater number of recipients using these services. See table II.3 for a summary of total Medicaid expenditures and table II.4 for information about the growth in Medicaid enrollment and expenditures in Hawaii and the United States. Table II.3 State and Federal Medicaid Expenditures for Hawaii (Fiscal Years 1989-92) (Dollars in Millions) 1989 1990 1991 1992 -------------------- -------- -------- -------- -------- Hawaii $109.2 $128.9 $141.6 $183.5 Federal 98.0 113.1 125.1 169.6 ============================================================ Total 207.2 242.0 266.7 353.1 ------------------------------------------------------------ Source: State of Hawaii Department of Human Services. Table II.4 Average Annual Growth in Medicaid Enrollment and Expenditures (Fiscal Years 1988-90) United Hawaii States ------------------------------------ ---------- ---------- Enrollment 1.82% 5.20% Expenditures 13.67 15.84 Expenditures per enrollee 11.64 10.11 ------------------------------------------------------------ Source: Health Care Financing Administration. -------------------- \1 The fiscal year 1992 figures were the most recent figures available from the state and HMSA. \2 In 1989, Hawaii expanded its Medicaid eligibility to include such optional groups as pregnant women and infants with family incomes less than or equal to 185 percent of poverty, and the elderly and disabled whose income is less than or equal to 100 percent of poverty. PREMIUM HISTORY OF PREVALENT INSURANCE PLANS IN HAWAII (1984-93) ========================================================= Appendix III Monthly Percent Monthly Percent Monthly Percent premium change premium change premium change -------- ---------- ---------- ---------- ---------- ---------- ---------- 1984 $52.92 $47.52 $52.92 1985 67.92 28.34% 47.52 0.00% 67.92 28.34% 1986 61.62 -9.28 55.72 17.26 61.62 -9.28 1987 63.88 3.67 64.70 16.12 63.88 3.67 1988 66.24 3.69 73.12 13.01 66.24 3.69 1989 72.68 9.72 87.58 19.78 72.68 9.72 1990 90.36 24.33 94.62 8.04 90.36 24.33 1991 100.70 11.44 101.58 7.36 103.80 14.87 1992 107.20 6.45 109.72 8.01 117.65 13.34 1993 115.49 7.73 128.38 17.01 130.49 10.91 -------------------------------------------------------------------------------- Note: All premiums are for individual coverage. \a Kaiser Foundation Health Plan. \b Hawaii Medical Service Association. Source: Kaiser Foundation Health Plan and Hawaii Medical Service Association. GENERAL EMPLOYMENT AND BUSINESS DATA: HAWAII COMPARED TO THE UNITED STATES ========================================================== Appendix IV Data that would permit a definitive evaluation of the Prepaid Health Care Act's effect on Hawaii's businesses have not been developed. However, some key employment indicators show that Hawaii has done as well or better than the United States as a whole. This appendix contains data on these economic indicators. Table IV.1 shows that from 1976 to 1992, Hawaii's part-time employment rate has remained close to the U.S. average, and table IV.2 demonstrates that since 1980 Hawaii's unemployment rate has been markedly lower than the U.S. average. Indexed growth rates from 1970 to the present for total private employment and employment in retail and wholesale trades show that Hawaii outstrips the U.S. average (figures IV.1 and IV.2). Table IV.1 Part-Time Employment Rates in the United States and Hawaii, 1976-1992 Annual Averages United States Hawaii -------------------------------------- ---------- -------- 1976 18.4 18.6 1977 18.3 17.9 1978 18.0 18.0 1979 17.9 17.4 1980 18.7 19.0 1981 19.0 18.6 1982 20.5 19.2 1983 20.3 18.1 1984 19.2 20.0 1985 19.0 20.3 1986 19.0 19.2 1987 18.8 20.0 1988 18.7 19.0 1989 18.5 16.8 1990 18.5 16.0 1991 19.2 16.1 1992 19.2 18.1 ------------------------------------------------------------ Source: U.S. Department of Labor, Bureau of Labor Statistics. Table IV.2 Unemployment Rates in the United States and Hawaii, 1976-1992; Annual Averages and First 6 Months of 1993, Seasonally Adjusted United States Hawaii -------------------------------------- ---------- -------- 1976 7.7 9.8 1977 7.1 7.3 1978 6.1 7.7 1979 5.8 6.3 1980 7.1 4.9 1981 7.6 5.4 1982 9.7 6.7 1983 9.6 6.5 1984 7.5 5.6 1985 7.2 5.6 1986 7.0 4.8 1987 6.2 3.8 1988 5.5 3.2 1989 5.3 2.6 1990 5.5 2.8 1991 6.7 2.8 1992 7.4 4.5 1993 7.0 4.7 ------------------------------------------------------------ Source: U.S. Department of Labor, Bureau of Labor Statistics. Figure IV.1: Total Private Employment, Hawaii and the United States (1970-92) (See figure in printed edition.) Source: U.S. Department of Labor, Bureau of Labor Statistics. Figure IV.2: Retail and Wholesale Trade Employment, Hawaii and the United States (1970-92) (See figure in printed edition.) Source: U.S. Department of Labor, Bureau of Labor Statistics. MEDICAID DISPROPORTIONATE SHARE HOSPITAL PROGRAM IN HAWAII =========================================================== Appendix V Hospitals that serve large numbers of Medicaid patients can face significant financial burdens because Medicaid generally reimburses providers at a lower rate than other insurers. To reduce the burden, the Congress established the Medicaid disproportionate share hospital program (DSH) in 1981.\1 The program allows states to designate hospitals treating large numbers of low-income patients as "disproportionate share hospitals" and to give these hospitals additional Medicaid reimbursement. Federal legislation gives states minimum criteria and formulas for identifying hospitals that qualify for disproportionate share status. This legislation requires states to consider the amount of charity care provided by the hospitals when deciding if they qualify as disproportionate share hospitals and in calculating their reimbursements. Each state chooses the formulas that are used to qualify hospitals for disproportionate share status and to determine the amount of funds these hospitals receive.\2 In Hawaii, 23 of the 28 acute care facilities in the state received disproportionate share payments in fiscal year 1992. (See table V.1 for data on hospitals' Medicaid utilization, revenues, and income in fiscal year 1992.) In recent years, disproportionate share payments have climbed rapidly in Hawaii. State officials attribute this increase to Hawaii's decision to designate as disproportionate share hospitals those facilities that derived more than $100,000 of annual revenue from public funds for the care of low-income patients. Total disproportionate share payments in Hawaii rose from almost $8 million in fiscal year 1991 to over $40 million in fiscal year 1992 (see table V.2). Table V.1 Medicaid Utilization, Revenues, and Income (Fiscal Year 1992) Medicaid utilizatio n Net Net rate patient income Hospital location and name (percent) revenues (loss) -------------------------- ---------- --------- --------- Island of Hawaii Hilo Hospital\a 13.64 $48,834,0 4,995,302 80 Honokaa Hospital\a 1.91 1,958,418 328,212 Kau Hospital\a 16.00 880,418 205,468 Kohala Hospital\a 0.89 586,054 (1,704,45 7) Kona Hospital\a 17.93 19,901,04 955,017 3 Island of Kauai Kauai Veterans Memorial 10.71 1,589,644 (6,185,93 Hospital\a 6) Samuel Mahelona Memorial 0 3,754,345 (298,725) Hospital\a Wilcox Memorial Hospital\b 12.28 32,982,58 (173,593) 7 Island of Lanai Lanai Community Hospital\a 34.02 513,311 (166,872) Island of Maui Maui Memorial Hospital\a 9.47 38,767,59 1,147,543 8 Island of Molokai Molokai General Hospital\b \e 2,152,068 (1,398,03 9) Island of Oahu Castle Medical Center\c 25.85 43,422,02 2,218,411 6 Kahuku Hospital\b 29.72 3,461,775 169,581 Kaiser Foundation 1.03 \e \e Hospital-Hawaii\b Kapiolani Medical Center 34.64 113,234,9 16,491,90 for Women and Children\b 52 7 Kuakini Medical Center\b 4.69 88,902,88 (470,757) 1 Pali Momi Medical Center\b 10.52 30,403,93 (6,601,19 5 3) The Queens Medical 17.58 222,629,4 14,482,04 Center\b 88 4 Rehabilitation Hospital of 11.14 19,582,07 908,242 the Pacific\b 2 St. Francis Medical 11.29 \e \e Center\c St. Francis Medical 24.67 24,121,08 (3,355,21 Center-West\c 3 2) Straub Clinic and 6.28 153,466,5 (5,495,74 Hospital\d 73 8) Wahiawa General Hospital\b 13.88 23,903,72 (961,100) 3 ------------------------------------------------------------ \a State hospital. \b Nonprofit hospital. \c Church hospital. \d Proprietary hospital. \e Not available. Table V.2 DSH Payments (Fiscal Years 1991 and 1992) Percent Hospital location and name 1991 DSH 1992 DSH change ---------------------------- --------- --------- -------- Island of Hawaii Hilo Hospital\a $371,654 $3,544,53 854 5 Honokaa Hospital\a 152,233 527,270 246 Kau Hospital\a 68,845 420,949 511 Kohala Hospital\a 145,649 757,654 420 Kona Hospital\a 1,180,328 4,934,850 318 Island of Kauai Kauai Veterans Memorial 768,176 3,440,496 348 Hospital\a Samuel Mahelona Memorial 255,733 1,438,853 463 Hospital\a Wilcox Memorial Hospital\b 138,575 386,021 179 Island of Lanai Lanai Community Hospital\a 61,897 334,264 440 Island of Maui Maui Memorial Hospital\a 422,153 7,105,387 1,583 Island of Molokai Molokai General Hospital\b 1,275 9,500 645 Island of Oahu Castle Medical Center\c 473,462 1,832,887 287 Kahuku Hospital\b 498,406 515,604 3 Kaiser Foundation Hospital- 20,849 276,420 1,226 Hawaii\b Kapiolani Medical Center for 106,003 1,293,745 1,120 Women and Children\b Kuakini Medical Center\b 162,955 585,584 259 Pali Momi Medical Center\b 104,182 509,901 389 The Queens Medical Center\b 2,238,280 8,676,643 288 Rehabilitation Hospital of 119,999 883,493 636 the Pacific\b St. Francis Medical Center\c 301,193 1,336,270 344 St. Francis Medical Center- 272,182 575,471 111 West\c Straub Clinic and Hospital\d 105,404 668,346 534 Wahiawa General Hospital\b 28,064 299,991 969 ------------------------------------------------------------ \a State hospital. \b Nonprofit hospital. \c Church hospital. \d Proprietary hospital. -------------------- \1 Omnibus Budget Reconciliation Act of 1981, Public Law 97-35. \2 Criteria established by State of Hawaii to qualify hospitals as disproportionate share facilities read as follows: A. Either-- (1) Has at least two obstetricians with staff privileges at the facility who have agreed to provide obstetric services to individuals who are eligible for assistance under the Medicaid program; or (2) Did not offer non-emergency obstetric services as of December 22, 1987; and B. Either-- (1) Has indigent inpatient days equal to or greater than 15 percent of total acute inpatient days; or (2) Has a Medicaid inpatient utilization rate equal to or greater than one standard deviation above the statewide mean Medicaid inpatient utilization rate; or (3) Has a low income utilization rate equal to or greater than 25 percent; or (4) Is a hospital that derives more than $100,000 of revenue from public funds paid for care of low-income patients (including state general assistance and state cash subsidies but excluding Medicare and Title XIX, Medicaid funds). MAJOR CONTRIBUTORS TO THIS REPORT ========================================================== Appendix VI HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, WASHINGTON, D.C. Sarah F. Jaggar, Director, Health Financing and Policy Issues, (202) 512-7119 Bruce D. Layton, Assistant Director Helene F. Toiv, Assignment Manager Frederick K. Caison, Senior Evaluator Michael F. Gutowski, Adviser FAR EAST OFFICE Patricia K. Yamane, Evaluator-in-Charge Mark D. Ulanowicz, Evaluator RELATED GAO PRODUCTS =========================================================== Appendix 0 Health Care: Rochester's Community Approach Yields Better Access, Lower Costs (GAO/HRD-93-44, Jan. 29, 1993). Employer-Based Health Insurance: High Costs, Wide Variation Threaten System (GAO/HRD-92-125, Sept. 22, 1992). State Health Care Reform: Federal Requirements Influence State Reforms (GAO/T-HRD-92-55, Sept. 9, 1992). Access to Health Care: States Respond to Growing Crisis (GAO/HRD-92-70, June 16, 1992). Access to Health Care: State Efforts to Assist Small Businesses (GAO/HRD-92-90, May 14, 1992). Health Care: Problems and Potential Lessons for Reform (GAO/T-HRD-92-23, Mar. 27, 1992). Health Care Spending: Nonpolicy Factors Account for Most State Differences (GAO/HRD-92-36, Feb. 13, 1992).