(Editor’s Note: Dr. Chinn’s 2004 article illustrates the monopolistic reasoning behind the Abercrombie administration decision to place HMSA and Kaiser representatives on the board governing the Hawaii Health Exchange.)
by Patricia L Chinn JD, MD Hawaii Medical Journal April 2004 (excerpts)
Hawaii's Prepaid Health Care Act ("PPHCA") of 1974 was lauded as the "first employer-mandated health care legislation in the country." Created to improve health care access for the uninsured, it provides that all employees in Hawaii who work twenty hours or more per week have access to health care. Some three decades later, this Hawaii experiment has produced unexpected results. The overall insurance coverage rate is estimated to be the same today as it was prior to the enactment of the PPHCA. More importantly, the implementation of the PPHCA has instead become the root cause of a health care monopoly in Hawaii. The manner in which the Act has been administered via the Prepaid Health Care Advisory Council ("Council") raises questions concerning antitrust behavior. This article discusses the underlying reasons for these concerns….
In 1974, Hawaii enacted what was truly an innovative plan -the PPHCA- not knowing that Congress would, within months, preempt the PPHCA by passing the federal Employees Retirement Income Security Act ("ERISA"). ERISA was designed to assure Americans that their pension and other retirement benefits would be solvent and well managed. As such, ERISA's effectiveness depended on universal applicability which it achieved with a broad preemption clause. Unfortunately, with this preemption clause, ERISA immediately precluded Hawaii's brand-new PPHCA as well as other states' initiatives. Congress later amended ERISA, giving Hawaii a unique exemption. This exemption from ERISA preemption was granted partly because the PPHCA was a new concept in health care delivery, essentially a state-wide experiment in comprehensive employer mandated benefits. Congress "allowed Hawaii to experiment with [what was then] innovative health care legislation.” However, the language of the exemption amendment and the manner in which the Act has been implemented have led to the development of a health care monopoly in Hawaii.
Two health plans dominate Hawaii's market, the Hawaii Medical Service Association ("HMSA"), a licensee of Blue Cross/Blue Shield, and the Kaiser Foundation Health Plan ("Kaiser"). HMSA currently claims 72% of the State's insureds and Kaiser, 17%. Because of its dominant market share, HMSA presumably exerts monopoly market power in Hawaii.
Every health plan intending to do business in the state must first win approval of the Council, as provided for by the PPHCA. However, employees of HMSA and Kaiser (collectively representing 89% of the State's insureds) have served continuously as voting members of the Council since 1975. HMSA and Kaiser employees only recently resigned from the Council in February 2003. This article will discuss how the Council's former composition may have facilitated anticompetitive activity, effectively keeping competition out of the Hawaii market….
The Director of the DLIR is mandated to appoint a Council whose members represent medical and public health professions, consumers, and persons with experience in prepaid health care. The Council may consist of up to seven members. Until recently, the members included a benefit plans consultant, a hospital personnel officer, a human resources officer from the hotel industry, a physician in private practice medicine, an insurance agent, an HMSA employee, and a Kaiser employee. A newspaper investigative report, in 2001, noted that representatives of "Kaiser Foundation Health Plan, the largest health maintenance organization in the state, and HMSA, the largest fee-for-service provider" have been voting members of the Council. At that time, Council members had served terms ranging_ from one to sixteen years.
On January 21, 2003, a newly elected Governor Linda Lingle, in her first State of the State Address, ''propos[ed] that HMSA and Kaiser Permanente be prohibited in the future from sitting on the board that recommends which insurance companies can enter the market in Hawaii." HMSA and Kaiser both voluntarily resigned from the Council shortly after the Governor 's Address. Following this, the State of Hawaii Twenty-Second Legislature then passed, and the Governor signed, SB 665 SDI HD2 CD1 which prohibits "a person representing a health maintenance organization under chapter 4320, a mutual benefit society issuing individual and group hospital or medical service plans under chapter 432, or any other health care organization" from membership on the Council.
At the beginning of each year, the Council chooses the plans that will be the benchmarks for the coming year- usually an HMSA plan and Kaiser HMO. New companies applying for approval to sell insurance in the state must provide, at a minimum, similar coverage at similar cost to the plan enrollee. These new companies submit their applications to the DLIR, at which time departmental staff review the paperwork along with a checklist and submit them to the Council for approval. Among the required data are: proposed premium rates, deductible amounts, stop-loss provisions, detailed coverage information regarding hospital, surgical, medical, outpatient care, maternity, and other benefits. The Council then may recommend approval of a plan with provisos. The Council may also reject a plan for any number of reasons.….
The Current Health Care Market
As noted earlier, HMSA and Kaiser dominate the market. HMSA, a non-profit tax-exempt mutual benefit society, "wields monopoly power as a seller of health insurance, and monopsony power as a purchaser of the services of health care providers." In 1977, HMSA provided coverage for44.3% of people in the private sector and served as the third party administrator for Medicare and several other health plans. Kaiser, HMSA's closest competitor, provided coverage for only 14.7% of the private sector. In 1999, more than 60% of consumers were covered by HMSA, "and estimates for 2000, are closer to 72%. As these figures indicate, "HMSA has enormous capacity to exercise control." Undoubtedly, HMSA is a dominant market player and has enormous marketing power which makes Hawaii, for all practical purposes, "a single payor health insurance system" and a monopoly health care market.
According to Professor Richard S. Miller, Professor of Law, Emeritus, William S. Richardson School of Law, HMSA "virtually monopolizes the Preferred Provider Organizations (PPOs) and is almost the only buyer of physicians' PPO services in this State ...” Indeed, the participating provider agreement, which physicians must sign in order to contract with HMSA, was characterized as a contract of adhesion in 1999, by Arleen Meyers, M.D., J.D., founder and President of the Hawaii Coalition for Health ("Coalition"), a non-profit health care consumer advocacy organization.
In 1999, the Coalition filed a complaint with Hawaii's Insurance Commissioner against HMSA. The following discussion of the Coalition's complaint is not offered in this article as legal authority, but to describe an aspect of the current health care market that has recently raised some antitrust concern. The Coalition's complaint alleged "unfair contracting practices and creating a business environment of adhesion, coercion, and intimidation and for exercising its monopsony power to unreasonably restrain physicians' ability to provide quality care for their patients or to advocate on behalf of their patients ....”
As regards HMSA and its provider contract, Dr. Meyers stated that
HMSA occupies more than sixty percent (60%) of the consumer market for health insurance and is the major payor of reimbursements for medical care for virtually all Hawaii physicians who are not fully employed by a single health maintenance organization. If physicians practicing outside the Kaiser Permanente system don't sell their services to HMSA. they are forced to go out of business. As a result, physicians are under enormous economic pressure to enter into any contract proffered by HMSA regardless of whether the terms are anti-competitive or against their or their patients' individual self-interest. HMSA therefore holds both monopoly and monopsony power of dangerous proportions, precluding any single physician's ability to negotiate with HMSA for either herself or her patients.
In response, HMSA argued that health care contract between HMSA and its providers were private contracts and not under the regulation of the Insurance Commissioner.
The Coalition's complaint was settled in 2000. HMSA agreed to "significant changes in the appeals processes it provides to physicians, while the Commissioner accepted HMSA's assertion that federal law prohibits state regulation of contracts between insurers and providers.''
This section will discuss potential antitrust issues and monopoly behavior, however, it must again be noted that the scope of this article does not permit a detailed antitrust analysis. The discussion in this section deals with the Council's implementation of the PPHCA and the Act's regulatory limitations.
Of note, HMSA and Kaiser representatives were first appointed to the Council in 1975, when the PPHCA was initially implemented, and served continuously on the Council until February 25, 2003, when they voluntarily resigned. HMSA's membership on the Council for the past three decades created an extraordinary conflict of interest and facilitated potential anticompetitive activity on the part of HMSA. New companies applying to do business in the state were obligated to submit applications and divulge proprietary and confidential information to the Council. While most new plans would have guarded this information from prospective competitors, the information instead went directly to HMSA and Kaiser employees by virtue of their membership on the Council. On occasion, this information also went to more than one HMSA or Kaiser employee in attendance at meetings of the Council. Data summary sheets, usually generated at each Council meeting, assisted a comparison of benefits between plans. Even a member of the Council itself "acknowledge[ d) that by being on the council the two companies ]HMSA and Kaiser[ may be getting 'a leg up' on their competitors by seeing their plans .... " It is likely that this loss of confidentiality was a strong deterrent to new market entrants -possibly serving to maintain Hawaii's contracted health care market.
Remarkably, previous directors of the DLIR and previous Council chairs allowed and even required the sharing of this proprietary information among market competitors. HMSA and Kaiser may have had an unfair advantage if their employees who were Council members directly relayed proprietary information belonging to new health plan applicants. There was certainly potential for violating a basic goal of antitrust law - fairness and elimination of unfair business practices.
The primary statute that is the basis for federal antitrust law is the Sherman Act. Section 1 of the Sherman Act declares that activity in restraint of trade is illegal and those who participate in such activity will be found guilty of a felony punishable by fine and/or imprisonment or may be subject to damage claims. Section 2 relates to independent conduct and states that "]e[very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony" punishable by fine and/or imprisonment, or may be subject to damage claims….
HMSA, covering 72% of insureds in a market analysis, would likely be found to have monopoly power, but monopoly power itself does not violate antitrust law if it has been legally obtained. However, if the HMSA and Kaiser employees who served on the Council voted to reject competitor plans for reasons other than furthering the lawful purposes of the Council, or if HMSA and Kaiser benefited from knowledge of proprietary information gained through the Council, then this conduct could constitute behavior consistent with illegal maintenance of a monopoly.
According to an investigative report of a major local newspaper published in 2001, the previous Council rejected ninety-six out of an approximate one hundred mainland plans that applied to do business in Hawaii. 127 Fifty-nine out of sixty-four plans were rejected in the first seven or eight months of 2001. In the same article, Professor Thomas Saving, Professor of Economics, Texas A & M University, stated, "I don't think there is much doubt that they (HMSA and the council) are deterring entry into the market." It is essential that recent Council denials be scrutinized and an assessment made of procedures to safeguard the confidentiality and disclosure of proprietary information.
Although it is imperative that the State of Hawaii provide adequate supervision of the Council, as Professor Richard S. Miller recognized, there was "only the most minimal of scrutiny and supervision" by the state's DLIR. By permitting HMSA and Kaiser seats on the Council, previous DLIR directors created a convenient mechanism for market competitors to control new entry into the Hawaii market and thus may have facilitated potential monopoly antitrust activity…. Informational fire walls should be enacted immediately if they do not yet exist. The newly constituted Council in 2003 must consider potential conflicts of interest at the same time it reconciles itself with Hawaii's sunshine laws…..
There may also have been an unusually close working relationship between the DLIR and HMSA, raising a question of propriety. A previous DLIR director resigned her position as DLIR director in October, 2000,135 was elected Chair of the Hawaii Democratic Party in April, 2001, and was then elected to the Board of Directors of HMSA in May, 2001. Scrutiny must be applied to the Council's activities, its voting members, and the State's supervisory role via the DLIR to insure that all business is conducted with the acknowledgment of conflicts of interest and with the assurance of propriety and fair dealing…..
One federal approach would be a Department of Justice ("DOJ") investigation. The advantages of a DOJ analysis include expertise in antitrust evaluations, the resources needed to perform econometric studies, and the general belief that an outside agency will look objectively at a situation in which the State itself may have been negligent by not providing adequate oversight and supervision of the PPHCC. Several procedures are available for enforcing antitrust law: criminal punishment, equitable relief including proceedings in equity, private suits in equity, consent decrees, and also private actions….
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