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The Honolulu Advertiser
Posted on: Sunday, July 22, 2001

HMSA target of federal antitrust investigation

By Frank Cho
Advertiser Staff Writer

The U.S. Justice Department is investigating the Hawai'i Medical Service Association, the largest medical services provider in the state, in connection with possible antitrust violations.

The investigation, under way since late last year, has involved a range of questions related to the firm's marketing and competitive practices, according to people questioned by Justice officials.

An HMSA spokesman said Justice officials contacted the insurer in late February and asked to review copies of a variety of documents related to employer contracts, financial statements and other records.

"We have provided them all the information they have asked for, but we have not heard from them since then," said Cliff Cisco, HMSA's senior vice president for community relations.

Cisco said the Justice Department reviews competition in markets across the country, and HMSA believes the department's interest in Hawai'i is no different. He said HMSA is mindful of its position in the marketplace and has been careful about how it competes.

"At this point we are just waiting to see what happens," Cisco said. "We don't think there is any reason for concern among our members or the community about this."

A person in the Justice Department familiar with the inquiry said no determination has been made about whether to file a formal complaint.

The Justice Department launches a hundred or more investigations into possible antitrust violations each year, but only a fraction result in a complaint being filed, according to the department. Antitrust investigations that do not involve the merger of large corporations are a lower priority for federal investigators and typically take longer to complete.

State Insurance Commissioner Wayne Metcalf declined to comment, saying his department's policy prohibits him from talking about any possible investigation of a health insurer.

Founded in 1938 as a nonprofit, member-owned benefit society, HMSA has long been the giant of Hawai'i's health care industry. It has 630,000 members and more than $1 billion in annual operating revenue. By some estimates, HMSA controls more than two-thirds of Hawai'i's medical insurance market.

The federal inquiry marks the second time in two years that HMSA has been investigated.

Last year, the state launched an investigation of HMSA's business practices under the state Patients' Bill of Rights law that was passed in 1999. Hawai'i Coalition for Health, an advocacy group that is made up of doctors and consumers, filed a complaint that accused the medical insurer of short-changing doctors on reimbursement rates and endangering patient care and asked the insurance commissioner to revoke or suspend HMSA's license.

The coalition accused HMSA of exercising monopoly power "to unreasonably restrain physicians' ability to provide quality care for their patients or to advocate on behalf of their patients."

HMSA denied the charges and after 14 weeks of hearings, a settlement was reached clearing the company of the charges and ending the investigation. Among other things, HMSA agreed to increase efforts to educate physicians about dispute resolution procedures.

Federal investigators began looking into Hawai'i's health care market in November, interviewing several doctors and key insurance executives in Honolulu about Hawai'i's competitive landscape, according to some of the people questioned who asked not to be identified because of the confidentiality of the interviews.

Two people queried by Justice officials said questions centered on HMSA's practices in the market.

One of those questioned said Justice officials asked about HMSA's role on the seven-member state Prepaid Health Care Advisory Council.

The council, established under the 1974 Prepaid Healthcare Act, reviews and makes recommendations on health insurance plans seeking entry into Hawai'i's health care market. The director of the state Labor Department appoints representatives from HMSA and Kaiser, along with other professionals, to the board.

One of the people questioned said investigators asked about HMSA's policy of prohibiting employer groups from offering certain competing plans.

Cisco acknowledged that HMSA restricts employers who offer HMSA plans from offering similar fee-for-service plans, but he said it is a standard industry practice used by insurers to manage risk.

The Justice Department's investigation comes as many of HMSA's fee-for-service competitors are leaving the Islands, citing an increasingly difficult market with rising health care costs and competitive pressures that lower premiums to unprofitable levels.

In the 1980s, nearly a dozen insurance plans competed for business in Hawai'i. Today, that number has dwindled to a handful.

Kapi'olani HealthHawai'i transferred its 27,000-member plan to HMSA in 1999. Queen's Health Plans is selling off all of its health insurance plans, citing millions of dollars in losses. University Health Alliance, unable to meet minimum state financial requirements, is operating under a court-appointed rehabilitator.

HMSA's nearest competitor in size, Kaiser Health Plan, has a third of the number of HMSA members. However, Kaiser is not a fee-for-service provider but a health maintenance organization.

HMSA officials said they are aware their market position brings a certain amount of scrutiny.

But HMSA, a Blue Cross/Blue Shield provider, has been facing its own market challenges over the past three years as increased consumer use of its plans and rising drug costs have cut into its operating profits. The insurer paid out $97 million more in claims last year than it did in 1999, according to its financial report. It also reported an operating loss in 2000 of $49 million on revenues of $1.2 billion.

Many HMSA members have seen double-digit increases in their monthly premiums to pay for the increased costs.

The average small business now pays nearly $600 a month for a worker's family on HMSA's preferred-provider plan. Large companies and organizations negotiate their plans separately, but HMSA has said they are seeing similar increases.

Insurance commissioner Metcalf said that, in general, he would like to see more competition in Hawai'i's medical insurance market but that it's difficult for this to occur when one or two larger companies dominate the market.

Metcalf noted that Hawai'i faces several challenges: a relatively small market, high costs, and HMSA and Kaiser dominating the fee-for-service and HMO businesses. Because HMSA and Kaiser are nonprofit entities, they also get certain breaks on state taxes, making it difficult for large Mainland insurers to see market opportunities in Hawai'i.

"It's been the policy of the (insurance) division that we welcome competition, but we don't have the tools to mandate that competition," Metcalf said. "But there are still real opportunities for small niche players if they are well capitalized."

You can reach Frank Cho at 525-8088, or by e-mail at fcho@honoluluadvertiser.com.