Posted on: Friday, February 11, 2005

HMSA refund bill faces hurdles

By Deborah Adamson
Advertiser Staff Writer

A Lingle administration bill that would force the Hawaii Medical Service Association to refund about $100 to each of its 688,000 members faces "an uphill battle" in the Legislature, said a lawmaker who sits on the committee hearing the bill.

At a hearing yesterday, members of the Senate Committee on Commerce, Consumer Protection and Housing question whether the proposal — which would lower a health plan's required level of reserves — is the best way to hold down medical costs.

When asked about the bill's chances, Sen. Will Espero, D-20th ('Ewa Beach, Waipahu), a member of the committee, said, "It's going to be an uphill battle. It's a noble effort ... (but) I'm not fully convinced whether that's the best course to take."

Sen. Ron Menor, D-17th (Mililani, Waipi'o), the committee chairman, added that he has "major concerns about the bill."

He said the committee wants to make sure that health insurers have adequate reserves to cover claims, especially in catastrophes.

"I don't think a strong case has been made," Menor said.

The bill, SB760, would lower a managed care plan's required level of reserves to 30 percent of annual expenses, down from 50 percent. Among Hawai'i's health insurers, only two would be affected. HMSA's $516 million in reserves amount to about 35 percent of annual expenses. If the bill passes, HMSA would have to refund about $68 million.

AlohaCare, the health plan for Medicaid members, would be about $1 million over the cap and result in a $23 refund per member.

Menor said the Insurance Division would have to submit actuarial studies to support its contention that a 50 percent ceiling is too high.

The state had enacted the 50 percent mandate recently and it needs a good reason to change course, he said. Former Insurance Commissioner Wayne Metcalf used actuarial studies to show that 50 percent was an adequate level of reserves for a health insurer to hold, he added.

The Insurance Division agreed to submit actuarial reports. The committee will meet again on Wednesday and make a decision on the bill.

Yesterday's hearing attracted several health insurers, which opposed the bill.

In submitted testimony to the committee, HMSA said its reserves are a "very important and necessary financial safety net," currently equal to about $749 per member. "How far would $749 per member go during a serious disease outbreak — like SARS or the West Nile Virus?"

But the Insurance Division, which is behind the bill, said that holding "excessively large" reserves may signal that a health plan is accumulating excess money rather using them to pay claims. When this happens, "customers may end up paying more in premiums than is necessary."

A reserve level of 30 percent of expenses is "sufficient to protect the insured against an insolvency," Insurance Commissioner J.P. Schmidt said.

The Insurance Division has not seen net losses or claims anywhere near 30 percent of expenses, he said. An analysis of underwriting losses suffered by HMSA, Kaiser, Hawaii Management Alliance Association and University Health Alliance from 1993 to 2003 showed that they averaged less than 3.6 percent of expenses and in no event rose above 9.5 percent, Schmidt said.

But HMSA countered that losses accumulate.

"Without sufficient reserves and investment income from reserves, a nonprofit health plan like HMSA would find it very difficult to survive," HMSA said.

HMSA said it also authorized three refunds in the past decade, giving back nearly $80 million.

Menor asked why the insurance commissioner doesn't block health insurance rate hikes instead of calling for a reduction in reserves. The state began regulating health premiums in 2003.

Schmidt said it's better to tackle the issue of large reserves separately from the rates. If HMSA rates are kept low while its reserves remain high, it could make it difficult for rivals to enter the market.

"This can result in an unfair competitive advantage for managed-care plans with very large reserves," Schmidt said. "This advantage can be a deterrent to new entrants into the marketplace and can restrict the growth of competitors once they enter."

Reach Deborah Adamson at 525-8088 or dadamson@honoluluadvertiser.com.