Honorable Robert Bunda

President of the Senate

Twenty-First State Legislature

Regular Session of 2002

State of Hawaii

Sir:

Your Committees on Commerce, Consumer Protection and Housing and Health and Human Services, to which was referred H.B. No. 1761, H.D. 1, entitled:

beg leave to report as follows:

The purpose of this measure is to require health insurers to submit rate filings for approval by the Insurance Commissioner to ensure that health insurance rates are not excessive, inadequate, or unfairly discriminatory.

Your Committees received testimony in support of this measure from the following: Insurance Commissioner, State Actuary, Department of Labor and Industrial Relations, Mental Health Association in Hawaii, NAMI Oahu, Hawaii State Teachers Association, Kokua Council, Hawaii State AFL-CIO, Benefit Plan Consultants (HI), Inc., and thirteen individuals.

Testimony in opposition to the measure was received from the following: Pharmaceutical Research and Manufacturers of America, Legislative Information Services of Hawaii, Healthcare Association of Hawaii, Hawaii Medical Association, Hawaii Management Alliance Association, Hawaii Business Roundtable, Building Industry Association of Hawaii, Kaiser Permanente, Hawaii Medical Service Association, Hawaii Pacific Health, Kanoelehua Industrial Area Association, and four individuals.

The following testifiers either supported the measure in part, offered comments, or proposed amendments: Board of Pharmacy, Office of Information Practices, Chamber of Commerce of Hawaii, Mediation Center of the Pacific, American Council of Life Insurers, and American Family Life Assurance Company of Columbus.

Currently, in Hawaii, health insurers set premium rates free from regulation or oversight and limited only by market forces. While opponents of this measure have argued that other health insurers are free to enter and compete in Hawaii's private insurance market and that the State should let the market determine what consumers pay for health insurance, this argument ignores the fact that in Hawaii one health plan controls almost ninety per cent of the private fee-for-service market, and that its largest competitor dominates the clinic-based HMO market. Further, within the last five years, four health insurers have exited the Hawaii market. Without significant competition, Hawaii's consumers have little choice but to pay the rates set by the major health plans or go without essential health care services.

For some, this means accepting substantial premium increases in order to protect the health and welfare of their families. Recent rate increases for members of one of the State's largest unions ranged from almost fifteen per cent to over thirty-four per cent. For many of Hawaii's working class, gains in wage increases are offset by increases in health premiums.

While health plans have argued that premium rates are the lowest in the nation, the facts do not bear this out. A 1999 medical expenditure survey by the Kaiser Family Foundation showed that out of forty-seven states and the District of Columbia, fourteen states had average annual premiums lower than or equal to Hawaii's average annual premiums. This figure would probably be higher if health care plans in the other states were typically organized as not-for-profit mutuals and enjoyed the same type of tax treatment and other benefits accorded health plans in Hawaii.

Health plans in this State are organized as nonprofits and while they pay a reduced health plan fee, they pay no State taxes, pay reduced federal taxes, and have no shareholders. The State's largest mutual health plan paid State health plan fees of almost $400,000 in fiscal year 2000-2001, but was exempt from premium taxes that would have resulted in an assessment close to $50,000,000. Further, health insurers are exempted from most of the requirements imposed on insurance companies in Hawaii, including investment requirements, agent licensing, and rate filing.

Hawaii's health insurers collected over $2,000,000,000 in revenues in 2000. Without the ability to place the ratemaking process in sunshine, the State is unable to determine whether these revenues are the result of premium rates that are excessive or biased, or reasonable in relation to the benefits provided, or whether there are biases in ratemaking. This measure would allow the Commissioner to examine a health insurer's ratemaking methodologies and calculations by requiring health plans to make rate filings, as is done in other lines of insurance, and would disallow excessive, inadequate, or unfairly discriminatory rates. In addition, this measure would require a health plan to return excess reserves to its enrollees or apply these amounts to effectuate rate reductions. Violators would be subject to monetary penalties or license suspension.

Your Committees find that rate review in other lines of insurance has resulted in lower premiums for consumers. Rate oversight in the areas of motor vehicle insurance and workers' compensation, respectively, has saved Hawaii's consumers over $300,000,000 since 1997, and Hawaii's businesses more than $1,000,000,000 since 1995.

Your Committees are not convinced, as asserted by opponents of this measure, that rate oversight would cause insurers to leave the market. Further, your Committees do not find that the Commissioner currently has the ability to examine the ratemaking process based on financial audits of health plans. These exams are conducted to assess an insurer's financial strength and do not involve an analysis of the insurer's ratemaking methodologies. Your Committees further find that health insurers have been reluctant to disclose information that would allow an analysis of their ratemaking, claiming that such information is proprietary in nature.

Your Committees find that health insurance rate oversight can be implemented with minimal cost to the State and the industry. While the Insurance Division will need to retain a health actuary on a contract basis, as it does in other areas of rate oversight, other additional personnel or resources will not be required.

Finally, your Committees note that over seventy-four per cent of uninsured adults report that they lack health insurance because of the cost. This measure would enable the Commissioner to examine health insurers' rates to determine whether the lack of affordable health care is due to excessive rates or other factors and to address the cost drivers that affect rates. Your Committees believe that Hawaii should join the forty-eight other states that protect its consumers against rising health care rates through rate oversight.

Your Committees have amended this measure by replacing its contents with the language of a similar measure, S.B. No. 2302, S.D. 2. As amended, this measure:

As affirmed by the records of votes of the members of your Committees on Commerce, Consumer Protection and Housing and Health and Human Services that are attached to this report, your Committees are in accord with the intent and purpose of H.B. No. 1761, H.D. 1, as amended herein, and recommend that it pass Second Reading in the form attached hereto as H.B. No. 1761, H.D. 1, S.D. 1, and be referred to the Committee on Ways and Means.