States Look at Hawaii’s Rx for Health Insurance Costs : Medicine: The system covers virtually all, with little economic disruption. But will it work on the Mainland?

More than 20 years ago, when this young island-state set out to provide health insurance to all its 1.1 million citizens, lawmakers faced two tough alternatives.

One was to simply expand Medicaid eligibility to the 17% of the population that had no coverage. But that, they feared, would require a hefty tax increase--and might lure additional planeloads of long-haired freeloaders from the Mainland.

Instead, Hawaii took the untrod path, one that’s now attracting increasing notice among policy-makers and health care analysts throughout the country, arousing a mixture of surprise, curiosity, envy and skepticism.

In 1974, Hawaii adopted a law that required businesses to offer health insurance to virtually every employee. Those exempted, such as seasonal and part-time workers, as well as students, would be covered by special state subsidies.

Almost overnight, and with minimal economic disruption to business, the state’s medically uninsured population fell to less than 5%.

And contrary to some predictions, total health care spending did not soar out of control. To be sure, it has continued to rise, as it has in the rest of the country, but at a lower rate.

Moreover, in a state with one of the nation’s highest costs of living, health insurance premiums here are remarkably low. The average Hawaiian family of four today pays half the rate of Californians and those in many other states.

And perhaps most important, Hawaiians’ health has improved. The infant mortality rate is down 50% from its 1974 high of 16 deaths per 1,000 births. Life expectancy is now 78 years, the highest in the nation.

“Because our citizens have access to affordable primary health care, we have the healthiest people in terms of outcome,” says Dr. John C. Lewin, Hawaii’s health director. “We have the greatest longevity, the lowest premature death rates from heart disease, cancer and lung disease in the nation. Our . . . per capita use of long-term care beds is the lowest in the nation.”

“These results have been achieved without noticeable price inflation, widespread hardship on employers, onerous administrative requirements or other consequences,” adds Mario R. Ramil, director of the state Department of Labor and Industrial Relations.

“We’re the nation’s undiscovered model, a demonstration project that works--with a 17-year track record,” Lewin says. “The price tag is zero. This is truly reform.”

The central question is whether Hawaii’s highly successful program can be duplicated on the Mainland--either in another state or as a national model under some form of universal health insurance.

On that score, given Hawaii’s unique history and geographic isolation, there is no consensus yet. “Certainly, what’s happened here can’t be simply imposed on the rest of the United States,” concedes Marvin B. Hall, president of the Hawaii Medical Service Assn., as the Blue Cross Blue Shield Assn. is known here.

But analysts say that the nation has much to learn from Hawaii’s ongoing program as the health care system becomes ever more expensive--and woefully inadequate. Dr. Molly Joel Coye, California’s new health director, agrees. “Hawaii is now our most important laboratory,” she says.

Nationwide, about 14% of the population is uninsured--about 35 million people, mostly full-time jobholders and their dependents. Aggregate health spending continues to soar, accounting for more than 12% of the gross national product, with no letup in sight. As a result, hard-hit businesses are forcing employees to pay a greater share of their medical bills while aggressively trimming overall benefits. Insurers also are cutting back, jacking up rates for everyone--often prohibitively for those with existing medical conditions such as cancer, diabetes and even bad backs.

The national crisis has spawned scores of proposals for reform, from adopting a universal coverage plan modeled after Canada’s to providing tax writeoffs for individual premiums. Among those that have attracted the greatest attention is a bill introduced in Congress by Senate Majority Leader George J. Mitchell (D-Me.). Similar to Hawaii’s 1974 Prepaid Health Care Act, the central feature of Mitchell’s plan is the so-called employer mandate.

And in California, a ballot initiative for 1992 is being considered that would require employers to offer basic, low-cost insurance to workers and their dependents.

But the concept of employer mandate has many doubters. The Urban Institute, in a study done for the U.S. Labor Department last month, warned that such mandated insurance nationwide could cost employers between $17.3 billion and $41.8 billion more in premiums and pose a crushing burden to small businesses. But the institute also said employer mandate could reduce the number of uninsured to about 8.7 million people.

Analysts agree that any significant federal reforms are at least several years away. In the meantime, the various measures being taken or considered in the states are coming under increasing scrutiny--and none more so than Hawaii’s unique program.

Hawaii’s law, which took effect Jan. 1, 1975, required every employer to pay at least half the cost of covering a full-time worker. The employee contribution was limited to 1.5% of the worker’s gross wages. Thus, a person earning $36,000 a year would pay about $550 in annual premiums. The cap remains in effect.

Employers were free to choose their health plans, but the law required a minimum array of benefits that included full-service hospital care, up to 120 days a year; surgical services that included anesthesia and post surgical-care; home, office and hospital visits by physicians; diagnostic lab and X-ray services, and maternity care.

Small businesses unable to purchase insurance because of the cost are eligible for special state reimbursement, but to date only about a half-dozen firms have applied, state officials say.

Significantly, because all employers in the state insure their workers, the employees in effect form a vast pool for spreading the insurance risk, thus eliminating the need for insurers to rate each business individually according to its claims experience, say Lewin and William H. Dendle III, Hawaii’s chief health planner. As a result, a small firm will not have its group rates increased--or canceled--just because one employee develops a serious and costly illness, a practice known as “underwriting.”

“This has reduced the administrative expenses for insurers and, together with the spreading of risk, made insurance premiums affordable for all but a handful of small employers,” says California’s Coye.

The upshot, Lewin adds, is that small employers pay rates 50% less than in most other states.

“This is a key element to our success. Hawaii is the only place in America where small business is not subject to underwriting,” says Lewin, who is also president of the Assn. of State and Territorial Health Officers.

Since the beginning, there has been no requirement for dependent coverage, but 95% of dependents are covered--a testament to the strong competition here for workers. Hawaii’s unemployment rate of 2.3% is the lowest in the nation.

The law also exempted salespeople paid solely by commissions, students, seasonal workers and those who work less than 20 hours a week. But they are eligible for special state subsidies.

“The whole plan went into effect without substantial hitch or complaint,” according to a 1978 state-funded review of the program. “It

is clear that Hawaii has accomplished in large measure what is being sought for the rest of the country. . . .”

And with virtually everyone in the state insured, hospitals here do not refuse to treat people without insurance, as is sometimes the case on the Mainland. Because the costs of such “uncompensated care” are negligible, there is virtually no cost to be passed on to those with insurance, analysts say.

The program also did not lead to a proliferation of bureaucratic red tape, state officials say. The act is administered and enforced by the disability compensation division of the Hawaii Department of Labor and Industrial Relations. “No substantial additions to the staff of my department were required,” Ramil says.

Another key to the program’s success, according to Lewin and others, is a vigorous competition among insurers to go after the uninsured.

The two dominant health insurance companies on the islands, Kaiser Permanante and the Hawaii Medical Services Assn., cover about 800,000 people, and they have “engaged in real and active competition,” keeping prices relatively low, says John van Steenwyk, a private analyst who conducted the 1978 state study.

But not everyone is happy, especially some small businessmen.

Samuel M. Slom, who owns a convention speakers bureau and a small-businesses consulting firm, is philosophically opposed to the state’s health system.

“I call it the new plantation system,” he fumes. “Everybody here depends on the government--for housing, for transportation, for health care.”

Many small businesses, forced to buy employees health insurance, have dropped other benefits, such as pension plans and profit sharing, according to Slom, who is also president of Small Business Hawaii, a trade association.

And Slom fears that the state’s business climate may deter new businesses from starting up and drive away established concerns.

But, Ramil says, the law does not appear to have deterred creation of new businesses. Hawaii is the nation’s third-fastest-growing state for small business, with more than 27,000 individual enterprises, 90% of which employ 50 workers or fewer.

And apparently for now, most businesses have chosen to remain. As Chicago-based analyst Emily Friedman notes, most Hawaii business people do not have the luxury of relocating across some convenient state border just because they do not like the program. “Being an archipelago doesn’t hurt,” she says.

Hawaii’s history and tradition played a part in its enactment of the system. Going back to pre-statehood days when plantations dominated the islands, Hawaii has a long track record of generously providing citizens with health services, minimum wage protection, workers’ compensation, unemployment insurance and disability income.

The state’s health plan met surprisingly little opposition when it was proposed, Lewin and Dendle say.

“No major interest groups saw the legislation or its requirements as a threat,” said the 1978 state review of the program.

A key reason for that, says Blue Cross Blue Shield official Hall, was that overall health care costs two decades ago were much lower than today, about half of the current 12% of the gross national product. “So it was not a large jolt,” he recalls.

In any case, the strongest argument against the Prepaid Health Care Act was “Why bother?”

It was widely assumed here in the early 1970s that Congress was on the verge of requiring employers to offer health insurance, a proposal that had the backing of both the Richard M. Nixon Administration and then-Rep. Wilbur Mills (D-Ark.), the powerful chairman of the House Ways and Means Committee, analysts say.

But Watergate soon distracted Nixon. And Mills ran into political problems of his own stemming from his drinking, including a highly publicized 1974 incident in which a companion, stripper Fanne Fox, jumped into Washington’s Tidal Basin when police stopped Mills’ speeding car.

In 1974, when the new law was being considered, 90% of all workers already had employer-based health plans--a legacy of the old days when plantations had their own doctors and hospitals, providing free care to sugar and pineapple workers. “The bill was a reflection of what already was pretty much in place through tradition,” says Hall.

But Hawaii’s current program is hardly resting on its leis. Rather, ambitious officials are pushing a host of other reforms aimed at reaching the remaining 2% still without coverage. “I’ll be the first to tell you that we’re far from perfect,” Lewin says. “We, like the rest of the nation, have a long way to go.”

For instance, native Hawaiians, who make up 20% of the population, still have among the poorest health status of any ethnic group in the country, he says. “And with 40,000 mostly uninsured Asian immigrants a year, we’re carrying a lot of health problems.”

Since 1975, the state has continued to expand coverage. In 1976, the Prepaid Health Care Act was amended to require coverage for treatment of alcohol and drug use as diseases.

Hawaii also has expanded Medicaid eligibility to the full limits of federally matched options, covering an increasing number of children and pregnant women. The state has about 75,000 Medicaid recipients.

As a result, residents are seeking outpatient services at twice the volume of the rest of the country but only half as much when it comes to much more expensive hospital visits.

And when a 1988 survey found that the remaining 2% to 5% of the uninsured were largely the unemployed and the dependents of low-wage earners, Lewin and Gov. John Waihee came up with a new initiative, the State Health Insurance Program (SHIP).

It began in June, 1990, with great fanfare and an active outreach program, with promotion at supermarkets, malls and through the news media. By December, more than 10,000 people had enrolled, nearly half of them children. Another 6,000 people have been enrolled since.

SHIP uses a sliding payment scale that requires those enrolled to pay a small fee for visits to a physician and a small portion of the insurance premium, with the rest picked up by the state. For example, a family of four with an annual income of under $21,906 is required to pay $45 a month. Such families with an annual income below $14,604 do not have to pay at all.

The program emphasizes preventive and primary-care services, with full coverage for baby and well-child coverage--but only five days of hospitalization and no coverage for elective surgery.

But SHIP is only another beginning, says Lewin, a Los Angeles native.

Now he is talking about building a “seamless system by turning the patchwork quilt of programs and benefits into one true system of universal access,” one that he says will guarantee every citizen a standard package that includes dental and mental health care and, above all, preventive services.

“We have the best health care system in the country,” Gov. Waihee declared in June at a National Governors’ Assn. health care task force meeting. “While others dream about universal access to health care insurance, we’ve got it.”

And that’s no idle boast, says Richard E. Merritt, director of George Washington University’s intergovernmental health policy project. “Hawaii is the only state that can legitimately claim to have universal health insurance,” he says.

Lewin hopes federal policy-makers will closely examine Hawaii’s experience before undertaking any national reforms. “We have some answers,” he says.

Coye agrees: “Hawaii should be overrun with health services researchers.”

Former Massachusetts Gov. Michael S. Dukakis, who spent the spring semester lecturing at the University of Hawaii, told the school’s magazine, Malamalama, that “the federal system is at its best when you have a state that’s out front experimenting, pioneering, leading and testing.”

Lewin concludes: “I confess, I’m occasionally accused of being a dreamer, a risk-taker and an idealist. . . . But maybe we should open up and dream about what might be, what should be and what ought to be. This dream is really about social justice.”

HEALTH CARE CRISIS: Nation’s governors call for innovative reforms at state level rather than federal action. A18

Insurance Premiums

Medical insurance premiums vary widely from state to state. These figures are the average monthly cost of premiums for a single person and for a family of four as of October, 1990.

State Singles Family of Four Hawaii $94 $263 New York 154 360 Kansas 282 546 Delaware 240 516 Georgia 140 340 Arizona 140 335 California 141 503 Iowa 139 313 Illinois 150 415 Massachusetts 217 508

Source: Hawaii Medical Service Assn.