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Hawaii Healthcare Alliance says
that it is exempt from insurance law
and can offer savings of
up to 40 percent

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By Ian Lind
Star-Bulletin

State and federal regulators are scrutinizing a local company's claim that its health plan marketed to families of small-business owners and the self-employed is exempt from insurance laws.

Hawaii Healthcare Alliance says it can offer savings of as much as 40 percent because it is exempt from financial, operational and disclosure requirements of the Hawaii Prepaid Health Care Act that other health insurers must meet.

State insurance regulators are wary of the exemption claim, fearing the unregulated health plan could pose a risk to consumers. Health insurance plans have drawn more attention since the 1997 collapse and seizure of the Pacific Group Medical Association, which left an estimated $26 million in debts owed medical providers and others.

Hawaii Healthcare Alliance was formed in January and provides coverage for more than 1,000 families, a total of about 3,000 individuals, according to Alliance founder and president Darren Larson.

Recent Alliance advertisements boast a "sample rate" of $340 a month for a family of four, including medical, drug, vision and dental coverage.

A comparable plan from Hawaii Medical Service Association, the state's largest health insurer, would cost more than $600, Larson said in a recent interview.

"We're not an insurance company," Larson said. "We're a nonprofit association that has formed, on behalf of its members, a medical benefit trust that basically goes out and purchases medical coverage on behalf of the members."

"We're acting as a consolidation company and pulling everybody together so we can get group buying power," said Larson, who splits his time between Honolulu and an insurance business in Houston.

Larson said Hawaii law is "insurance friendly" and allows the consolidation company approach, which is prohibited by insurance codes in all other states.

'We've been an open book'

Larson said he is cooperating with reviews of the company by the state Insurance Division and the U.S. Department of Labor's Pension and Welfare Benefits Administration.

"We've been an open book," Larson said. "We've supplied them with every piece of information they've asked for. We've even provided the Labor Department with a list of our policyholders."

Insurance Commissioner Wayne Metcalf declined to comment on the Alliance plan but said his office previously referred several complaints to the Labor Department.

A spokesman for the Pension and Welfare Benefits Administration regional office in Los Angeles said he could not comment on a pending investigation.

Larson said the Hawaii Healthcare Alliance is financially healthy, and he is not concerned about the reviews.

"We've got plenty of money to pay claims," Larson said.

Hawaii Healthcare Alliance is attempting to serve people exempted from Hawaii's 1974 Prepaid Health Care Act, who have a difficult time obtaining health insurance, Larson said.

This group, estimated at between 7 percent and 10 percent of the population, includes small-business owners, independent contractors, consultants, the self-employed, unemployed and people in transition between jobs.

The company's unconventional form allows its health plans to be priced below competing products, Larson said.

Funds reserve is not required

But the lack of regulation also means the company does not have to maintain funds in reserve for paying future claims as otherwise required by law, and does not routinely disclose its finances to regulators or the public.

An important feature of the plan is a two-year exclusion on payments for pre-existing medical conditions, a delay that would not be allowed under plans regulated by the Hawaii Prepaid Health Care Act.

"We're not going to cover anything where you had advice or treatment, or a prudent person would have gotten treatment, in the last nine months before you came into the plan, and we don't cover maternity for 15 months," Larson said.

Dick Botti, president of Legislative Information Services of Hawaii and spokesman for several local industry associations, said the Alliance plan addresses a serious need.

"We have a number of independent contractors who find a great hesitancy among other insurers on accepting them," Botti said. "If somebody can't get the insurance, what do they do? It's a catastrophic situation right now, the same as workers' compensation was before the Legislature passed reforms."

"It's nonprofit, and what we see, we like," Botti said of the Alliance plan.

But, Botti acknowledged, "we don't have any assurance of financial stability."

Earlier plan was dropped

Max G. Botticelli, chief executive officer of University Health Alliance, said his group previously set up a health plan for Design Benefits Insurance Services Inc., an insurance agency started in 1996 by Larson and his wife, Linda.

The plan, also aimed at individuals and small-business owners, was dropped after a short time.

"It turned out not really to be a good business for us," Botticelli said. "It was a little risky, it was difficult to control the risk, and administrative costs were quite high."

HMSA also offers a plan for individuals, but spokesman Cliff Cisco said it is a small market that accounts for a very small portion of the company's total enrollment. "It's a very tough sell, always an underwriting challenge."

In a document submitted to the insurance commissioner, Larson said premiums paid by Hawaii Healthcare Alliance members are deposited into a medical trust account administered by the California-based Arrowhead Trust Inc. Administrative costs and smaller claims for medical treatment are then paid directly from the trust account by a bonded third-party administrator.

Protection in reinsurance

The Alliance protects itself by purchasing reinsurance to pay off large claims, a standard practice of insurers, Larson said.

Larson declined to say at what level reinsurance takes over, saying that is proprietary information.

Companies typically balance costs and risks in purchasing reinsurance. A low reinsurance threshold means the reinsurance pays more of total claims and reduces risks but costs more. As the threshold rises, the cost of reinsurance drops while risks go up.

Larson said Hawaii Healthcare Alliance tries to control that risk with another insurance policy limiting its aggregate payout in any year, allowing it to survive even a "worst case" scenario.

Larson's own insurance agency, Design Benefits, shares an office with the Alliance and does all of its sales and marketing. The company uses salaried employees instead of paying commissions, a move that provides further savings, he said.

The Alliance has contracted with the Queen's Physician Group to serve as its preferred provider network, while a Queen's spinoff, Health Unified Inc., provides medical management services, an arrangement Larson equates with monitoring by the marketplace.

"They're not officially monitoring us, but if they're not comfortable with our arrangement and how we're doing business, they're not going to recommend us to their doctors," he said.