Entrepreneur Kimo Kaleiwahea is making due without costly health insurance.

Small business,
heal thyself

Hawaii health insurers slowly drop
plans that will cover sole proprietors

Lyn Danninger

For small businesses and independent contractors, obtaining health insurance through a trade group or an association has been one of the only ways to get an affordable comprehensive medical plan.

But the state's insurers have recently been eliminating these group plans, leaving those they covered through associations with few options for health insurance and paying higher out-of-pocket costs.

The latest group to be weeded out, the Hawaii Farm Bureau, is a 1,800-member association of farmers and farm-related businesses.

Last month, the state's largest health maintenance organization, Kaiser Permanente, terminated the bureau's group plan. Farmers covered under the bureau's plan have the option of converting to a more expensive individual Kaiser plan that offers fewer benefits.

"My understanding is that it would cost about $70 or $80 more per month for a family of four. Co-payment costs would also go up," said Michael Scoyni, an independent farmer on Kauai who had been covered under Kaiser through the Farm Bureau plan and must now decide what to do.

Kaiser acknowledges the shift.

"The choices are probably not as attractive as maintaining the status quo," said Claudia Schmidt, Kaiser's director of business development.

Bureau members still have two remaining options, with several choices from Hawaii Medical Service Association and University Health Alliance. But both are considerably more expensive for equivalent coverage, Scoyni said.

Scoyni said he has not made up his mind what to do yet but will have to decide by the end of May.

HMSA Vice President Cliff Cisco said his company now insures very few association plans, mostly because over time, it has been difficult to control association rates.

Likewise, health insurer HMAA no longer offers group rates to associations even though it does have some programs for association members, said company President Arnold Baptiste Jr.

"We don't have any of what I would call deals or programs for associations where we give them cut rates," he said.

Association-type group plans mostly attract mostly who are looking for medical services rather than the mix of people needed to maintain stable rates, HMSA's Cisco said.

An association may start out with good rate, Cisco said. But what happens that rate, which is determined by the association's use of services, eventually moves higher than the average rate paid in the community.

When that happens, larger businesses who are part of the association plan often opt out because they can find other plans at lower prices, he said. These larger businesses are the ones that stabilize association rates.

"The whole idea of sharing the risk is that you have some people in the pool who are not using services," said Kaiser's Schmidt. "But what happens is that the pool deteriorates and you get into what is called a 'death spiral.'"

From a marketing perspective, the move by the insurers has also been bad news for Hawaii's business associations, eliminating a selling point and costing them members.

"It was one of our biggest benefits," said Marni Herkes, head of the Kona-Kohala Chamber of Commerce on the Big Island. "We used to have five companies that provided insurance for chamber members. Now we have none."

As a result, the chamber lost members, she said.

Likewise, Small Business Hawaii has only one plan remaining for its members now, but that plan is not open to sole proprietors.

At one point, the association had seven insurance carriers and offered 15 different plans, President Sam Slom said.

"Our whole idea was that our members should have choice," said Slom, who is also a Republican state senator.

But gradually, the plans withdrew.

With few insurers left in the insurance market and no legal requirement to offer coverage to sole proprietors, choices are limited, he said.

Health care consultant Paul Tom, president of Benefit Plan Consultants, said part of the problem is that Hawaii's Pre-Paid Health Care law only covers businesses who have employees.

"Even if you have only one employee, the law says you must offer a group plan," he said.

As a result, insurers have few incentives, and no requirements, to offer plans to sole proprietors. Meanwhile the number of independent contractors and sole proprietors continues to rise.

Absolutely, it's a growing problem," Tom said. According to the Business Action Center, the operation funded by the legislature to assist budding businesses with licensing requirements and other business-related paperwork, around 22,000 to 23,000 new businesses started in Hawaii last year.

Just about all would be considered small business, with most starting off as sole proprietorships, said center manager Milton Kwock.

"My guess is that most of them, perhaps 90 percent, start off with no employees," Kwock said. Consultant Tom believes that if proposed legislation calling for state oversight of health insurance rates is passed, such sole proprietors would eventually have an easier time obtaining insurance, because rates would have to be approved by the state Insurance Division.

Bev Harbin, the small business advocate for the Chamber of Commerce of Hawaii, said that since she assumed her current position in August, she has received calls every week from sole proprietors and independent contractors looking for health insurance.

Harbin has no answers. "I have nowhere to send them," she said.

Moreover, Harbin said she expects more calls in future.

"I know the numbers are growing astronomically because more and more people are losing jobs and becoming independent consultants or contractors," she said. "I think it's been something that has crept up on us."

One of those who called Harbin is Kimo Kaleiwahea.

Kaleiwahea, a graduate of Kamehameha Schools and the University of Hawaii with a degree in architecture, does design work and also has an Internet services company, OhanaNet Corp. At 28 years old, healthy and rarely in need of medical services, he should be an insurer's dream.

But as an independent contractor, finding -- much less affording -- a health insurance policy is a challenge. At one time, Kaleiwahea had the option of continuing with his health plan from a previous employer through the federally-mandated COBRA program.

But $250 to $300 per month was too much to pay while trying to establish a business, he said.

"I know I'm taking a chance and I can't take it forever, but cash flow is tight," he said.

He believes there are many others like him.

Recently Kaleiwahea, who has also worked in Arizona, has taken an interest in Hawaii's business-related legislative proposals.

So far he is not encouraged with what he has heard.

But he believes if Hawaii lawmakers want to encourage entrepreneurship in the state, they could make it easier for people like him in areas such as affordable health insurance.

"Between the cost of doing business and the cost of health care, it makes it hard to grow the company," Kaleiwahea said. "How can I offer incentives for someone to come on with me if I can't compete with the benefits?"

It's particularly hard for small businesses, he said.

"Government says they want entrepreneurs, they see we are innovative and do all the research and development, yet it's difficult. They could make it easier on small business," Kaleiwahea said.

Since insurers are under no obligation to offer insurance to solo business owners, in some other states the government has assisted.

That is one possibility for Hawaii, insurers say.

But HMSA's Cisco said he is not sure whether a state purchasing pool for business owners could be established.

"It's not clear yet to me how it would be managed," he said.

The other possibility is tightening rules related to association health plans.

An example is the Legislative Information Service of Hawaii, which has tight underwriting guidelines and monitors use closely. So far it has managed to maintain relatively stable rates with its HMSA plan, said LISH Executive Director Dick Botti.

For example, the association has a three-month waiting period for any new business that joins before it can become eligible for health insurance. Businesses cannot hop in and out of the plan at will.

If they choose to leave the plan, they must wait a year to sign up again. LISH is also actively involved in the administration of its plan.

"The difference is that we administer our plan in total," said Botti. "We accept applications, collect money, make payments, we balance it out."

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