Hawaii is facing a projected $1.4 billion budget shortfall for the coming fiscal year, with talk of cuts in vital government services and higher taxes. Instead, if the state reformed financing of state employee health benefits and Medicaid, around $850 million a year could be recovered to fill that shortfall.

Prior to the pandemic, health care costs were about 30% of the nearly $8 billion state budget: about half EUTF (Employer-Union Trust Fund) health benefits for state employees and half Medicaid. Medicaid enrollment has increased 20% due to the pandemic, so Medicaid is now about 20% of the budget.

Both EUTF health benefits and Medicaid contract with health insurance plans to accept full insurance risk. Most other states have already moved to self-insure employee health benefits, with the state becoming the insurer and contracting with a health insurance company for Administrative Services Only (ASO).

With full-risk contracts, health insurance plans always charge enough to assure they are very unlikely to lose money, increasing cost. ASO contracts typically reduce administrative costs by two thirds or more compared to full-risk contracts, and also give the state more control over health program design, instead of letting insurance companies do whatever they want.

For example, HMSA has forced the “value-based payment” (VBP) policy fad onto Hawaii’s primary care doctors, resulting in increased cost, and Medicaid plans to follow suit. But VBP is widely blamed as a major cause of Hawaii’s doctor shortage and for discouraging doctors from starting new practices in Hawaii.

A 2013 Hawaii law requires the state to pre-fund future health benefits, and current payments are about $500 million a year, with over $11 billion in remaining unfunded future liabilities. Bills introduced for the 2021 Legislature would convert EUTF health benefits to a self-insured model with an ASO contract. This would not affect negotiated benefits or EUTF management, and the state would bear full direct responsibility for assuring continued funding of health benefits.

Pre-funding is less important with the self-insured model, since benefits are guaranteed directly by the state, and do not depend on payments to an insurance middle-man. Self-insurance could save the state around $175 million annually in administrative costs, and another $500 million from eliminating pre-funding.

For Medicaid, Hawaii should heed the experience of Connecticut, which terminated its Medicaid managed care program in 2012 in favor of a self-insured managed fee-for-service system called Primary Care Case Management (PCCM). In the four years prior, Connecticut Medicaid costs rose 45%. After the conversion, Medicaid costs stabilized immediately. Six years later physician participation had improved substantially, ER visits were down 25%, hospitalizations were down about 6%, and per-capita Medicaid costs had dropped 14% compared to 2012. Administrative costs dropped from 20-25% under at-risk managed care to 2.8% with PCCM, including the cost of the ASO contract.

Hawaii’s Medicaid program just issued a request for proposal (RFP) to renew contracts with managed care insurance plans effective July 1, 2021, locking in the administrative waste and access problems of our privatized managed care system for another six years. We urge the Ige administration to rescind the managed care RFP, and use the Connecticut template to rapidly design a PCCM system with a non-risk ASO contract. Savings comparable to Connecticut would mean around $175 million per year for the state budget.

Hawaii law designates the Hawaii Health Authority with responsibility for overall health planning, but it has been sidelined for the past nine years. It should be re-activated and empowered to assist the state in designing cost-effective self-insured systems with ASO contracts for both EUTF health benefits and Medicaid. Savings could be in the range of $850 million per year.

Stephen Kemble, M.D., is a former member of the Hawaii Health Authority.