An official of the small company that recently displaced HMSA as administrator of the “default” preferred provider health plan for state and county workers says HMSA’s corporate arrogance and a string of bad strategic decisions are responsible for the nonprofit insurer’s recent problems.

Harris Nakamoto, vice-president and general manager of HMA Inc., a health plan administrator, and Summerlin Life & Health Insurance Company, an affiliated insurer, said his company has benefited from HMSA’s mistakes, as well as a business plan emphasizing patience, strong performance, and a measure of good luck.

Earlier this year, HMSA was ousted from its position as primary insurer for Hawaii’s unionized public school teachers, losing more than two-thirds of the state’s 9,000 teachers to HMA.

The Hawaii State Teachers Association provides health coverage through the separate HSTA Voluntary Employees Beneficiary Association Trust under temporary legislative authority designed to test the VEBA approach. Health coverage for other public employee unions is combined through the Hawaii Employer-Union Health Benefits Trust Fund.

Nakamoto hopes the EUTF’s decision to make an HMA-administered plan its “default” as of February 1, 2010 could shift another 20,000 members to HMA out of the 33,000 currently in an HMSA-administered plan, with family members and dependents added on top of those member numbers. [Note: An earlier version of this entry reported the date of the new plans as January 1, a deadline which has been delayed for one month.]

The projected losses are a body blow to HMSA, long the state’s dominant health insurer.

Both HSTA and EUTF have shifted largely to self-funded insurance plans, attempting to save money by paying an administrative fee to a “third party administrator” like HMA and covering claims from their own trust funds, instead of paying insurance premiums to an insurer such as HMSA, which would then pay claims and keep any profits, but also absorb all the risks.

The move to self-funding has been criticized by some because it also shifts all risks to the trust funds, leaving them vulnerable to unexpected cost increases or higher numbers of doctor visits by members. EUTF has been struggling to stem a series of substantial monthly losses.

The move to self-funding by public employee health plans is likely to cost HMSA hundreds of millions in annual insurance revenues, Nakamoto estimated.

Nakamoto, who starred with the Iolani football team back in the 1970s, said he was contacted by HSTA officials in April and asked whether HMA could provide an alternative to a substantial increase in premiums being demanded in a “take it or leave it” offer from HMSA.

On May 30, the HSTA VEBA board of trustees voted to move all 9,000 teachers to a new self-funded 80-20 plan administered by HMA.

Nakamoto believes HMSA was surprised when the teachers union “called their bluff” and rejected the insurers ultimatum. Subsequently HMSA agreed to offer a fully-insured 90-10 plan promising more benefits at a higher price.

According to a September 22 letter from HSTA to the EUTF, only 2,850 members have chosen the higher-cost HMSA plan.

“Our competition means that HSTA is now in the drivers’ seat,” Nakamoto said. “They were able to call the shots, and teachers now have a choice.”

“HMSA took a double whammy” in the HSTA negotiations, Nakamoto said with a smile. “They lost membership, and they also took all the risk.”

He believes those seeking the higher coverage of the 90-10 plan are likely to be those with more medical needs, so that the deal moved a lot of bad risk to HMSA through “adverse selection”.

In the HSTA case, HMA’s 80-20 plan became the default because the HSTA VEBA initially cancelled the prior 90-10 HMSA plan. Even when they later approved a new HMSA plan, the HMA 80-20 plan remained the default.

Nakamoto believes HMSA officials wrongly thought a similar 80-20 plan would become the default and the dominant plan for the larger EUTF, and immediately jumped on it when offered a choice of plans to administer.

But EUTF eventually decided that its 90-10 plan, now to be administered only by HMA, should remain the default, threatening to leave HMSA’s offering as an also-ran.

Nakamoto estimates HMSA has spent at least $1 million in advertising attempting to counteract its own bad decisions and to encourage its members to stay in an HMSA-administered plan. It also faces potential penalties for violating EUTF rules requiring advance review and approval of advertising concerning open enrollment issues.

HMA, part of the Arizona-based IMX Companies, entered the Hawaii market in 2002 and quickly targeted major unions that hire outside administrators for health plans funded through union health and welfare trusts. Like EUTF, these trusts are governed by boards composed of union and employer representatives.

HMA now administers health plans for more than 125,000 union members and their families in Hawaii, including Unite HERE! Local 5, Hawaii Teamsters, Hawaii Electricians, ILWU Local 142, and the United Food and Commercial Workers Union.

The company collects an administrative fee paid “per employee, per month”.

“I believe we do a good job, and provide a solution to escalating health care costs,” Nakamoto said.

Nakamoto said his company knows what it’s like when your competitor is in the default position.

“We were just a small peanut for the past three years,” Nakamoto said, referring to HMA’s fewer than 1,000 EUTF members compared to more than 33,000 that signed up with HMSA.

But we were required to attend all the open enrollment sessions, the same as any vendor. We traveled to the neighbor islands, we spent all the necessary money to be at the dozens of sessions, just like a good soldier. We were just thankful to be able to participate. We have to be patient.

Nakamoto said that patience has now paid off, as the company hopes its position as the default plan will translate into 20,000 or more new EUTF members.

HMA didn’t think about the default designation or take any special actions to grab that position away from HMSA, Nakamoto said.

He described it as a surprise, “an acorn that dropped into our hands.”

Nakamoto also responded directly to critics who say his company has a reputation for paying less and paying late.

HMA, as a third party administrator, doesn’t decide when claims are paid, Nakamoto said. Each trust fund has its own payment schedule, with some paying weekly, some bi-weekly, and at different times of the month.

“We follow their direction,” Nakamoto said.

In addition, Nakamoto said HMA is stricter than HMSA in pursuing questions like “third party liability”, cases where another insurer might be responsible for covering part of the cost.

“Our clients do more due diligence, and we do more management of claims,” he said.

Nakamoto said each of the unions has its own performance measures that the company has to meet or exceed in order to retain its contracts.