J.P. Schmidt

J.P. Schmidt worked for years as the state insurance commissioner during the administration of Gov. Linda Lingle and made one of his primary goals the expansion of competitiveness among Hawaii’s insurance carriers.

Now he is seeing the process from the other side as the chief executive officer of Family Health Hawaii, the newest entrant into the Hawaii marketplace.

Schmidt, 57, became acquainted with this business first as an attorney in private practice on Maui, where he also started his public-sector work with the county corporation counsel office.

This launch into another phase of his career coincides with a new phase of life: He is the father of two daughters, a teenager from his first marriage and a 2-year-old with his current wife. So change is part of the landscape, personally and professionally.

Across the country, more change is coming with the full rollout next year of the Affordable Care Act. Up to this point, Hawaii’s own Prepaid Health Care Act has governed much of the industry locally for the past four decades, adding an employer mandate to provide health insurance. Hawaii was unique in that because it is the only state to get an exemption from the Employee Retirement Income Security Act (ERISA), the federal law that regulates employee benefit plans.

Family Health Hawaii executives hope their small-business niche and a formula of focusing on preventive care will align well with the ACA, which also attempts to "bend the cost curve" by encouraging early detection and prevention of illness. It’s going to be challenging, though, Schmidt concedes.

"The Affordable Care Act places a lot of restrictions on insurance companies, and so we have to be prepared with those requirements," he said. "If other insurers stumble in their compliance with the new laws, then that could provide a benefit to us, because we feel we do have a good handle on it."

Exactly how will the new company’s bottom line look? That’s a question for the future, he said.

"That’s why I have a crystal ball on my desk," he said. "Because a lot of what we do in insurance is predicting the future."

QUESTION: What was the genesis of this new company?

ANSWER: As insurance commissioner, I was always in favor of having good healthy competition in the market. I was very happy when Summerlin (Life & Health Insurance Co.) came into the market, and they did very well.

Unfortunately, for personal reasons, the owner of the company after a while sold the business, so that became a part of another insurer that’s already in the market (Hawaii Medical Assurance Association). … The competition it had brought to the market, I think, was beneficial to everyone. … We helped bring six new hurricane insurers into the market, which, of course, is also very important to Hawaii.

But this company was really the idea of some local businessmen who felt we needed more choices and competition in the market … just felt that small businesses needed some choices and there needed to be some competition. So they put the company together, asked me to be their attorney to help them through the regulatory process. I helped get them through the regulatory process to get the certificate of authority, which is the license to sell insurance. …

And having gone through that process, of course, I got a chance to really see the business plan and financial structure of the new entity and felt they had a very good plan, and it’s something that would be needed and helpful in the market here in Hawaii. So when they asked me to come on board as CEO, I was happy to do so. I didn’t think long about it because I saw that they had a good plan.

Q: What is the plan, basically? You’d be catering a lot to small business?

A: Yeah. The target would be small businesses, providing health insurance to small businesses, which are called "small group plans."

Q: We’re talking how small?

A: We’re talking primarily businesses of 100 employees or less. For larger businesses, if we can provide a plan that makes sense for the large business and for Family Health, we will certainly look at doing that as well. …

The majority of businesses in Hawaii are small businesses, so we feel that’s the best area to target.

Q: What makes the needs of small businesses so different?

A: The small businesses have a particularly heavy burden under the (state) Prepaid Health Care Act, in requiring them to provide health insurance for all their employees, whether they have only one employee or 100 or 1,000.

Q: There isn’t a carve-out for very small businesses?

A: The state act says that if you have one employee, you’ve gotta provide. One full-time employee. The Affordable Care Act, or "Obamacare," says that if you have 50 or more employees you have to provide health insurance.

So businesses here in Hawaii still have to follow the Prepaid Health Care Act, so long as it doesn’t conflict with the Affordable Care Act — or "frustrate a core purpose" of the Affordable Care Act, is actually how the statute is written.

One area that can be a great benefit to small businesses here in Hawaii, of the Affordable Care Act, is if the health exchange in Hawaii provides silver and bronze plans as well as the platinum and gold. There’s some question of whether they’re going to do that. I have heard some indications that they may offer only the platinum and gold. …

The exchange should be a real benefit to individuals, because they have really had a hard time finding health insurance. As insurance commissioner, I tried to help them by getting a bill passed that said a self-employed person needs to be treated the same as a small business. I had hoped that they would then be put in the pool with other small businesses and be able to get more affordable care in that manner.

Q: How does the ACA affect that law?

A: Obamacare may counteract that, because I think it may say that a self-employed person is not a small business.

Q: But they would still have access to insurance under the exchange?

A: Individuals do, yes. … But in the small-group market, that’s where there have been some indications that it may be only platinum and gold, which would essentially be the same as plans that are out there on the market. And so this would be an opportunity for small businesses to get a break under the Prepaid Health Care Act that they haven’t been able to get, where they could get some less expensive plans.

Q: What makes the Hawaii insurance market different from those elsewhere?

A: Well, there are other small states that have a dominant Blue Cross/Blue Shield insurer, similar to Hawaii. We are more isolated and distinct in our market, and we are the only state that requires employers to provide health insurance to employees, because every other state is pre-empted by ERISA, and we got an exemption from that.

Massachusetts enacted a workaround by saying, "This is not a mandate on employers, this is a tax; we’re going to tax you. But if you provide health insurance to your employees, you get a big tax credit." …

We (Hawaii) went to court at the beginning and we prevailed because we got an exemption from Congress, because we passed the Prepaid Health Care Act about the same time that ERISA was passed.

But that exemption said that we could not materially change the law without losing our ERISA exemption. And so, as I said, where we’ve seen there are problems, such as the heavy burden on small employers, we couldn’t change it as you usually do with laws because if we did, we’d end up having to throw the whole thing out. So we’ve been frozen in that structure for 40 years. …

One of the burdens on business is that it originally was argued that — and in the law, it states that — the employer will pay half the premium and the employee will pay half the premium. They argued that this is fair.

However, there was also a section in it that said you could not charge the employee; it’s like 1.3 percent of their salary. As a result, now many employers say the amount that the employee would contribute is so small that it’s not worth the administrative cost and effort to try to collect it from them. So they just pay for the whole thing. So there is that.

… For many years, Kaiser and HMSA sat on the Prepaid Health Care Council and rendered judgments on new companies and plans that would come in to compete against them. They did step down from there in 2003, at the beginning of the Lingle administration. … They recognized that people did perceive that as a conflict of interest.

Q: Almost antitrust?

A: Yes, yes. In fact, there were claims that in fact it was a violation of the antitrust law. So they stepped down.

But there is also the fact that nonprofits are not taxed on their premium income in Hawaii, but for-profit insurers are. Summerlin was a for-profit health insurer. They attempted to get the law changed so that it would be tax-free for for-profits as well. And I argued in favor of that at the Legislature as well.

I had talked with Aetna and United Health Care, some of the big mainland companies. Aetna had previously provided health insurance in Hawaii. And I had talked with them to try and get them back into the market, more competition. And they said, "Well, with the little over 4 percent premium tax, that is too much to overcome in a competitive industry like health insurance." …

And then, just generally, when I came on board as insurance commissioner, we had 150 companies on backlog who wanted to do business, trying to get their certificate of authority to do business here in Hawaii.

Q: Wow, 150 companies?

A: Yeah, 150 companies who wanted to do business in Hawaii! (Laughs.) And it would take six months to a year to review and give them a certificate of authority. So we worked on that and reduced it to 60-90 days. Because when a company decides they want to do business in Hawaii, they want to get going.

Q: So competition has somewhat improved in the last decade?

A: Yes.