Hefty subsidies continue for Hawaii’s state-run hospitals

Top officials with the state agency that oversees many of Hawaii’s neighbor island hospitals and long-term care facilities say there’s no current push to privatize more of its facilities even though the private sector could operate them more cheaply and efficiently, easing the hefty subsidies provided by state taxpayers.

In recent years, the transfer of three Maui County hospitals to Kaiser Permanente raised expectations that more state-run facilities could be privatized. But Dr. Linda Rosen, president and CEO of the Hawaii Health Systems Corp., which oversees the facilities, said there has been little interest from the private sector or regional boards to continue the trend.

HHSC’s facilities provide critical health care to many of the state’s rural areas. For the 2024 and 2025 fiscal years, those hospitals, clinics and long-term care facilities are projected to need taxpayers to cover about one-third, or $250 million, of the agency’s overall budget, according to information provided by HHSC during a Thursday budget briefing before the state House Finance Committee.

The biggest expense for HHSC has been personnel costs, particularly fringe benefits for civil service employees. HHSC’s budgeted cost of fringe benefits as a percentage of wages is about 63% — double that of private hospitals, Rosen told lawmakers. Overall, personnel costs comprise about 80% of expenditures.

With that rate, Rep. Bert Kobayashi (D, Diamond Head-­Kahala-Kaimuki-Kapahulu) told HHSC that it’s “doomed to coming here year after year and asking for huge, huge operating subsidies.”

Rosen said the state subsidy would be even higher if Maui Memorial Medical Center, the island’s only acute-care hospital, and its affiliates in Kula and on Lanai, had not been transferred to Kaiser in 2017.

In 2014, when the Maui County facilities were still run by the state, they received $38 million in government aid. The transfer was projected to save the state about $260 million over the following 10 years.

The facilities, which now operate as Maui Health, a not-for-profit, wholly-­owned subsidiary of Kaiser Foundation Hospitals, have continued to receive government subsidies but at a lower amount. The hospital system is expected to be self-sufficient in the next few years. In the 2024 fiscal year, Maui Health would receive $5.4 million in operating subsidies and $1.6 million in the 2025 fiscal year under Gov. Josh Green’s budget, which will be going to the Legislature for debate.

Rosen said that overall she believes the Maui transfer has been a success, but there still aren’t indications that other HHSC facilities are looking to follow suit.

“The other boards are not of that mindset, but part of it also is that there’s not any evidence that the private sector is eager to take over our hospitals,” she told the Honolulu Star-Advertiser.

HHSC was created in 1996 as a centralized state agency to operate many of the state’s “safety net” hospitals. By 2007, regional conflicts led to the creation of separate boards that oversee the services and finances of facilities in five regions, including East Hawaii island, West Hawaii island, Kauai, Maui and Oahu. The system includes about a dozen hospitals, long-term care facilities and affiliate clinics, including Hilo Medical Center, Ka‘u Hospital, Kona Community Hospital and Kohala Hospital on Hawaii island; Samuel Mahelona Memorial Hospital and Kauai Veterans Memorial on Kauai; and Le‘ahi Hospital and Maluhia on Oahu.

Rosen said that Maui was more attractive to the private sector because Maui Memorial is the island’s only major hospital, thereby lacking competition, and it had a relatively high percentage of patients with private health insurance, which offers higher reimbursement rates than Medicaid and Medicare.

She said the private sector could likely operate other hospitals in the HHSC system at lower costs, boosting the profit potential, but operating rural health care facilities would still be a challenge.

“They are all aware that these small rural hospitals are not necessarily contributing a lot to their bottom line, and our facilities have so much deferred maintenance and other issues that may not be attractive,” she said.