Understanding Hawaii's Prepaid Health Care Law

Hawaii's uninsured rate was low pre-ACA thanks to prepaid health care

Surfers in Hawaii on a large wave

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In 2013, just before the bulk of the Affordable Care Act was implemented, 14.5% of Americans were uninsured. But in Hawaii, the uninsured rate stood at just 6.7%. Five years later, it had dropped a little, to less than 5%. This is still well below the national average, which stood at 8.9% as of 2018. But why was it so low even pre-ACA?

Hawaii was well ahead of its time on health care, implementing a comprehensive reform law decades before the ACA. Hawaii's Prepaid Health Care Act was enacted in 1974. This made the state the first in the nation to require employers to provide health coverage to workers. The ACA now requires large employers to offer health coverage to full-time workers, but Hawaii's requirements are much stronger.

Under the Hawaii Prepaid Health Care Act, employees get employer-sponsored health insurance as long as they work at least 20 hours per week. The employee's share of the premium (for self-only coverage) is very minimal, and the maximum waiting period for coverage eligibility is much shorter than federal law allows.

The ACA set federal minimum requirements for a variety of aspects of employer-sponsored coverage, but Hawaii's rules generally go well beyond what the federal government mandates.

20 Hours Per Week Equals Health Insurance Coverage

Employees in Hawaii who work at least 20 hours per week and earn at least 86.67 times the hourly minimum wage must be offered health insurance by the employer. The 2018 minimum wage in Hawaii is $10.10/hour, so that's $875 in monthly earnings.

For perspective, the ACA's employer mandate only applies to large employers (50+ full-time equivalent workers) and only requires them to offer coverage to employees who work at least 30 hours per week.

There are some exceptions to Hawaii's rule, including certain situations in which people are employed by family members, seasonal workers in the agriculture industry, insurance agents and real estate agents who work on a commission-only basis, and situations in which a person works for more than one employer. But for the most part, all employees who work at least 20 hours per week in Hawaii are guaranteed health coverage. Employees who have other coverage can seek an exemption from the requirement that they be covered under their employer's plan.

Coverage After Only Four Weeks of Employment

Employers in Hawaii do not have to provide health insurance coverage immediately, but employees can only be required to work for four consecutive weeks before coverage must be offered. After four weeks, the employee must be provided with health coverage at the earliest date allowed for by the health plan—usually the first of the following month.

For comparison, the Affordable Care Act allows employers to impose waiting periods of up to 90 days before employees can become eligible for health coverage.

Employers Pay Most of the Cost

Under Hawaii's law, the employer must pay at least 50% of the premium for employee-only coverage. But more importantly, the employee's share of the monthly premium for employee-only coverage can't be more than 1.5% of the employee's gross monthly earnings.

For comparison, the ACA requires large employers to offer coverage that's considered affordable, but that threshold is a much higher percentage of employees' wages. In 2020, employer-sponsored coverage is considered affordable under the ACA as long as the employee doesn't have to pay more than 9.78% of household income for self-only coverage. Since employers don't tend to have access to employees' household income data, most large employers use safe harbor rules that base the calculation on the employee's wages or a similar single-employee metric. But even still, Hawaii's law ensures that employees pay very nominal amounts for the health insurance coverage they get from their employers.

With Hawaii's Prepaid Health Care Act, employers are not required to cover the cost of premiums for employees' dependents if the plan is a "7a" plan, but they are required to cover at least half the cost of dependents if the plan they offer is a "7b" plan. These designations come from Section 393-7 of the law, and the plans that are approved under Section 393-7b. These include several policies offered by Kaiser, Hawaii Medical Service Association, and Hawaii Management Alliance Association. But most of the approved group health plans in Hawaii are 7a plans, which means employers can choose to require employees to pay the full cost of adding dependents.

Under the ACA, large employers are required to offer coverage to employees' dependents, but are not required to cover the cost of adding dependents to the plan. Most employers go beyond the basic requirements, however, and do cover a significant chunk of the cost of family health coverage for their employees. As of 2019, employers in the U.S. cover nearly 71% of the total premiums for employees with family health coverage.

Mandated Benefits Under Prepaid Health Care Act

In order to comply with Hawaii's Prepaid Health Care Act, employer-sponsored plans must include coverage of:

  • Inpatient care (at least 120 days of hospital confinement per year must be covered)
  • Surgical care
  • Medical care (including physician care received as an inpatient or outpatient)
  • Diagnostic care (including lab services and X-rays)
  • Maternity care
  • Substance abuse treatment

The ACA requires individual and small group health plans to include coverage for essential health benefits. As defined by the ACA, essential health benefits include all of the services required by Hawaii's law, but also some additional services, such as preventive care, prescription drugs, and pediatric dental and vision care.

The ACA's rules are minimum standards—states can exceed them, but cannot impose more lenient standards. So employer-sponsored plans offered to small groups in Hawaii (up to 50 employees) must include all of the ACA's essential health benefits.

Large group plans are not subject to essential health benefits under the ACA (only preventive care is mandated, and large group plans must provide "substantial" coverage for inpatient and physician services in order to avoid a penalty). So Hawaii's requirements for covered benefits remain the minimum standard for large group plans in the state.

Using ACA Small Business Health Insurance Tax Credit

In late 2016, Hawaii became the first state to secure a federal waiver under Section 1332 of the ACA. Hawaii's waiver eliminated the small business health insurance exchange (SHOP exchange) in the state and funneled small business premium tax credits that would have been received by Hawaii employers into the state's existing premium supplementation fund. The fund, established as part of the Prepaid Health Care Act, helps employers with fewer than eight employees afford coverage for their employees. Small employers in Hawaii purchase insurance directly from insurers, rather than through the SHOP exchange, but funding is available to help offset premiums for very small businesses. In most of the rest of the country, small employers purchase coverage directly from insurers, as employers were mostly uninterested in enrolling via the SHOP platforms.

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