Hawaiʻi’s largest healthcare insurer, HMSA, and its largest healthcare provider, Hawaii Pacific Health, have proposed a new partnership. Both companies would be subsidiaries of a new nonprofit organization, One Health Hawaii, which would have the power to impose rules that bind both companies and essentially force them to coordinate more closely.

HMSA and HPH argue that such coordination is necessary in an era of declining federal support for healthcare, widespread physician shortages, and, they argue, the “unsustainability of Hawaiʻi’s health care system.”

Leadership from the companies contend that the partnership would enable them to reduce the cost of care by inducing some patients to receive care at more appropriate, lower-cost locations; shift a larger share of healthcare premiums towards prevention activities; allow better coordination of patient care; consolidate overhead expenditures; and reduce administrative burdens on physicians and nurses by standardizing medical records systems.

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HMSA and HPH argue that these and other measures would reduce costs by over $2 billion over a ten-year period, and that this savings would be passed onto consumers in the form of lower healthcare premiums, investment in facilities, physician recruitment measures, and behavioral health services.

The proposed consolidation is part of an ongoing nationwide movement by insurers, hospital systems, and physician groups to consolidate their activities under a single umbrella organization. Health economists agree that these umbrella organizations have the potential to reduce the cost of care and/or raise the quality of care. But while there may be benefits to the vertically integrated system, there will also be costs.

In conventional healthcare markets, the costs of vertical mergers between insurers and providers are twofold. The first is a phenomenon known as steering, whereby a vertically integrated insurer–provider system directs patients toward its own facilities through network design, pricing, contracting, or referral patterns. This can disadvantage rival providers such as Queen’s, Kuakini, and Castle, reduce patient choice, and ultimately leave consumers worse off.

More broadly, the merger could weaken competition among providers. Evidence from countries such as Chile suggests that, while these mergers can generate some efficiencies and cost savings, those gains may be offset by patient steering and declines in hospital competition.

When hospitals face less competition — especially under administered or negotiated prices — they tend to compete less on quality, which may lead to declines in care quality over time. If Hawaii Pacific Health gains structural advantages over The Queen’s Medical System through vertical integration, there is a risk that the quality of care in the state could deteriorate over time.

The softening of competition among Hawaiʻi hospitals could also reduce competition for physicians, physician assistants, and nurses. In concentrated labor markets, hospitals and insurers may be able to exercise monopsony power by offering compensation below competitive levels and hiring fewer healthcare workers than would prevail in a more competitive market.

In vertically integrated systems, these pressures can be reinforced when a dominant insurer also has increased leverage over provider reimbursement and patient steering. Hawaiʻi’s already concentrated healthcare markets may therefore contribute to persistent shortages of primary care physicians and recurring labor unrest among medical staff.

The fundamental reason for concern about increased monopsony power is that Hawaiʻi already has one of the least competitive insurance markets in the United States. In 2024, HMSA insured roughly 760,000 Hawaiʻi residents (55.8% of the population), while Kaiser covered another 270,000 residents (19.8%).

Across the individual, small-group, and large-group insurance segments, the top three insurers — including University Health Alliance — collectively control more than 90% of the market.

A vertical merger between HMSA and Hawaii Pacific Health (which has a substantial share of the hospital market on Oʻahu) could allow the combined entity to favor its own hospitals in contract negotiations, reimbursement policies, and patient referrals while placing competing providers such as Queen’s at a disadvantage.

In a health care market that is already highly concentrated, this could weaken competition, increase HMSA’s bargaining power over physicians and hospitals, and further limit choices for both patients and healthcare workers.

A final reason for concern is that the proposed merger could make entry into Hawaiʻi’s healthcare insurance market even more difficult. Once a dominant insurer is vertically integrated with a major hospital system, any new insurer entrant may need its own large provider network simply to compete effectively.

This substantially raises the cost of entry into an already highly concentrated market. Over time, the merger could further entrench the dominance of the existing healthcare incumbents and reduce the likelihood of future competition.

In the worst-case scenario, One Health Hawaii would realize only modest cost savings while gaining greater ability to steer patients toward Hawaii Pacific Health hospitals and physicians, weaken competing providers, and exert downward pressure on physician and nurse compensation.

In the best-case scenario, the efficiencies generated by better care coordination and lower administrative costs would outweigh any reduction in competition and ultimately lead to better care and lower insurance premiums.

At this point, however, the jury is still out on whether the One Health Hawaii partnership would provide net benefits to Hawaiʻi consumers.

Hawaiʻi antitrust authorities should therefore carefully scrutinize the proposed consolidation, paying close attention to its potential effects on consumers, healthcare workers, and independent providers. Because this partnership would likely be difficult to unwind once approved, it is critical to establish beforehand whether gains in efficiency and care coordination are likely to outweigh the potential costs associated with increased market power.

Regulators should also consider how the new umbrella organization coordinating HMSA and HPH activities would be monitored to ensure that it does not engage in anti-competitive behavior.