Hawaii Medical Service Association, which lost more than $100 million in the last two years, rebounded in the first quarter of 2010 with a $1.5 million profit.

But the $8 million gain from its investments masked the underlying dilemma for the state's largest health insurer in that medical costs continue to rise. Excluding the investment gain, HMSA had an operating loss of $8.7 million.

“;That investment result is going to be very difficult to replicate based on where the investment market has been in recent weeks,”; HMSA Chief Financial Officer Steve Van Ribbink said yesterday. “;The big concern is that the health care costs trend has not abated. We've gone 36 straight months with medical trends up about 10 percent. These are very high trends and compound on each other. An elevated trend over a protracted period of time causes me a lot of concern.”;

HMSA received approval last month from the state Insurance Division to increase rates by an average of 7.8 percent beginning July 1 for 11,000 small businesses with fewer than 200 employees. The insurer also boosted rates an average of 11.7 percent earlier this year for larger businesses.

Due to the rate increases, Van Ribbink said HMSA's revenue also increased in the first quarter of this year and likely will again in the third quarter when the small-business rate rise takes effect.

Nevertheless, HMSA said it continues to change how it reimburses its medical providers from a fee-for-service model to one based on quality and value.

“;Our intent is to move from a reimbursement model that compensates based on quantity to one that's based on quality,”; Van Ribbink said about the transition that began this year. “;Today we're reimbursing on volume, not value. We want to shift more and more to reimbursement based on quality and value.”;

Van Ribbink said HMSA current reimburses 98 percent of its providers using a fee-for-service model.

“;But by the time we get to 2012,”; he said, “;at a minimum we want that reimbursement based on a minimum of 15 percent value and quality and a maximum of 85 percent fee for service. Beyond that, fee for service still will be an important piece, but we want it to become a lesser percentage of the payment for providers.”;

HMSA is coming off a year in which it lost $64.4 million, its worst annual loss ever. In 2008, HMSA was in the red by $35.8 million, its second-worst loss ever at that time.

Thanks to the big investment gain, last quarter's profit was a significant improvement from the year-earlier period when HMSA lost $13.9 million, including a $4.1 million investment gain. However, HMSA's operating loss in that same period was $18.5 million.

HMSA's revenue, or the dues collected from premiums, rose 8.9 percent last quarter to $433.9 million from $398.6 million. Benefit expenses paid to health care providers increased 6 percent to $400.9 million from $378.1 million, and administrative expenses rose 7.1 percent to $41.7 million from $38.9 million.

The insurer, which had 682,751 members as of March 31, has seen its reserve decrease amid continued losses. HMSA had $350.7 million in its reserve at the end of last quarter compared with $356.1 million at the end of 2009, $380.6 million as of the first quarter of 2009 and $406.7 million at the end of 2008. The reserve pays for special initiatives and protects members, employers and providers from losses and emergencies.