HMSA earnings
take hit

But the health insurer's
controversial reserve rises
to over $541 million

Hawaii Medical Service Association, fighting a Lingle administration bill that would cut its reserve, boosted its cash cushion last quarter to more than $541 million but saw net income tumble 72.4 percent from a year ago.

HMSA's earnings fell to $10 million from $36.4 million a year earlier, partially because of $13.3 million in nonrecurring gains in 2003. HMSA also had lower investment returns and a narrower spread between what it collected in premiums and what it paid for hospital, physician and drug costs.

HMSA's net operating gain -- membership dues minus physician and administrative costs -- dropped 79.9 percent to $5.7 million from $28.2 million. Revenue, which is what HMSA receives from membership dues, rose 6.4 percent to $401.4 million from $377.2 million.

HMSA, the state's largest health insurer, had 692,786 members at the end of December.

The insurer's net operating gain for the year jumped 52.6 percent to $27.7 million from $18.2 million as health care costs did not go as high as HMSA expected when it set rates a year ago. Revenue increased 9.9 percent to $1.6 billion from $1.5 billion.

For the year, the nonprofit's net income slipped 3.3 percent to $45.5 million from nearly $47 million in 2003. Investment income contributed $26.7 million to HMSA's gain. The HMSA board voted last month to use all of its investment income to subsidize insurance rates in 2005. State law only requires that 80 percent of an insurer's annual investment income be used to fund future rates.

"The good news is that costs rose at a slower pace than expected," HMSA Chief Financial Officer Steve Van Ribbink said. "This was due in part to the effectiveness of our chronic disease management program for diabetes, asthma and cardiac conditions. The bad news is that health care costs in general are not going down. They are continuing to rise."

A Lingle administration bill working its way through the Senate seeks to lower an insurer's maximum reserve level to 30 percent of annual expenses from the 50 percent allowed by state law. HMSA's reserve was $516.3 million, or about 33 percent of its annual expenses, at the end of the third quarter before the bill was introduced. HMSA's reserve level, bolstered by $9.7 million in investment income during the fourth quarter, ended 2004 at 34.3 percent.

Initially, the bill required insurers to return an excess surplus to members. But an amended bill seeks to freeze HMSA's proposed rate increases until the insurer's reserve level is eventually worked down to 30 percent or below. The latest 4.9 percent rate increase request for small businesses, which is before the state Insurance Division, is scheduled to go into effect on July 1.

Van Ribbink said both bills are bad policy, and noted that the company has refunded dues in the past.

"The problem that we have with the bills, in general, is that it really usurps the whole governance of how our company runs," Van Ribbink said.

Van Ribbink said freezing dues while costs are rising can snowball into a financial nightmare. HMSA's reserves would be depleted in less than three years if dues were frozen, hypothetically. If dues rose 5 percent every year, he said HMSA's reserves would last six years.

Freezing HMSA's 4.9 percent rate increase request this year would result in an operating loss of $91.7 million in 2005 that could not be offset by investments.

That would cause HMSA, Van Ribbink said, to boosts its rate increase request to 14.7 percent in 2006 to get back on track.

"The point is that it's gratifying to have a year of not having a dues increase," Van Ribbink said. "But it's going to come back and bite you because then you're just going to have to make up for it. People mistake keeping premiums flat with containing cost. It has nothing to do with cost. It has to do with just passing that cost on, which ultimately you've got to do."

HMSA's health-care service expenses, which include hospital, physician and drug costs, rose 11.3 percent to $356.7 million last quarter from $320.6 million a year ago. Administrative expenses rose 37.5 percent to $39.1 million from $28.4 million.

The year-over-year comparisons of health-care service costs and administrative expenses are skewed because of an Insurance Division accounting change that altered the way certain costs are categorized. Under previous reporting guidelines, health-care service costs would have risen 12.5 percent last quarter and administrative expenses would have increased 23.8 percent.

For the year, health-care service costs rose 8.6 percent to $1.4 billion and administration expenses increased 18.1 percent to $132.5 million under the current reporting rules. But using a direct comparison to a year ago, health-care service costs increased 9.9 percent in 2004 over 2003 while administrative expenses rose 3 percent.