Kaiser’s income
jumps 50 percent as
investment profit triples

Kaiser Permanente Hawaii, the state's largest health maintenance organization, boosted net income 50 percent in the first quarter from a year earlier as its investment earnings more than tripled.

However, the provider said yesterday it was concerned with its financial situation after operating income fell 22.2 percent due to rising health-care costs.

"Our first-quarter results are less than what we had expected," said Arnold Matsunobu, Kaiser's vice president of finance.

"We remain challenged by the costs for hospitalization, pharmacy and outside services."

Kaiser, which operates 17 outpatient clinics statewide and one hospital, posted net income of $3.9 million compared with $2.6 million in the first quarter of 2004. The gain was fueled from investment income, which grew to $2.5 million from $800,000 a year earlier when Kaiser incurred costs from paying off a bond early.

The HMO's operating margin, however, shrunk to 0.68 percent of revenue from 0.93 percent in the first quarter of 2004. That's because operating income shrunk to $1.4 million from $1.8 million while revenue, or premiums collected from Kaiser's 230,000 members, rose 7.3 percent to $207.2 million from $193.1 million.

"Achieving a minimal 0.68 percent operating margin was a challenge given the continuing increases in health care costs," Kaiser President Janice Head said.

Operating expenses increased 7.6 percent to $205.8 million from $191.3 million.

"We are concerned about the higher-than-expected costs and utilization of care outside our system," Matsunobu said. "If it becomes a trend, we'll be faced with some very difficult choices."

In April, Kaiser agreed to a $1.9 million settlement with the state and federal governments for submitting inaccurate Medicare and Medicaid claims over a 17-year period.

That settlement, the result of a year of negotiations, was estimated and accounted for in Kaiser's previous financials.

The settlement stemmed from allegations by a Kaiser employee that the provider billed Medicare and Medicaid between 1984 and 2001 for services performed by a dermatology employee who did not have a state physician's assistant license. State law requires physicians' assistants to be certified. Kaiser said the dermatology employee, who is now in a nonclinical position, was employed before the requirement's passage and had failed to get a license once the law went into effect.

Kaiser, which raised its insurance rates 11 percent this year to help pay for rising medical care costs and for upgrading facilities, has been undergoing a major transition on several fronts.

The insurer is putting in a new $3 billion nationwide electronic medical record system, KP HealthConnect. Kaiser also opened two new clinics late last year -- in Wailuku, Maui, and Waipio Gentry, Oahu -- and is breaking ground later this month on a $68.5 million Moanalua Medical Center project.

Kaiser also is moving its outpatient clinics at Moanalua to its Mapunapuna Clinic over the next few years to increase hospital and specialty care capacity at Moanalua.

"To ensure that we are meeting our members' needs, our investments in KP HealthConnect, new clinics, and increased capacity at Moanalua Medical Center are essential," Head said. "Ending 2004 positively and maintaining that trend in 2005 is absolutely critical for us as we move forward with these projects."

Kaiser finished last quarter with a reserve level of $119.2 million, or the equivalent of 1.7 months of expenses if it operated without receiving any dues.

However, only $85 million of the insurer's reserve was in cash. The rest was tied up in the company's investments in construction and equipment.

The insurer's total reserve level came to about 15 percent of annual expenses, below the 30 percent cap that was sought in a recent Senate bill that failed to make it through the state Legislature.

Hawaii Medical Service Association, the state's largest insurer, primarily offers a preferred provider plan and holds a higher cash reserve level than Kaiser because it needs the money to pay physician claims.