HMSA health care expenses
rise 9.1% in quarter

The cost of hospital services and
prescription drugs weigh down
the insurer's net income

Hawaii Medical Service Association, the state's largest health insurer, saw its net income fall 35.3 percent in the second quarter from a year earlier despite a 45.9 percent jump in investment gains.

A 9.1 percent rise in heath care costs and a similar increase in administrative expenses left the insurer with earnings of $4.8 million, down from $7.5 million in the second quarter of 2004. Health-care service costs totaled $390.6 million, or 91.9 percent of dues, while administrative expenses were $33.8 million, or 7.9 percent of dues.

The insurer's revenue, or premiums collected from its 693,235 members, rose 8.1 percent last quarter to $425.2 million from $393.3 million.

HMSA's operating gain, or the money it receives from premiums minus what it pays out for benefits and operating costs, plunged 80.4 percent to $830,882 from $4.2 million a year earlier. On average, HMSA paid physicians, hospitals and other providers more than $130 million a month last quarter -- about $11 million more than the corresponding period a year ago.

"Hospital services and prescription drugs are driving health-care costs higher in Hawaii," said Steve Van Ribbink, HMSA executive vice president and chief financial officer.

Last quarter's rise in health-care service costs came on top of a 7.6 percent increase in the first quarter of this year.

"If this continues through the remainder of this year, we may be forced to look at higher health plan rates next year," Van Ribbink said.

HMSA lifted rates 4.9 percent on July 1 for its small-business groups, which have fewer than 100 employees. The increase covers prescription drugs, dental and vision coverage for the Preferred Provider Plan, the most popular plan among the insurer's members.

Businesses with 100 or more employees renew their insurance at different times of the year and saw their premiums rise an average of 5 percent beginning in January.

The increase was smaller than in previous years because HMSA said it would subsidize insurance dues with 100 percent of its annual investment income for a year. Health plans are required by law to use only 80 percent of their annual investment income from reserves to augment payments from premiums.

"For the 4.9 percent adjustment to work against 9 percent inflation in heath-care services, we've got to continue to see investment gains so this income would be used to offset losses," HMSA Senior Vice President Cliff Cisco said. "That was the commitment we made up front. So we're keeping the rates low by using investment income. Hopefully, the combination of those two will meet and will cover the 9 percent -- providing those costs stay about the same."

HMSA's operating gain as a percent of revenue in the second quarter was 0.2 percent compared with 1.1 percent a year earlier. As a nonprofit, HMSA tries to get as close as it can to breaking even.

The insurer's reserve level was $549.8 million at the end of the quarter, or 32.5 percent of its annualized expenses.

A Senate bill that would have lowered a health insurer's maximum reserve level to 30 percent of annual expenses from 50 percent died in the Legislature this year