HMSA income declines on higher costs

Hawaii Medical Service Association posted a 33.5 percent decrease in fourth-quarter net income as health-care service costs continued to climb.

The state's largest insurer said yesterday the amount it paid to physicians and hospitals, as well as for prescription drugs, dental and vision care, rose 10.6 percent, or by $37.7 million, last quarter from the year-earlier period. For all of 2005, its payments increased 8.8 percent, or by $126.3 million, from the previous year.

"I'm a little concerned of the larger increase health-care costs in the fourth quarter versus the other quarters," said Steve Van Ribbink, HMSA executive vice president and chief financial officer. "That causes me pause (as) to what may happen in 2006."

HMSA, which operates as a nonprofit but pays federal taxes, saw its net income decline to $6.7 million in the fourth quarter from $10 million in the year-earlier period. Revenue, or dues collected from members, rose 7.8 percent to $432.7 million from $401.4 million. HMSA had 700,493 members at the end of 2005.

Health-care service costs rose to $394.3 million from $356.7 million in the fourth quarter. In 2004, they hit $1.44 billion.

Van Ribbink said the insurer's $556 million reserve level will fall this year to about 30 percent of its annual expenses with the addition of a newly enacted Medicare drug-benefit program that is expected to cost HMSA an additional $40 million.

State law caps health insurers' reserve level at 50 percent of annual expenses. A controversial bill introduced in the Legislature last year had sought to lower the reserve level ceiling to 30 percent to reduce the surplus that insurers can hold. The measure was deferred last year to this year.

State Insurance Commissioner J.P. Schmidt, who supported the bill last year, said it won't be resurrected this year because HMSA's reserve level was down to 32.5 percent at the end of 2005 from 34.3 percent at the end of 2004.

"We did not propose it again this year because it appears all the health plans are voluntarily complying," Schmidt said. "They're taking closer looks at their reserve level and we didn't feel the legislation to force them was necessary."

HMSA's administrative expenses last quarter edged up 0.8 percent to $39.4 million from $39.1 million. Coupled with its revenue and health-care service costs, HMSA ended the quarter with an operating loss of $1 million. In the year-earlier quarter, HMSA had operating income of $5.7 million, or 1.4 percent of dues revenue.

Investment income slipped 2.9 percent to $9.4 million from $9.7 million.

Last month, HMSA asked the state Insurance Division for a 3.8 percent rate increase for its small-employer groups, which have 100 or fewer employees. A decision is expected by the end of May, taking effect on July 1, Schmidt said.

For the year, HMSA's net income fell 44 percent to $25.5 million from $45.5 million, largely because health-care service costs rose to a record $1.57 billion from $1.44 billion. Administrative expenses rose 6.9 percent to $141.6 million from $132.5 million, mainly because of costs related to a $40 million information technology system that HMSA is paying for out of its reserve.

Revenue rose 7 percent to $1.72 billion from $1.6 billion. HMSA ended 2005 with its operating income down 81.6 percent to $5.1 million, or 0.3 percent of dues revenue, from $27.7 million, or 1.7 percent of dues revenue.

Investment income gained 9 percent to $29.1 million from $26.7 million.