HMSA's 11% profit increase won't alter its outlook

The nonprofit denies predatory pricing charges

Hawaii Medical Service Association, which posted an 11.4 percent increase yesterday in first-quarter earnings, says it doesn't plan to do anything differently once state control over its rates draws to an end next month.

HMSA, whose health premium rates already are slated to increase July 1, said the quarterly earnings increase came as investment income jumped.

The nonprofit company, the state's largest insurer with nearly 705,000 members, said yesterday it had net income last quarter of $8.4 million, compared with $7.5 million a year earlier. Investment income exceeded HMSA's expectations, rising 31.5 percent to $7.6 million from $5.8 million on strong dividend returns.

Revenue, or the dues collected from premiums, rose 5.9 percent to $443.8 million from $419.1 million.

HMSA's 3.8 percent rate increase, approved by state Insurance Commissioner J.P. Schmidt earlier this month, marked the last time the insurer had to abide by a three-year-old regulation requiring state approval to raise rates.

The law will end June 30 and wasn't reinstated by the Legislature, much to the chagrin of Schmidt and small insurers like Summerlin Life and Health. Both Schmidt and Summerlin Vice President Jack Borja have said that allowing insurers such as HMSA and Kaiser to charge what they want without state oversight can tilt the playing field and hurt consumers and smaller insurers.

However, Steve Van Ribbink, chief financial officer for HMSA, said the insurer won't determine its rates any differently now than it had since rate regulation began in 2003.

"The way we look at it, we've been in existence for 68 years, we've had rate regulation for three of those 68 years, and we didn't do anything different in the first 65 than we did in the more recent three or we'll do in future years," Van Ribbink said. "We'll just rate the business the way we always have, which is basically trying to get to about a break-even operation and try to maintain a prudent reserve through investment income."

HMSA rate increases that will go into effect on July 1 will raise premiums 3.8 percent for businesses with 100 or fewer employees in its preferred-provider plan. Other increases effective on the same date for small-employer groups are an average 7.9 percent increase for Health Plan Hawaii Plus, which is HMSA's health-maintenance organization plan, and 3.8 percent for CompMED. All of the rate increases include riders such as prescription drugs, dental and vision coverage.

HMSA's health-care services costs, which are the amount HMSA paid to physicians and hospitals, as well as for prescription drugs, dental and vision care, increased 4.4 percent last quarter to $396.2 million from $379.4 million. Van Ribbink said the addition on Jan. 1 of a newly enacted Medicare drug-benefit program will increase HMSA's costs even more this year, because of the number of Medicare members and the cost of the drugs.

The insurer's administrative costs also are expected to rise as it continues a $40 million information-system replacement project that began in the fourth quarter of 2005 and is expected to last through next year and possibly into 2008. In the first quarter, HMSA's administrative costs jumped 20.3 percent to $42.3 million from $35.2 million. Historically, HMSA has paid 93 percent of every dues dollar to health-care providers and 7 cents of every dollar for administrative expenses.

"The board has taken the position ... that we are not including (the information system expenses) in the rate we pass on to the members," Van Ribbink said. "That money is coming out of our reserves."

HMSA's reserve level, which the Legislature has criticized as being too high, was $572.7 million, or 32.5 percent of annual costs, at the end of the first quarter. Lawmakers had sought to cap HMSA's reserve level at 30 percent, but Van Ribbink said HMSA's reserve level soon will be close to that level anyway due to the implementation this year of Medicare Part D.

HMSA's operating gain jumped 17.1 percent to $5.3 million, or 1.2 percent of revenue, from $4.5 million, or 1.1 percent of revenue, a year earlier. Net income was 1.9 percent of revenue compared with 1.8 percent of revenue a year ago.

Summerlin's Borja said earlier this month that historically there was "a lot of predatory pricing from the current (insurance) carriers and new insurance companies weren't able to compete."

Van Ribbink denied the allegation.

"We've never, ever done any predatory pricing," he said. "I know some people like to claim that could happen, but we've never done it. We don't plan on doing it. Our pricing is purely a function of what we anticipate the health-care trend to be prospectively."