Tax benefit skews HMSA's net income

A $10.4 million tax benefit boosts HMSA's results to $12.6 million

Hawaii Medical Service Association said yesterday its second-quarter net income surged 159.3 percent from a year earlier after the insurer settled a 14-year-old federal income tax case that resulted in a tax benefit of $10.4 million.

The tax settlement boosted HMSA's net income to $12.6 million from $4.8 million in the same quarter last year. Net income as a percent of revenue was 2.8 percent, because of the one-time tax benefit, versus 1.1 percent a year ago.

Before income taxes and the one-time tax benefit, HMSA had net income of $2.1 million. Without the tax benefit and factoring in other tax liabilities, the insurer's earnings would have been $237,085, down 95.1 percent from a year earlier, HMSA said.

HMSA's net investment income fell 11.1 percent to $6.3 million from $7 million.

The state's largest insurer, HMSA said the tax settlement stemmed from its treatment of depreciation deductions after nonprofit Blue Cross/Blue Shield plans became taxable in 1987 under the IRS code. HMSA is a member of the Blue Cross and Blue Shield Association.

The insurer filed an appeal with the IRS starting with the insurer's 1991 tax return, but had to pay taxes on the disputed deductions until the case was resolved. Under the settlement, HMSA is now being allowed to claim some of those deductions.

HMSA's operating results, or the money it receives from premiums minus what it pays out for benefits and operating costs, swung to a loss of $4.5 million in the second quarter versus an operating gain of $830,882 a year earlier. Its operating loss as a percent of revenue was minus 1 percent versus a gain of 0.2 percent in the second quarter of 2005. For the first six months of this year, HMSA posted an operating gain of 0.1 percent as a percent of revenue.

"We're right around break-even for the year to date (for operating income as a percent of revenue) even though we had the loss in the second quarter," HMSA Senior Vice President Cliff Cisco said.

He said the nonprofit insurer will get a boost in the third quarter because of a 3.8 percent increase in premiums for its 11,000 small-employer groups that went into effect on July 1.

Cisco said it's too early to determine the rates for HMSA's small-employer groups for the next fiscal year starting in July 2007. Cisco said rates for businesses with 100 or more employers probably will be decided in late September or early October. Those groups renew their insurance at different times of the year, with most of the increases occurring in January. The average rate increase for the large groups this year was 3.4 percent.

The new Medicare drug-benefit program that went into effect Jan. 1 boosted HMSA's revenue and expenses in the second quarter, Cisco said.

Revenue, or premiums collected from HMSA's 704,612 members, rose 5.8 percent to $450 million from $425.2 million even though membership rose just 1.6 percent. The 38,000 Medicare beneficiaries enrolled in the new program contributed to health-care service costs rising 6.7 percent to $416.9 million from $390.6 million.

Administrative expenses increased 11.4 percent to $37.6 million from $33.8 million, primarily because of a $40 million information-system replacement project that began in the fourth quarter of 2005. The project is expected to last through next year and possibly into 2008.