HMSA plans to increase dues

It says its last rise in rates was too low, but some suspect a political motivation

Hawaii Medical Service Association, saying it undercharged members with its last rate increases, plans to raise dues this year by more than its previous round after suffering a $20 million operating loss in the fourth quarter and a $39.4 million operating loss in 2006.

Chief Financial Officer Steve Van Ribbink said yesterday that the state's largest health insurer had underestimated how much health-care costs would rise last year.

As a result, he said, HMSA's rate increase for small-employer groups beginning July 1 will exceed the average 3.8 percent that is in effect for the current fiscal year. He also said the next increase for businesses of 100 or more employees will be larger than the 4.4 percent hike that took effect in January.

RISING RATES The Hawaii Medical Service Association is planning to raise membership dues by a greater percentage than last time. » 2006 health-care costs: $1.7 billion, up 7.5 percent over 2005 » 2006 total dues revenue: $1.8 billion, up 5.2 percent over 2005 » 2006 operating loss: $39.4 million, a reversal from a $5.1 million operating profit in 2005 » New rate increase: Greater than 3.8 percent and 4.4 percent, respectively, for its small-business and large-business groups, but less than 10 percent » Effective periods: July 1 for small businesses and Jan. 1 for large businesses that renew in January Source: HMSA

In both cases the increase will be less than double digits, Van Ribbink said.

"Based upon what I know right now, based on the experience information I do have available, I believe in hindsight that we should have given a larger rate increase in 2007 than we did," Van Ribbink said.

Health-care service costs in the fourth quarter jumped 11.5 percent to $439.5 million from $394.3 million a year earlier, while revenue, or dues collected from members, rose just 6.2 percent to $459.3 million from $432.7 million. Some of the increase in revenue was due to the rise in membership to 707,097 at the end of the year, compared with 700,493 at the end of 2005.

"Insurers ought to be in the business of taking a longer-term view of things, and we are," Van Ribbink said. "So we missed maybe a little bit, to the members' benefit, what the rate increase should have been in 2006. But in the whole scheme of things, it's been very tight," with HMSA showing an operating gain of just $5.3 million, or 0.02 percent of dues, during the 68-year history of HMSA.

State Insurance Commissioner J.P. Schmidt, who until last July had to approve insurers' rate changes, questioned whether HMSA had sought a lower rate last year because of the ongoing legislation at the time concerning state oversight of rates.

"That is something I suspected, given the fact there was a battle over rate regulation at the time," Schmidt said. "One of their main arguments at the time was rates were low and we don't need (state oversight). When we reviewed the rate, we did look very carefully at all the factors involved and felt they had justified it. But I did wonder if they were really taking into account all of the costs that they would anticipate seeing."

HMSA Senior Vice President Cliff Cisco said the insurer had based its rate request on the trend that was in place, and had no ulterior motive.

"We set our rates on the facts we had at the time," Cisco said.

Van Ribbink said the new rate increase for the community-rated, or small-business, groups would be determined in late April or early May. The rate increase for the merit-rated, or large-business, groups that renew in January will be decided toward the end of the year, he said.

HMSA has 143,000 CRG members, 245,000 MRG members and 174,000 members in state and federal programs. The remainder of HMSA's members are in other programs such as Medicare and Quest, the state's Medicaid program.

The 3-year-old law that gave the state Insurance Division power to regulate health insurance rates expired at the end of the last legislative session.

But bills are making the rounds again in this year's Legislature that would restore rate regulation and cap insurers' reserve levels at 30 percent of annual expenses.

Van Ribbink said such regulations are unnecessary because HMSA regulates itself, and that its $567.6 million reserve level -- 30.76 percent of annual costs at the end of 2006 -- is used for investments that help mitigate potential losses.

Despite the $20 million fourth-quarter operating loss, HMSA ended the period with net income of $4 million, largely because of an $11 million tax benefit stemming from the settlement last year of a 14-year federal income tax case.

HMSA also benefited in the quarter from $12.5 million in investment gains, up 33.9 percent from $9.4 million in the year-earlier quarter.

HMSA had net income of $6.7 million in the fourth quarter of 2005.

For the year, HMSA's net income declined 30.1 percent to $17.8 million from $25.5 million, despite a $21.3 million tax benefit from settling the IRS case and an 18.1 percent increase in investments to $34.3 million.

Payments to health-care providers hit $1.7 billion -- an all-time high -- and were up 7.5 percent over 2005. Revenue rose 5.2 percent to $1.8 billion from $1.7 billion.