Hawaii Medical Service Association, reeling from a $64.4 million loss in 2009—its worst annual loss ever—is requesting an average 7.8 percent small-business rate increase for its most popular health plan and said it is making a fundamental change in the way it reimburses its medical providers.

The state's largest insurer, which reported a $10.7 million fourth-quarter loss yesterday, said rising hospital and physician costs are prompting it to change its provider reimbursement model from the traditional “;fee for service model”; to a “;quality outcome and efficiency model.”;

“;Under this model, providers will be paid for the health outcomes of our members as well as for delivering health care services in an efficient manner,”; HMSA Chief Financial Officer Steve Van Ribbink said.

HMSA currently has five pilot programs in various stages of the new reimbursement model—two on Oahu and one each on the Big Island, Maui and Kauai.

“;The transition begins this year and we'll transition over several years,”; Van Ribbink said. “;We need to do that; otherwise, we aren't doing anything to bend the cost curve. These costs we've been experiencing clearly are not sustainable. The community can't afford these kind of increases year after year after year.”;

HMSA also said it was continuing the hiring freeze and freeze on management compensation that it implemented last year and said that President and Chief Executive Officer Robert Hiam's total compensation in 2009 of $1.3 million was down 3.4 percent from the previous year.

The insurer's 7.8 percent rate increase request for its Preferred Provider Plan comes on the heels of a 12.1 percent rate increase that went into effect in July. The rate increase request for the Preferred Provider Plan and two others, which all need approval from the state Insurance Division, cover 11,000 community-rated employer groups (businesses with fewer than 200 employees) encompassing 133,000 members. The increases covers drug, dental and vision and would go into effect July 1.

Besides the 7.8 percent increase for its Preferred Provider Plan, HMSA is also seeking a 15.1 percent average increase for Health Plan Hawaii Plus and an average 10.5 percent increase for HMSA CompMED.

“;We know it's hard for business owners right now during the current economic downturn, and the last thing we want to do is make things more difficult,”; Van Ribbink said. “;But the reality is our members' health care costs are continuing to outpace revenue, and we must adjust rates to cover costs.”;

HMSA said it paid physicians, hospitals, pharmacies and other health care providers more than $131 million per month last year—one of the highest per-month payment levels in the past five years. The company's reserve declined $50.6 million, or 12.4 percent, to $356.1 million in 2009 from $406.7 million the previous year. HMSA's reserve has plunged nearly $213 million over the past two years, and the company has lost more than $100 million during that time. HMSA's $35.8 million loss last year at the time was its second-worst loss ever behind the $46.7 million it lost in 2002.

The insurer also has seen membership fall to 688,934 at the end of last year from 705,249 at the end of 2008.

In the fourth quarter, HMSA's revenue rose 10.4 percent to $425.2 million from $385.2 million a year ago, when it lost $14.1 million. Its expenses increased 13.1 percent to $412.4 million from $364.7 million.

For the year, HMSA's revenue rose 8.6 percent to $1.64 billion from $1.51 billion while its expenses rose 9.7 percent to $1.58 billion from $1.44 billion.

State Insurance Commissioner J.P. Schmidt said HMSA's move to a different reimbursement model has been a nationwide trend.

“;I think everyone has been trying to move toward evidence-based medicine where there is some evidence that the treatments being prescribed are effective, rather than simply paying on a piece-per-piece basis,”; he said.

Dr. Richard Chung, senior vice president of HMSA, said the transition to the pay-for-performance program is an extension of programs that already are in place in a limited degree.

The difference, he said, is that now 5 to 7 percent of the compensation from the program is tied to national quality measures, and over time the arrangement might be as much as 10 to 15 percent.