Announcement

March 2, 2010
HMSA reports 2009 operating loss and requests rate adjustments

Chuck Marshall
(808) 948-6826
chuck_marshall@hmsa.com

The Hawaii Medical Service Association (HMSA) today announced that its annual operating results included a shortfall after taxes of $64.39 million. The shortfall represented 3.9 percent of revenue, and was due in large part to a significant increase in hospital and physician costs over the previous year.

In 2009, health plan revenue did not keep pace with rising health care costs. Hospital and medical expenses alone increased 10.9 percent over 2008, but revenue increased only 8.5 percent for the same period. HMSA’s total payments to health care providers were $1.58 billion.

On average, HMSA paid physicians, hospitals, pharmacies, and other health care providers more than $131 million per month last year. This represents one of the highest per-month payment levels in the past five years.

“In 2009, provider reimbursements grew to 96.3 percent of dues revenue,” said Steve Van Ribbink, HMSA executive vice president and chief financial officer. “When this amount of dues is spent on health care services, it makes it extremely difficult for the health plan to achieve break-even. But it also means our members received an outstanding value for their health care dollar last year.”

Proposed Rate Adjustments for HMSA Plans

HMSA also announced that it filed documents with the state Insurance Division requesting health plan rate adjustments for its 11,000 community-rated employer groups, which are businesses with fewer than 200 employees. The state has 60 days to review the rate request. The average rate increase requested for HMSA’s prevalent plan, the Preferred Provider Plan (PPP), is 7.8 percent. The plan year for community-rated groups begins July 1.

HMSA health plan rates are based on actual health care costs (i.e., benefit usage by members), health care cost trends (cost projections and inflation), and health plan administrative expenses. Based on current cost trends and last year’s $64.39 million shortfall, HMSA requested the following rate adjustments:

• HMSA Preferred Provider Plan (PPP) – Average increase of 7.8 percent (includes drug, dental and vision).
• Health Plan Hawaii (HPH) Plus – Average increase of 15.1 percent (includes drug, dental and vision).
• HMSA CompMED – Average increase of 10.5 percent (includes drug, dental and vision).

“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,” said Van Ribbink. “But the reality is our members’ health care costs are continuing to outpace revenue, and we must adjust rates to cover costs.”

“At the same time, it’s clear that current health care cost trends are simply not sustainable,” said Van Ribbink. “We must significantly bend the cost curve down so that the community can afford access to quality health care. To accomplish this, HMSA is fundamentally changing its provider reimbursement model. The traditional ‘fee for service model’ is being transitioned 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.”

Membership and the HMSA Reserve

At the end of 2009, HMSA had 688,934 members and maintained a health plan reserve of $356 million. On average, the HMSA reserve equals $517 per member.

Over the past year, the reserve declined $50.57 million, or 12.4 percent. In total, the reserve declined nearly $213 million over the past two years. This was due to significant operating losses caused by increases in health care costs and the U.S. financial crisis that began in late 2007.

In 2009, the HMSA reserve generated $24.49 million in investment income which helped to reduce HMSA’s shortfall.

“The realized investment income for 2009 is well below the $47.82 million realized in 2008 primarily because HMSA actively locked in gains during 2008 in anticipation of the market downturn,” said Van Ribbink. “Unfortunately, as our reserve declines, so does our opportunity to earn investment income. Our investment income has been used in the past as an effective tool to subsidize member dues.”

The HMSA reserve is used to protect members from financial losses and community health emergencies, like a disease outbreak or natural disaster. It is also used to fund important health initiatives that affect members and the community at large.

Trimming Administrative Expenses

HMSA’s administrative expense (as a percentage of revenue) is among the lowest in the country. In 2009, HMSA engaged in a number of cost-cutting measures to further reduce operating expenses, promote greater operational efficiency, and increase employee productivity. Company-wide efforts included:

• Freezing compensation for management staff.
• Continuing a hiring freeze (except for critical positions).
• Reorganizing business functions for increased efficiency.
• Reducing department budgets, including budgets for travel and training.
• Continuing “green” initiatives throughout the organization for cost- and energy-savings.
• Using digital technology to reduce corporate printing and postage expenses.

In 2010, HMSA is continuing the hiring freeze and the freeze on management compensation.

HMSA is a nonprofit, mutual benefit association founded in Hawaii in 1938. It is governed by a community board of directors and includes representatives from health care, business, labor, government, education, clergy, and the community at large. HMSA is a member of the Blue Cross and Blue Shield Association, an association of independent Blue Cross and Blue Shield plans. Nationally, HMSA and 38 other Blue Cross and Blue Shield plans provide worldwide coverage to more than 100 million members.

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