The Hawaii Medical Service Association ended 2008 with more losses, increasing the possibility that it will raise rates for small businesses in coming months.

HMSA, which is the state's largest health insurer, said it lost $14.2 million in the final three months of 2008, or more than twice as much as a year earlier.

Meanwhile, Kaiser Foundation Health Plan's Hawai'i operations — the largest HMO in the state — reported a $3.2 million profit during the same period.

Both HMSA and Kaiser reported higher expenses, though in HMSA's case the costs for benefits and administration rose faster than dues revenue growth. HMSA said it was battered by higher healthcare costs as it paid out more for services, including an increase in reimbursements to physicians and hospitals.

"I haven't seen a prolonged period of healthcare inflation quite like I've seen right now," said Steve Van Ribbink, HMSA's executive vice president and chief financial officer. "That's the story for the entire year."

Van Ribbink said costs per member grew by 10 percent in both 2007 and 2008. Besides provider costs, also included in the expense figure is the number of members, frequency of use and severity of illness.

HMSA's losses probably mean a rate increase for thousands of small businesses this summer. Last year HMSA had an average 10.4 percent increase for this group.

Van Ribbink said there probably would be a rate increase, but said he couldn't predict how large it would be until he sees another month's worth of data on costs. HMSA must have its rates approved by the state insurance commissioner and intends to file a request sometime in April.

$58M LOST IN 2 YEARS

Also contributing to the fourth-quarter loss were lower gains on investments. Most of HMSA's reserves are invested in bonds, which performed better than the tanking stock market.

HMSA's fourth-quarter loss capped a year in which it lost money in three of four quarters and had a bottom line loss for the entire year for the second year running. Over the past two years, HMSA has lost more than $58 million.

State Insurance Commissioner J.P. Schmidt said his division does take a closer look when it sees patterns of big profits or losses developing for nonprofit insurers such as HMSA.

"I don't at this point have any significant concerns about HMSA's health but as with all insurance companies we watch the trends very closely and try to step in before they are excessively good or start to show too many losses," Schmidt said.

"HMSA's comments that these numbers are in part due to increases in reimbursements is something that I am also watching closely, because we know that we need to provide the appropriate level of reimbursements to doctors and hospitals in order to keep them providing healthcare for our citizens."

The losses, along with the insurer extending coverage to Aloha Airlines employees after the air carrier shutdown, contributed to HMSA's reserve fund dwindling to $420.7 million at the end of 2008.

That was more than 25 percent less than the $569.1 million HMSA had at the end of 2007.

The insurer reported having 705,249 members at the end of the year, up by a little more than 4,000 from a year earlier.

Van Ribbink said he believes HMSA still has a good level of reserves and added that the insurer received an "A" financial strength rating from Standard & Poor's Rating Services in a November review.

"I liked where we were a year ago better than where we are now," said Van Ribbink. But, he said, he isn't overly concerned at the level of reserves, which amount to 26.3 percent of annual costs.

A year earlier, reserves amounted to 33.2 percent.

KAISER MEMBERS GROW

Kaiser also reported a gain in membership, rising 1,000 to 223,000. That contributed to an increase in operating revenue, which grew faster than expenses.

Fourth-quarter investment income also rose for Kaiser, which has benefited from restructuring and cost controls implemented in the past two years.

"Kaiser reported net income of $3.2 million for the quarter and $7.3 million for the full year, both lower than comparable 2007 results.