In a move that surprised its membership and customers, Summerlin Life and Health Insurance Co. yesterday said it would sell its health plan membership portfolio to a competitor and withdraw from the business here.

Summerlin said it had reached an agreement to sell coverage for its 22,800 members to the Hawaii Medical Assurance Association in a deal that will make HMAA the third-largest health insurer in the state.

The transaction comes about five years after Summerlin entered the state, promising to boost competition in the health insurance business. Its departure will be a setback for proponents of bringing in more companies to compete with the large insurers that dominate Hawai'i's market.

Summerlin was the first health insurer to set up shop in Hawai'i in at least a decade when it started up in 2004. At the time the head of Summerlin's parent firm, Tempe, Ariz.-based I/MX Companies, said the company had sufficient resources to compete with the state's two largest plans, HMSA and Kaiser Permanente Hawaii, and was in the market for the long haul.

But the company failed to build a significant presence in Hawai'i and at the end of September 2009 ranked as the smallest of health insurers in the state, according to state Insurance Division data.

It also has a reputation among some doctors and medical providers for tardy payments and in 2006, the year for which the latest state figures are available, had a complaint ratio of 0.259 complaints per 1,000 members — the highest of the state's health insurers.

Paul Carter, Summerlin president and chief executive officer, said several factors contributed to the decision to sell its fully insured health insurance portfolio, including a strategic shift in I/MX's strategy to focusing on providing administrative services to self-funded union trust fund plans.

"The Hawai'i market is a very interesting one," Carter said. "We think this transaction will help to continue to increase the competition in the fully insured market."

NO BENEFIT CHANGES

HMAA will have more than 48,000 members when it absorbs Summerlin's membership ranks. HMAA said Summerlin plan members won't see a change in their benefits or premiums unless agreed upon by the plan and approved by the state.

But the added size may give HMAA economies of scale to go after more members and better compete with HMSA, which has about 558,000 members (excluding those in self-insured plans), and Kaiser Permanente, with about 223,500 members.

"For the past several years we've been working on expanding our capacity to take on larger groups," said John Henry Felix, HMAA president and chief executive officer. "We're going to be marketing more aggressively."

Felix said the mutual-benefit company was approached in August about looking into the deal. No purchase price was disclosed, but HMAA apparently beat out several other local and Mainland suitors. Among the employers choosing Summerlin for employee health coverage are ABC Stores, Central Pacific Bank and The Honolulu Advertiser, he said.

"We think HMAA gave us the best fit," Carter said.

J.P. Schmidt, state Insurance Commissioner, has been a proponent of getting more insurers to open offices here, but said he also wants to foster strong health companies that can compete with the larger insurers.

"The combination with HMAA will increase the strength of HMAA," Schmidt said. "So that hopefully will provide beneficial competition as well."

Schmidt's office will review the sale and how it will affect policy holders, transition plans and company finances. He said he hopes the review will be completed in 30 days and said policy holders have the option of switching to another insurer if they don't want to have HMAA coverage.

ADDITIONAL SERVICES

Felix said the new members may not want to opt out since there are additional alternative medical services available from HMAA that weren't available from Summerlin. HMAA also has a more extensive provider network, with 4,500 physicians and 60 percent more practice locations than Summerlin.

Hawai'i is the last market where Summerlin provides health insurance. It had a bumpy ride in three other states — Nevada, Illinois and Iowa — where it also pulled out of the business. Carter said the Hawai'i operation was profitable, but that its decision to focus on services, along with uncertainty about health care reform and having to pay a 4.265 premium tax persuaded it to exit the Hawai'i operation.

Summerlin had to pay the premium tax because it is a for-profit company. Other insurers in the state are non-profits and aren't subject to the tax.

I/MX will retain its business in Hawai'i for third-party processing of claims and administrative duties for self-funded health plans.

That business, known as HMA Inc., has contracts with the state Employer-Union Health Benefits Trust Fund and the teachers union as well as others. About 100 people are employed by HMA and Summerlin in Hawai'i.

HMAA also employs about 100 people. Felix said it has been gearing up to add more business and probably will hire about 30 more people to handle the business obtained from Summerlin.