Posted on: Friday, August 10, 2001

HMSA raised rates despite huge surplus

By Frank Cho
Advertiser Staff Writer

The Hawai'i Medical Service Association, the state's largest health insurer, has amassed more than half a billion dollars in surplus money while raising rates for most of its members in recent years.

HMSA's reserves have more than tripled during the past 10 years to more than $502 million at the end of last year — more than five times what the insurer is required to have on hand under state law.

But such large reserves are coming under increasing scrutiny by consumers and employers around the country as health care costs spiral upward. And some Hawai'i officials said they may seek increased regulatory oversight of local insurers.

Last week, some Philadelphia business owners sued local insurer Independence Blue Cross after its financial reserves reached $613 million last year, up from $433 million the year before. A similar lawsuit was filed last month in York County, Pa., against that state's biggest insurer for amassing millions of dollars in reserves.

The suits say the insurers are violating state law governing nonprofits' finances and should instead use the surplus money to lower rates and increase benefits to people who cannot afford health coverage.

In Hawai'i, officials say there is no maximum amount of surplus insurers can collect.

Wayne Metcalf, the state's chief insurance regulator, said state law only requires HMSA, and other insurers, to maintain a minimum reserve balance. In HMSA's case that minimum reserve balance is $95 million.

"If they were regulated like auto insurers, we would be looking at that reserve amount and trying to determine if it was excessive," said Metcalf.

Hawai'i Democratic Rep. Kenneth Hiraki, chairman of the House consumer protection committee, said he is talking with other legislators about creating a state health care consumer advocate position that would review how much health insurers charge consumers and assess how much of any surplus they should be allowed to keep.

"It is definitely something we want to look at," he said.

HMSA, a nonprofit Blue Cross/Blue Shield member, collected more than $1.1 billion last year in premiums. Of the state's 1.2 million residents, more than one in two are covered by HMSA's health plans.

Cliff Cisco, a spokesman for HMSA, said the company believes the reserves are necessary, and are used to pay for operating losses when premiums fail to cover the company's expenses, which has happened for the past three years.

For example, the company reported an operating loss of $49 million last year because of increased drug and physician payments. A $66 million gain on its investments more than offset the loss. Still, the company also elected to raise rates on most businesses.

Cisco said money from the company's reserves is used to pay for losses, while rate increases are used to pay for the company's expected costs such as inflation.

"We have to maintain stability and not having enough reserves is not a good thing," Cisco said. "That is why we are very conservative (with investments)."

Cisco said the surplus fund has ballooned over the past few years because of the strong stock market. HMSA has invested its $500 million in reserves mostly in bonds and cash, with 45 percent in fixed-income, 40 percent in stock and 15 percent in cash and treasury investments, Cisco said.

In previous years, HMSA has used money from its reserves to cover expenses, make up shortfalls and even to help launch some of its for-profit subsidiaries, Cisco said.

Sam Slom, a Republican state senator and president of small business advocacy group Small Business Hawaii, said HMSA should use its surplus to lower rates.

"They are a monopoly," Slom said. "I think there will be several different actions that will be utilized, and I would not be surprised if one of them is in the legal arena." Slom added that he doesn't support more government regulation of business.

Joe Luchok, a spokesman for the Health Insurance Association of America, said the industry has no rule on how much money an insurer should keep in reserve to be protected from losses.

Until the 1990s, Blue Cross/Blue Shield recommended a surplus equal to three months of claims and operating expenses.

That would amount to between $250 million and $300 million in HMSA's case.

But a growing number of Blue Cross/Blue Shield plans now use a different formula that takes into account more variables, Cisco said. Under that formula, HMSA's reserves still are above the average of similar plans.

Cisco said that in the past, when the company has believed it has adequate reserves, it has refunded a portion to its members.

In 1996, HMSA returned about $23 million to members from premiums that exceeded claims in the previous year. It also returned money to members in 1998.

Metcalf said that as health care costs rise and competition in the insurance market dwindles, people are increasingly becoming concerned about insurers like HMSA.

"I think it's timely that we begin a discussion of rate regulation now," Metcalf said.

Reach Frank Cho at 525-8088 or fcho@honoluluadvertiser.com.

CORRECTON: The Hawai‘i Medical Service Association has returned money to its members twice, in 1996 and 1998. Because of a reporter’s error, the number of returns was incorrect in an earlier version of this story posted on Aug. 10.