The state's largest health plan suffered a $10 million net loss during the first three months of 2008 as higher-than-expected payouts to hospitals and physicians, along with a project to upgrade its computer systems, took a toll on the bottom line.

The Hawaii Medical Service Association reported that its loss was about 15 times the amount HMSA lost a year earlier and contrasts with a $3 million profit reported by the Kaiser Foundation Health Plan's Hawaii Region during the same period.

Both health plans are coping with rising medical costs as people use more healthcare and Hawai'i's population ages. HMSA's cost increases have been magnified in the past year because it has increased what it pays to hospitals and physicians. HMSA is also nearing the completion of an expensive upgrade of its information technology, which has kept its administrative costs high.

"First-quarter operating results indicate that higher hospital and physician fees in 2008 are having a significant effect on the health plan's finances," said Steve Van Ribbink, HMSA's chief financial officer.

HMSA remained the largest health plan in the state with 701,527 members, though the total was down 1 percent from a year earlier. The company has been raising premiums to stem operating losses and in late March it applied for its largest rate hike in nearly two decades for its preferred provider plan for small businesses.

That proposed 12.8 percent hike is pending before state insurance commissioner J.P. Schmidt, who may rule by early next month, HMSA said.

Members' premium revenue at the nonprofit licensee of the Blue Cross and Blue Shield Association fell by double digits to $366.1 million during the quarter, reflecting the loss in the past year of the State of Hawaii Employer-Union Health Benefits Trust Fund, which has gone to self-insurance.

"As costs grew faster than member dues, HMSA experienced its seventh straight quarter of operating losses," Van Ribbink said.

The insurer also reported a downturn in investment income earned off its $540.7 million of surplus. HMSA has in the past come under fire for maintaining this amount of surplus, though the insurer defended it again, saying investment income earned off the reserve subsidizes rate increases.

Van Ribbink noted that without the $5.89 million of investment earnings in the quarter, the insurer's net loss would have been somewhere in the $16 million range.

Investment income also played a role in results for Kaiser, the state's second-largest health plan, with 222,000 members. Kaiser reported net income fell from a year earlier, with much of the decline being traced to a half-million dollar drop in investment returns.

Kaiser reported net income of $3 million as operating revenue rose to $225.5 million. Kaiser said a rate hike in the past year helped it achieve higher revenue even as the number of members declined by about 1,000.

Spokeswoman Jan Kagehiro said it appears Kaiser has turned the corner of membership loss, with the trend ending last September, and that it is beginning to take on more members since that time.

Operating expenses rose at a slightly slower pace than did revenue, resulting in higher operating income. Kaiser said it has kept a constant watch on expenses and that it had benefited in spending less on outside services, including sending patients to other hospitals when its own medical facilities were full.

"The rising cost of medical care continues to challenge all of us in the industry, however our first-quarter performance shows that we are working hard to continue controlling our costs," said David Delaney, Hawaii Region chief financial officer.

Kaiser, which differs from HMSA in that it is a health maintenance organization, in April celebrated the opening of a new wing at its Moanalua medical center. The 176,000-square-foot, six-story addition is the first phase of a $157 million expansion project.