The Hawaii Medical Service Association's fortuitous timing on a sale of stock is helping it report its first profit in seven quarters, though the insurer said it is continuing to lose money on an operating basis and faces mounting pressure to raise rates in the coming year.

HMSA had a profit of $5.1 million during the third quarter as the sale of some investments before Wall Street's meltdown in September offset a loss on its health insurance operations of almost $19 million.

"We're still incurring significant underwriting losses on the operating side," said Steve Van Ribbink, HMSA's chief financial officer. "It's still a tough time."

HMSA and Kaiser, the state's largest health maintenance organization, are facing rising costs as expenses for hospitals, physicians and drugs increase.

Kaiser said it lost $400,000 in the third quarter. It reported also that results would have been worse if not for investment income that partially erased losses from operating its hospitals and health plan.

The health plans typically supplement operating results with gains from investments. But the stunning decline in the stock market in the past two months comes as healthcare costs continue to escalate while Hawai'i goes through an economic downturn that's thrown thousands of people onto unemployment rolls.

Kaiser has proposed a 4.9 percent increase in member rates and is awaiting approval by state Insurance Commissioner J.P. Schmidt. HMSA, which enacted a 10.4 percent increase for its small-business members in July, also is contemplating rate hikes.

COSTS STILL RISING

Van Ribbink said HMSA is continuing to face the same cost pressures this quarter as it had earlier in the year, and that it most likely can't rely on investment gains to bail it out again. The insurer had projected operating losses this year in raising reimbursements to hospitals and boosting payments to physicians, and drug costs are also up.

For the first nine months of 2008, the insurer has had net losses totaling $21.6 million. Operating losses, which don't include investment income or taxes, are almost three times that amount.

"It does put pressure on us to raise rates," Van Ribbink said.

Already the insurer has asked for an average 11.5 percent increase for large employers whose rates are adjusted in January.

"We hate that we're in a situation that we have to do that. But our investments at this time can't be looked on to mitigate the operating losses," he said.

HMSA is the dominant healthcare insurer here, with 697,135 members at the end of the third quarter, down slightly from a year earlier when it had 699,806.

Kaiser said the downturn in the economy also weighed on its results because of slower-than-expected membership growth. It also said expenses exceeded revenue because of higher utility costs. It ended the quarter with 222,000 members.

Its $400,000 net loss loss during the fourth quarter compared with a $2.1 million profit a year before. Revenue rose to $226 million, while operating expenses increased faster, totaling $228.9 million. That resulted in Kaiser's operating loss of $2.9 million. Investment income was $2.5 million.

RESERVES SHRINKING

At HMSA, the operating loss of about $19 million compared with an operating loss of $23.3 million a year earlier.

Van Ribbink said the insurer was able to sell stocks as it rebalanced its investment portfolio before the mid-September stock market plunge. That produced a gain of $23 million.

The company's net profit of $5.1 million compared with a net loss of $10.9 million a year earlier.

Van Ribbink said the year-over-year bottom-line improvement came against a troubling backdrop that included the value of its reserves declining.

"Due to escalating healthcare costs causing ongoing losses, and a decline in the market value of our investment portfolio, we've seen our financial safety net — the HMSA reserve — shrink by $94.5 million since the third quarter of 2007," he said.

"In short, the HMSA reserve has lost more than 16 percent of its value in just one year."