Hawaii Medical Service Association recorded a $12.8 million profit in the three months ended March 31, its highest first-quarter gain since 2004.

The state’s largest health insurer posted 53.8 percent growth in net income due in part to the Hawaii Employer-Union Health Benefit Trust Fund’s switch on Jan. 1 from a self-funded medical plan — an arrangement in which an employer agrees to carry the risk for its members and their dependents — to a fully insured plan, in which HMSA has the risk.

This change increased membership by 111,985, or 19.2 percent, to 693,897 and now requires HMSA to report additional revenue and expense from the group in its financial earnings. In addition, HMSA attributes part of the gains to a new pay-for-performance provider reimbursement model intended to contain costs.

"We are still cautiously optimistic that our new provider reimbursement methodology is improving quality for our members and helping to contain costs," HMSA Chief Financial Officer Steve Van Ribbink said.

HMSA’s revenue rose 18.4 percent to $614.5 million from $519 million in the year-earlier quarter, while expenses grew 17.6 percent to $554.9 million. Administrative expenses also increased to $52.3 million from $43.1 million. Its operating gain totaled $7.2 million, up from $4 million. After investment gains of $5.1 million, HMSA’s net was 2.1 percent of dues revenue. Reserves at the end of the quarter were $422.1 million.

Meanwhile, HMSA is seeking to raise health insurance premiums on July 1 for roughly 84,000 small-business members by 3.8 percent — its lowest proposed increase since 1997.

"If we’re operating at a small margin — this quarter’s margin was 1.2 percent — that means we aren’t chasing a loss that has to be captured through a rate increase," Van Ribbink said. "If we can have that happen, we can stabilize rates and hopefully persist with lower rate increases than they have been in recent years."