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Independent Health, the region's largest HMO, lost $27.8 million in the first half of the year, one of the biggest downturns in recent memory by a health plan in the state.

News of the loss, which was reported in financial statements filed with the state Insurance Department, follows the company's announcement in August that it would increase health insurance premiums by an average 18 percent, the largest rate hike in the HMO's 20-year history.

Officials at Independent Health acknowledged that the loss looked bad but offered assurances that the not-for-profit HMO is financially sound. The Insurance Department echoed that diagnosis, saying the health maintenance organization has taken steps to improve financial performance and held a large fund in reserve that it could dip into to cover losses.

Meanwhile, competitors in the Buffalo area's hotly contested HMO market saw the loss as a comeuppance, arguing that Independent Health was paying the cost for underpricing key health insurance plans.

Those competitors also filed financial statements for the first half of 2000.

Community Blue, the HMO of Blue Cross and Blue Shield of Western New York, lost $10.4 million. Univera Healthcare showed a $2.1 million gain.

"What's happened could be viewed as alarming, but you have to look at our total operation. Even after the losses, we will exceed minimum (required) reserve levels," said Frank Colantuono, president and chief executive officer of Independent Health.

Colantuono said $11 million of the loss came from unexpected prescription-cost increases, the result of higher prices and greater use of drugs.

Recently, the HMO's officials said use of medications had nearly doubled in the past three years, from an average 6.5 prescriptions per member per year to more than 10 prescriptions per member per year.

Independent Health is not alone.

Spending on prescription drugs increased by a record 17.4 percent last year in the nation, according to an annual survey published by St. Louis-based Express Scripts, a pharmacy benefits manager. The increase resulted from higher prices, greater use of drugs and the introduction of expensive new medications, the survey noted.

"We're focusing on better ways to manage the pharmacy benefit," said Colantuono.

For instance, officials have talked about a new three-tier prescription plan in which members pay different amounts depending on their use of generic and brand-name drugs.

He said another big chunk of the loss -- about $5.8 million -- stemmed from 1999 medical claims for care provided to Independent Health members at Kaleida Health System.

More claims than expected from Kaleida arrived later this year than expected, the result of changes Kaleida made in its billing system in preparation for possible Year 2000 computer problems, according to Colantuono.

Colantuono also said a larger portion of medical care -- about 55 percent -- is provided in the first six months of the year than in the last six months, leaving the HMO with larger expenses in the first half of 2000.

"The second six months will get better," he said, estimating that the HMO would finish the year with a loss of about $21 million.

Colantuono also said Independent Health began the year with its reserve fund -- a sort of rainy-day account the state requires health insurance companies to maintain in case of emergencies -- at $75 million. It now stands at $48 million, about $15 million more than the minimum level the HMO would be required to maintain based on the total amount of premium dollars it collects each year.

The status of the reserves, as well as other measures Independent Health has taken, led state officials to downplay the HMO's predicament.

"We were concerned. But when the company put the facts on the table, we felt it was in good financial condition. We wouldn't get involved unless they dipped substantially into those reserves," said Joanna Rose, spokeswoman for the Insurance Department.

One of the steps Independent Health took was to increase premiums, which is what employees and employers pay for health insurance coverage. Health insurance companies, in turn, use the premium dollars to pay for members' medical care and prescriptions, as well as administrative costs.

Independent Health's premium increases -- they vary depending on which of the company's health plans an individual is in -- will take effect initially for the 17,000 members who re-enroll in October, November and December. Most of the company's members will feel the increase when they re-enroll next year, which means the rate increase won't be much help to this year's bottom line at the HMO.

Competitors expressed surprise at Independent Health's financial report and attributed it to the HMO's offering health plans at unrealistically low prices to gain market share.

Colantuono agreed that some Independent Health plans were priced below cost but said it was not company policy to do this. "Yes, we were underpriced, but it was not willful. We attempt to run this business in a responsible way. We didn't anticipate the expense trends that hit us," he said.

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