The financial picture for the state’s two largest health insurers significantly improved in the fourth quarter, as premiums caught up with actual medical costs after a series of rate hikes over the past year.

Hawaii Medical Service Association posted a $16.7 million profit in the quarter ending Dec. 31, after boosting rates last year an average 14.8 percent for 77,500 large-employer group members and 3.7 percent for 89,110 small-business members.

"There’s a close correlation between the increase in revenue and health care costs," said Steve Van Ribbink, HMSA’s chief financial officer. "Our health care dues need to stay in close step with health care costs; otherwise, bad things will happen."

The state’s largest health insurer continued to raise premiums this year, increasing rates by an average 3.6 percent in January for 84,000 members who work at large companies, and plans to file additional rate adjustments as early as this month for small-business members renewing health plans in July.

Kaiser Permanente Hawaii, the state’s No. 2 insurer, narrowed its fourth-quarter loss to $500,000 from $2.3 million at the end of 2010. An estimated 162,000 Kaiser members saw medical premiums rise 8.8 percent in January.

The two companies’ financial progress will be noted the next time they apply for premium increases.

"With the improved financial performance, we’ll closely monitor the insurers’ reserves and earnings and take those into consideration when the insurers apply for future rate adjustments," said Gordon Ito, state insurance commissioner. "The rate hikes have had an impact in improving their financial conditions, but there are other factors that may have come into play, like reduced utilization of health care services."

HMSA managed to increase its bottom line in the quarter by 16.9 percent from $14.27 million in the 2010 quarter. For the year, earnings jumped more than eightfold to $43.8 million from $5.27 million, even though health costs grew 15.1 percent over 2010.

The company attributed much of its gains to the transfer of nearly 24,000 seniors into a new Medicare health plan.

"These are Medicare memberships, so they attract higher expenses and corresponding higher dues revenue," Van Ribbink said.

HMSA said it paid President and CEO Robert Hiam $1.2 million last year, up from $855,331 the year prior, which followed a salary decrease of more than 30 percent from $1.3 million in 2009. Executive compensation includes a base salary and performance measures such as how well the organization delivers health care, customer service and overall financial performance.

HMSA’s fourth-quarter revenue rose to $514.9 million, compared with $452 million in the year-earlier period. Expenses grew to $455.5 million from $401 million. Investment gains of $6.1 million and other income from military administrative services helped boost profits from operations to $10.7 million from $3.4 million.

For the year, HMSA’s revenue rose to $2.1 billion from $1.8 billion, while expenses totaled $1.9 billion, compared with $1.6 billion. Investment gains of $19.7 million and other income helped reverse an operating loss of $26.4 million in 2010 to a profit of $22.3 million, or 1.1 percent of revenue.

HMSA had 692,011 members at the end of 2011 and a reserve of more than $406 million, or $587 per member.

Kaiser’s fourth-quarter revenue climbed to $268.8 million from $241.1 million in the 2010 quarter, while expenses totaled $270.5 million, up from $244.8 million. Investment gains of $1.2 million helped reduce a quarterly operating loss to $1.7 million from $3.7 million. Kaiser’s Hawaii region president, Janet Liang, did not report her income.

The health maintenance organization posted an annual profit of $4.3 million, reversing a year-earlier loss of $5.1 million. Kaiser’s revenue totaled $1.1 billion, an increase from $957 million in 2010, while expenses rose to $1.1 billion from $967.7 million. Investment income totaled $4.9 million, resulting in an annual operating loss of $600,000, compared with a loss of $10.7 million.

"Health-care costs continue to rise," Kaiser spokeswoman Laura Lott said in an email. "Increases in labor costs and pharmaceuticals are just some of the challenges facing health care providers. We work in a very capital-intensive industry. Health care providers need a margin just like any other business, to maintain facilities, upgrade equipment, and enhance technology infrastructure."