(Crain’s) — After surging earlier in the year, profits of the parent of Blue Cross & Blue Shield of Illinois dropped sharply during the second quarter, to a still hefty $270 million, as benefits rose and membership shrank.

Chicago-based Health Care Service Corp’s net income fell nearly 23% during the second quarter compared with almost $350 million in the year-earlier period. The fourth-largest insurer in the U.S. has a tight grip on the health insurance market in Illinois, making its performance a matter of keen interest to employers, employees and people who buy individual insurance policies.

“They’re far and away No. 1,” said Joel Peyton, an analyst who studies the Illinois insurance market at Nashville, Tenn.-based research firm HealthLeaders-InterStudy. “I don’t see that changing anytime soon.”

Health insurance profits are expected to come under increased scrutiny because of a new law—part of the federal overhaul of health care—that requires the companies to pay a fixed percentage of revenues on medical care and activities that broadly improve health care, such as patient education.

Quarterly fluctuations in net income are not unusual for health insurance companies. Health Care Service’s second-quarter showing was offset by the insurer’s strong first quarter, when profits soared to nearly $437 million.

As a result, Health Care Service’s net income rose 13.2%, to $706.3 million, during the first half of 2011, compared with $623.9 million during the first half of 2010, according to a second-quarter statement the company filed with the National Assn. of Insurance Commissioners, which is a clearinghouse for insurance financial information.

For Health Care Service, rising benefit expenses are inherent in having a large claims base, and the company’s membership continually changes, a spokesman said.

He added that the drop in net income was partly caused by a lower rate of return on short-term investments, which he declined to provide.

The financial reports only cover Health Care Service’s insurance operation. Not included is its low-margin, fee-based work administering health plans for self-insured clients.

“It’s very difficult to look at our filing and get a full picture of the business,” the spokesman said.

Health Care Service is a mutual company, owned by its policy holders.

Insurance companies report their financial results on a cumulative, quarterly basis. Crain’s calculated Health Care Service’s second-quarter results by subtracting its first-quarter results from those for the first six months.

Profits plummeted in the second quarter even though revenue rose 4.5%, to $4.93 billion, compared with $4.72 billion for the year-earlier period. Benefit expenses, money spent on health care, climbed 3.6%, to a little more than $4 billion, in the second quarter, compared with $3.9 billion in second-quarter 2010.

Membership slipped 1.5%, to about 7.62 million, in the second quarter, compared with 7.73 million members in second-quarter 2010, when the company’s enrollment was boosted by Unicare Inc.’s exit from Illinois and Texas, states where Health Care Service is strong.

“Given the current economic and competitive environment, (Health Care Service) and the health insurance sector as a whole will continue to be challenged with organic membership growth over the next year,” according to a report by Moody’s Investors Service issued on July 12, before the company released its second-quarter results.

Health Care Service’s net profit margin tightened to 5.5% during the second quarter, compared with 7.4% for the year-earlier period.

The company wrote 54.1% of all small group plans and 71.9% of all large group plans issued in Illinois in 2010, according to a report earlier this year by the National Assn. of Insurance Commissioners, which is based in Washington, D.C.

During the second quarter, Health Care Service paid off $400 million in debt.

That loan was essentially replaced with $500 million in unsecured notes that the company issued earlier this year. Those notes, at an interest rate of 4.7% a year, come due on Jan. 15, 2021, according to Health Care Service’s second-quarter filing.