Tufts Health Plan, a Massachusetts-based health insurer, announced yesterday that it is returning to Rhode Island to challenge the two insurers dominating the market.

Tufts, which pulled out of the state in 1999, will take on Blue Cross & Blue Shield of Rhode Island and the smaller UnitedHealthcare of New England.

“We’re very excited about entering the Rhode Island market,” said James Roosevelt Jr., president and chief executive officer at Tufts.

State officials, doctors and business leaders said they welcomed the return of a company with a reputation for customer satisfaction.

But they cautioned that the competition will probably not lead to any reductions in premiums.

“Health care is not like any other part of the economy,” said Steven DeToy, a spokesman for the Rhode Island Medical Society. “Bringing more so-called competitors to the market has never proven to reduce rates and improve access.”

Christopher F. Koller, the state health insurance commissioner, said 8-to-10-percent annual increases in health-care costs –– driven by everything from expensive new technology to poor management of chronic diseases –– mean premiums will continue to rise.

But observers voiced hope that the competition could at least slow the increase of premiums in the state.

Tufts has been angling to enter the Rhode Island market for months now, meeting with state regulators, politicians and business interests to promote the idea.

Roosevelt said there were three prerequisites to a return: the company had to win the proper state licenses to operate; Tufts needed to negotiate competitive contracts with the hospitals providing care; and the state legislature had to change an obscure provision of state law that advantaged Blue Cross and United.

The law dictated that only insurers doing business in Rhode Island in 2001 could take the health status of members into account in setting rates for “small groups” of insured –– companies with 50 covered employees or fewer.

That meant only Blue Cross and United could reduce rates for healthy pools of members or hike them for the unhealthy.

Governor Carcieri signed a bill in June that stripped the health status provision out of the law –– leveling the playing field for Tufts and any other insurers eyeing the Rhode Island market.

Tufts won one of two state licenses it needed last month and the second this week.

And Roosevelt said the company negotiated contracts with hospitals that are “on par” with Blue Cross and United deals.

Tufts operated in Rhode Island from 1995 to 1999, and had about 5,700 subscribers.

Competition among five insurers led to a price war that ate into the companies’ bottom line. And a subsidiary of Harvard Pilgrim Health Care of New England pulled out of the state.

A Tufts subsidiary operating in Rhode Island, Maine and New Hampshire fared better in the Ocean State. But the company pulled the plug on the entire operation when losses piled up in Maine.

Tufts has maintained a small presence in the state since then. The company covers about 8,000 residents who get their insurance through Massachusetts employers.

But the full-fledged return to the Rhode Island market will mark the insurer’s first significant venture outside Massachusetts since 1999.

Roosevelt plans to kick off the marketing effort today with an appearance before the Rhode Island Business Group on Health, a consortium of more than 50 businesses in the state studying health-care issues.

Tufts plans to open a sales office in Providence in the coming weeks and start running print, radio and television advertisements promoting its products.

The company will start by offering a preferred provider organization, or PPO plan, which generally costs more than a health maintenance organization, or HMO plan, but provides greater flexibility in choosing doctors and specialists.

The new coverage will be effective Jan. 1, 2009. And Roosevelt said the company hopes to have 10,000 subscribers in place by that time –– adding about 2,000 to the 8,000 already on the rolls.

Tufts will start offering an HMO plan in Rhode Island later in the year.

Roosevelt declined to set growth targets, but noted that insurers generally take time to build market share as consumers grow comfortable with new plans.

Rhode Island’s leading political figures said Tufts’ return to the market, no matter how gradual, is important.

Governor Carcieri said, in a statement, that the company’s presence will “give consumers more health insurance choices at competitive rates.”

And Lt. Gov. Elizabeth Roberts said she hopes that Tufts can become “a real partner in health-care reform” in the state.

But Laurie White, president of the Greater Providence Chamber of Commerce, was less enthusiastic.

She said only systemic health-care reform –– a greater emphasis on preventative care, better management of chronic disease, introducing electronic medical records –– will curb costs in a meaningful way.

Competition among health insurers, she said, will do no such thing.

“I’m not optimistic that carving up an existing pie is going to do anything from a long-term perspective,” White said.

dscharfe@projo.com