WEISS RATINGSLarge and Small HMOs with Strong Capital
Successfully Navigate Six Years of Industry Trouble
Third-quarter turn-around bodes well for industry
although nearly half of HMOs continue to lose money
PALM BEACH GARDENS, Fla., June 18, 2001 — Forty-five health maintenance organizations (HMOs) consistently maintained good financial health despite the most turbulent period in the industry's history, according to a recent analysis by Weiss Ratings, Inc., the only provider of independent financial ratings on HMOs. The well-performing institutions represented 8.6% of the 525 plans reviewed by Weiss; with more than $30 billion in premiums, they represented approximately 26% of the industry's total premiums of $113 billion as of September 30, 2000.
From January 1995 to September of 2000, the industry as a whole suffered serious problems. During that nearly six-year period, 57 HMOs failed, the highest failure rate of any financial industry. Profits started to decline in 1995 and culminated in three years of heavy losses from 1997 to 1999 when HMOs lost a total of $1.8 billion. As a result of these years of poor performance, the percentage of companies rated B- or higher (considered "Good" by Weiss Ratings) has declined from 48% of the industry in 1995 to only 19% today.
"The key factor was capital," commented Martin D. Weiss, Ph.D., chairman of Weiss Ratings. "In tough times, it gave the 45 well-performing HMOs a cushion. In good times, it enabled them to leverage their assets for maximum efficiency and growth. Not all of these companies totally escaped losses, however they maintained overall financial stability by (a) remaining adequately capitalized and (b) maintaining adequate levels of liquidity, profitability, and stability — the three other key measures we use to evaluate HMOs."
Among the 45 HMOs that maintained good financial health, 22 are relatively small, with less than 100,000 members, bucking the trend Weiss had reported earlier regarding the greater difficulties faced by many smaller plans. Also, many of the plans are affiliated with much larger organizations such as Cigna, Kaiser, Regence, and United Healthcare, which often gives them additional access to capital.
Industry Profitability Continues to Improve
For the first nine months of 2000, the HMO industry recorded total profits of $908.8 million, a significant turnaround from the net loss of $13.7 million for the same period in 1999. Nevertheless, 241 HMOs, or 46% of the 525 plans reviewed, continued to lose money during the period. With $32.8 billion in premiums, those plans reporting losses represented 29% of total industry premiums.
"Although the continuing improvement in the industry totals is very positive, we are still concerned that 33 large plans earning $1.1 billion are driving aggregate industry profits," Weiss added. "The industry won't be completely out of the woods until we see a significant decline in the number of unprofitable HMOs."
Notable Upgrades/Downgrades and Ratings Distribution
In reviewing the industry's financials for the third quarter of 2000, Weiss upgraded the ratings for 23HMOs while downgrading 14.
Notable upgrades include:
• FirstGuard Health Plan Inc. (Mo.) From D+ to C-
• Keystone Health Plan West Inc. (Pa.) From C+ to B-
• Oxford Health Plans Inc. (N.Y.) From D+ to C-
Notable downgrades include:
• Wellness Plan of North Carolina Inc. (N.C.) From D- to E+
• Aetna US Healthcare Inc. (Ariz.) From C+ to C
• Island Care (Hawaii) From D- to E+
The Weiss ratings are based on an analysis of a company's risk-adjusted capital, five-year historical profitability, liquidity, and stability. The latter category combines a series of factors including asset growth, premium growth, strength of affiliate companies, and risk diversification.
Weiss issues safety ratings on more than 15,000 financial institutions, including HMOs, life and health insurers, Blue Cross Blue Shield plans, property and casualty insurers, banks, and brokers. Weiss also rates the risk-adjusted performance of more than 11,000 mutual funds. Weiss Ratings is the only major rating agency that receives no compensation from the companies it rates. Revenues are derived strictly from sales of its products to consumers, businesses, and libraries. Consumers needing more information on the financial safety of a specific company can purchase a rating and summary analysis for as little as $7.95 through the Weiss Ratings web site at www.WeissRatings.com.
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