HMO revenues turn around, but many still losing money

Forty-five health maintenance organizations (HMOs) consistently maintained good financial health despite the most turbulent period in the industry's history, according to a news release from Weiss Ratings Inc., the only provider of independent financial ratings on HMOs.

The institutions represented 8.6 percent of the 525 plans reviewed by Weiss. With more than $30 billion in premiums, they represented approximately 26 percent of the industry's total premiums of $113 billion as of Sept. 30, 2000.

From January 1995 to September 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) declined from 48 percent of the industry in 1995 to only 19 percent today.

Capital

"The key factor was capital," said Martin D. Weiss, 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.

Profits

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 percent of the 525 plans reviewed, continued to lose money during the period. With $32.8 billion in premiums, those plans reporting losses represented 29 percent 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."

Upgrades

In reviewing the industry's financials for the third quarter of 2000, Weiss upgraded the ratings for 23 HMOs while downgrading 14.

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.