Standard & Poor's, the New York-based debt rating agency that is highly influential in determining which companies are extended credit, says it sees better times ahead for the healthcare industry in 1998.
Standard & Poor's, in its report "1998 Health Care Industry Outlook," says it is "cautiously optimistic" that this year will be "more stable" than 1997, when the agency had a negative outlook for the industry, especially for managed-care insurers.
The report was released in early February, two weeks before S&P downgraded PacifiCare Health Systems and put Kaiser Permanente, on a list of companies that could possibly have their credit ratings revised downward after it reported higher-than-expected losses for the fourth quarter of 1997 (see Vitals). A downward revision can mean a company will have to pay higher interest rates on bonds and other corporate debt.
Despite the bad news for PacifiCare and Kaiser, the report had a positive outlook for managed-care insurers because of several trends. They include: 5% to 10% price increases for 1998 contracts, lower medical cost inflation, better expense management and requirements by the National Association of Insurance Commissioners for more extensive reserves, says Arun Kumar, director of S&P's healthcare group.
The S&P report also predicted that managed-care companies will go back on the upside of the so-called underwriting cycle, which alternates between three years of profitability and three years of earnings squeezes.
"1997 was the worst of the underwriting down cycle," Kumar says. Eleven companies were downgraded in 1997, compared with eight companies that were upgraded.
S&P, however, tempered its optimism somewhat because of the continuing attempt by state, federal and even local governments to regulate the care that insurers must pay for, such as setting minimum hospital stays for certain procedures.
Also, Kumar says, 1998 could bring a few more high-profile financial problems, like that faced by Oxford Health Plans in 1997.