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August 30, 1999 01:00 AM

PREFERRED HEALTH DISPUTES POOR RATING

John Morrissey
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    A provider-sponsored managed-care company in Maryland last week disputed the near-failing grade it got from a rating agency that assesses the financial strength of HMOs.

    The agency, Weiss Ratings of Palm Beach Gardens, Fla., issued the pessimistic rating to Preferred Health Network based on a conclusion that the Linthicum, Md.-based managed-care organization was severely undercapitalized and did not have the reserves to stave off a cash crunch.

    But Preferred Health officials said the conclusion was flawed because it didn't consider other sources of financial help in an emergency, such as CareFirst Blue Cross and Blue Shield, a 17% owner, and prominent provider owners such as MedStar Health, which was created through the recent merger of Baltimore-based Helix Health and Washington-based Medlantic Healthcare Group.

    In addition, the managed-care plan said the evaluation didn't take into account an aggressive new business strategy in 1999 that has resulted in a 30% increase in enrollment to 72,500.

    On a scale of A to F, Weiss gave Preferred Health a grade of "E" to signify a very weak financial condition, said Melissa Gannon, vice president of the rating agency.

    The managed-care company took in $76 million in premiums in 1998 but had only $1.9 million in capital to cushion against losses, Gannon said. The premiums represent revenues but also medical-care obligations to enrollees that could stack up.

    According to the Weiss formula, Preferred Health was in a precarious position in 1998 with a 40-1 ratio of premiums to capital; a good ratio is under 10. "It doesn't take much to wipe out $1.9 million in capital," Gannon said. In 1995, Preferred Health had $2.7 million in capital for $18 million in premium volume.

    But the company met the state requirement of $1.5 million in capitalization, based on the proportion of premium revenues from risk-based products, said Richard Hill, Preferred Health's chief financial officer. About $31 million came from risk-based coverage in 1998.

    An $800,000 profit in 1995 was the last time the company finished in the black. It lost $1 million in 1996, $5 million in 1997 and $1 million in 1998, according to Weiss.

    Preferred Health anticipates another $1 million loss in 1999 but expects to be profitable by spring 2000, Hill said.

    That's when a working relationship with CareFirst should pay off. The Blues plan bought its stake in Preferred Health in early 1997 intending to leverage a sales force of 1,800 Blues brokers to significantly increase enrollment. Key to the partnership was developing coverage options that encompassed the provider networks of both companies.

    Preferred Health's enrollment continued to stagnate while the market moves were formulated, but the launch of a new plan Jan. 1 has netted nearly 17,000 new enrollees by offering access to CareFirst providers, Hill said. The company is projecting 80,000 enrollees by year-end.

    Because most of the new enrollment is coming from risk-based insurance products, the state increased the plan's capital minimum to $3 million in 2000, Hill said.

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