Thanks to rapidly escalating premiums, many health plans are looking healthier than last year, but checkup results vary significantly by individual HMO, size and region.
Provider-owned health plans, for the most part, are not on the healthy end of the spectrum.
That's the word from Standard & Poor's, which last month issued a moderately optimistic report on the health of the managed-care industry. S&P says managed-care giants such as Aetna U.S. Healthcare, Cigna HealthCare, WellPoint Health Networks, PacifiCare Health Systems and UnitedHealth Group hold strong advantages over the rest of the competition, especially when it comes to economies of scale, technology-driven medical management efforts and greater access to capital.
The New York-based credit-rating agency also was impressed by apparent financial turnarounds at national HMOs such as Norwalk, Conn.-based Oxford Health Plans and Woodland Hills, Calif.-based Foundation Health Systems. Strong results at Blues plans such as Indianapolis-based Anthem; Blue Cross of California; Health Care Services Corp., which operates Blues plans in Illinois and Texas; and Trigon Healthcare, the former Blue Cross and Blue Shield of Virginia, made a favorable impression as well.
Brookline, Mass.-based Harvard Pilgrim Health Care and Louisville, Ky.-based Humana bucked the upward trend in the first half, turning in weaker results, S&P notes.
Overall, an S&P review of 659 health plans' year-end 1998 results revealed that 52% lost money last year, with their net losses totaling $2.5 billion. Things are looking up this year, however. Premiums are escalating and medical cost inflation is under control in most areas.
Even so, the overall outlook is decidedly mixed.
"We see a lot of companies improving their performance, but a large number of plans around the country continue to be financially weak," says Arun Kumar, one of the S&P healthcare analysts who wrote the report.
Many of the industry's weak sisters are local or regional plans, many of them provider-owned HMOs that have been hit hard by overly aggressive pricing and inadequate capitalization, he says.
Geographically, the outlook for HMOs is strongest in the Midwest and relatively strong in the West and South, according to S&P. Generally speaking, health plans in New York, the mid-Atlantic region and New England have the greatest cause for concern, especially in what Kumar describes as "pockets of weakness," caused in part by highly competitive pricing and high medical costs. Florida, Massachusetts, Rhode Island and Texas remain among the toughest venues for HMOs to do business, he says, citing price and cost issues, lack of HMO penetration and opposition by providers, among other factors.
Small regional and local plans continue to be vulnerable because they lack capital and continue to show poor operating results, according to the rating agency.
S&P warned that capital adequacy levels are at their lowest levels in years and that only a few states have adopted guidelines regulating risk-based capital levels.
However, S&P predicts that a number of other states will adopt stricter regulations, which will put more pressure on the industry's weaker players to augment their reserves.
As earnings improve and the industry continues to move out of the downward part of the underwriting cycle, however, capital levels should stabilize, the agency says. Another reason for optimism, according to the report, is that most health plans are pricing their products more conservatively these days; they're looking for profitable business, not growth at any price.
That cautious approach is likely to carry over to mergers and acquisitions, as the biggest HMOs shy away from megamergers such as Blue Bell, Pa.-based Aetna U.S. Healthcare's recently completed $1 billion acquisition of Prudential HealthCare (Aug. 16, p. 10) and focus on smaller, geographically targeted deals, S&P predicts.
That includes further consolidation in the ranks of Blues plans nationally, as regional Blues plans continue to join forces.
Much of the consolidation is likely to involve smaller and mid-sized health plans, especially those plagued with inadequate capital reserves. "A lot of hospitals may divest their HMOs, because many of them have sustained high losses," Kumar says. "Hospitals have not been the best managers of health plans, and they're finding that out in a hurry."