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A.M. Best Co. recently completed its annual review of public data (pd) financial strength ratings for health maintenance organizations (HMO). A.M. Best has upgraded the pd ratings of 57, downgraded the pd ratings of 20, affirmed the pd ratings of 67 and assigned pd ratings to three HMOs. Over the last year, the pd rated HMOs had approximately one-third the amount of downgrades as upgrades. The majority of the companies are single state HMOs, which include Medicaid and Medicare insurers. Although the overall health insurance market continues to exhibit strong profitability and improved risk-based capitalization, a number of pd rated HMOs have been downgraded. The pd rated HMO downgrades were due to weak risk-based capitalization, unfavorable operating performance, higher than average asset allocation to stocks, negative operating cash flows and product concentration, particularly in Medicare and Medicaid products. In a number of regional markets, local health plans experienced significant competitive pressures from Blue Cross Blue Shield (BCBS) plans and strong regional and national health insurance companies. While most health insurers have reported premium increases to keep pace with trends, the pd rated HMO’s total revenues continued to trend downward as business shift to Preferred Provider Organizations (PPO) and Point of Service (POS) plans. Unfavorable operating performance was primarily driven by poor results in the commercial line of business. In many cases, the Medical loss ratio had spiked 100 base points (bp) or higher to the low or mid 90s. Furthermore, for some health plans, the balance sheet was exposed to investment risks due to higher than average asset allocation of stocks and non-investment grade bonds. This resulted in a higher asset risk-based capital charge, which weaken an HMO’s capital position. However, favorable changes to both Medicare and Medicaid reimbursements have resulted in significant revenue growth and concentration risks for a number of local HMOs. This concentration in either Medicare or Medicaid has hampered HMOs’ ability to remain flexible in a market where reimbursements are driven by federal or state governments. Pd rating upgrades were primarily driven by medical loss ratios in the mid 80s, capital and surplus growth of greater than 10%, return on revenues (ROR) 2.5% or higher, continuation of positive operating flows and modest revenue growth. This enabled any healthcare organization to report improvement in its risk-based capitalization. Pd rating affirmations were a result of favorable performance without operations and risk-based capitalization levels that deviated from outside the norms for current rating levels. A.M. Best expects that the sustainability of future earnings for any health plans will be challenged by a number of factors. These include the increasing competition from national and regional health insurance companies, continuation of moderating medical trends and reliance on either Medicare or Medicaid for growth. A.M. Best’s pd ratings are assigned to insurers in select markets that do not subscribe to A.M. Best’s interactive rating process. A.M. Best uses the same rating scale and definitions as it does for its long-term financial strength interactive ratings but applies a pd rating modifier to ensure the user is aware of the more limited information basis for the rating. An interactive A.M. Best rating is produced at the request of the insurer. The interactive rating process includes detailed interviews of senior management and access to non-public data and other information. A.M. Best Co., established in 1899, is the world’s oldest and most authoritative insurance rating and information source.
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For more information, visit A.M. Best’s Web site at www.ambest.com.
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