A.M. Best Reports HMOs in Maryland Improving But Challenged

Business Wire, Sept 25, 2002

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Sept. 25, 2002

A.M. Best Co. has increased the number of financial strength ratings on Maryland Health Maintenance Organizations (HMOs) this year, releasing ratings on 13 HMOs compared to 11 in 2001.

These financial strength ratings include five within the secure category, while the remaining eight companies are rated vulnerable. These 13 include four downgrades, one upgrade, two initials and six affirmations--reflecting the improvement in the HMOs' operating performance and capital position--which is offset by decreasing membership and inadequate Medicare Choice reimbursement.

During 2001, the Maryland HMO market improved its operating performance to an aggregate net loss of $8.2 million compared to an $82.0 million loss in 2000. Nevertheless, the companies remain challenged to control the increases in health care and administrative expenditures, which continue to negatively impact overall profitability. In 2001, commercial premium rate increases and benefit buy-downs improved the overall performance; however, Medicare Choice and Medicaid rates did not keep pace with expenses, thus contributing to the industry's aggregate loss. Capital and surplus have strengthened in relation to total premiums, primarily due to capital contributions from affiliated organizations.

Total premiums for Maryland decreased by 5% during 2001, which was directly related to the decline of 9% in HMO membership. The enrollment losses were driven by withdrawals from the Medicare Choice and Medicaid lines of business. Despite this decline in enrollment, membership within the commercial line of business remained flat, experiencing only a 1% decrease in the same period. Maryland continues to rely on HMOs for health care insurance. HMOs in Maryland serve approximately 35% of all residents and almost 41% of the insured population. Health insurance organizations continue to create more variations of managed care products to support consumers' demand for choices. A.M. Best anticipates HMO membership may decline slightly due to cost shifting from managed care products to Preferred Provider Organization (PPO) products giving the consumer more flexibility.

The challenge for Maryland HMOs will be rising health care costs and to raise premium rates accordingly. Higher HMO insurance costs are largely dictated by increasing health care expenditures, driven by higher than expected utilization, skyrocketing pharmacy expenses and higher costs from providers and hospitals. Consequently, a key to future profitability will be determined by the industry's ability to get employer groups to accept substantial rate increases to offset increases in health care expenditures. As an alternative, some employers are reducing benefits and/or passing more of the insurance expenses on to their employees.

Declines in Medicare Choice and Medicaid enrollment are largely attributable to inadequate government reimbursements in relation to rising health care expenditures. A.M. Best expects the HMO Medicare Choice population will continue to decline as companies shift their benefit offerings to a PPO product.

A.M. Best views Maryland as a recovering marketplace that will continue to be challenged to report favorable earnings due to the premium rate increases and the continuing lagging increases in health care inflation. A.M. Best believes insurers will continue to exit unprofitable markets, shifting membership to more viable managed care products.

The financial strength ratings on the 13 HMOs are as follows:

                                                   Current  Previous
                                                    Rating   Rating


Aetna Health Inc. (a Maryland Corporation)              A-    A-
AMERIGROUP Maryland, Inc. (a Managed Care Organization) C  pd NR-3
CIGNA Health care Mid-Atlantic, Inc.                    A-u   A-
Delmarva Health Plan, Inc.                              C  pd B-pd
DentaQuest Mid-Atlantic, Inc.                           C pd  NR-5
Free State Health Plan, Inc.                            C pd  C pd
Kaiser Foundation Health Plan of the Mid Atlantic
 States, Inc.                                           B-pd  Bpd
M.D. Individual Practice Association, Inc.              Bpd   B pd
Mid-Atlantic Vision Service Plan, Inc.                  A-    A-
Optimum Choice, Inc.                                    Bpd   B pd
PHN-HMO, Inc.                                           C-pd  Dpd
United Concordia Dental Plans, Inc.                     A-    A-
United Healthcare of the Mid-Atlantic, Inc.             A-    A-

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.