A.M. Best Special Report: Medical HMO Trends Past, Present and a Glimpse of the Future

Business Wire, Sept 16, 2004

OLDWICK, N.J. -- Over the past few years, most HMOs have recovered their profitability but have lost membership, according to a special report issued by A.M. Best Co.

The previously widespread acceptance of the HMO model for health insurance declined significantly with consumers' rejection of the gatekeeper HMO model. The removal of the gatekeeper HMO features resulted in escalating medical costs and ultimately, operating losses. Over time, the operating losses have been reversed as pricing has been brought in line with the jump in claims. With the resulting large premium increases, the HMO is no longer the most efficient vehicle for cost control. Non-HMOs that are able to offer more flexible plan designs that permit lower premium increases have gained popularity. However, among certain market segments, a demand for low-cost HMOs with limited access and tight controls has emerged.

HMO enrollment in the commercial segment has been declining steadily for the past three to four years. The increase in pricing discipline and premium rates resulted in a lower price spread between HMO and PPO plans, which ultimately reduced the desirability of HMOs. An increasing number of individuals and companies continue to switch to PPOs and other, more flexible plan designs that offer choice to both the employee and the employer. The decline in overall HMO enrollment is expected to continue as the demand for flexibility strengthens.

However, the rate of decrease in enrollment is beginning to lessen as a significant shift to PPOs, which occurred earlier in the decade, begins to slow.

Commercial premiums per member per month increased by 21.8% in 2003 and have grown by more than 75% since 1999. A lower increase is expected for 2004, as health trends are moderating slightly. The current, modest rate of growth reflects a double-digit medical cost trend, offset by declining enrollment. However, premiums per member per month have continued to rise.

Medicare Advantage premiums per member per month rose 10.9% in 2003, their highest increase in three years, and 38% since 1999, as carriers increased premiums to the beneficiaries. In 2004, increases to the government reimbursement rate should help lower the rate of premium increases, provide richer benefits and allow for a modest increase in enrollment.

Declines in both the health-care expense ratio and the administrative expense ratio have resulted in an increase in operating income. In aggregate, medical HMO companies reported their first underwriting gain, of $3.2 billion, in 2002, which more than doubled to almost $7 billion in 2003. Net income has been growing every year since turning positive in 2000 and has strengthened from a net loss of $462 million in 1999 to a net gain of $6.6 billion in 2003. Worth noting is that net income has doubled or near doubled each year for the past three years.

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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 http://www.ambest.com.