A.M. Best Special Report: HMO Impairments Remained Low In 2005 and 2006

Business Wire, Dec 3, 2007

OLDWICK, N.J. -- The number of financially impaired Health Maintenance Organizations (HMOs) has fallen substantially in recent years. In contrast to the late 1990s when the number of financially impaired companies (FICs) annually approached nearly two dozen, only three HMOs each in 2005 and 2006 were deemed insolvent. Stricter underwriting standards, a stabilization in medical trends and improved financial performance have allowed the industry's capital and surplus to more than double to $39.6 billion at year-end 2006, up from $17.1 billion at year-end 2002, according to a special report by the A.M. Best Co.

* The number of FICs among HMOs fell from as high as 23 each in 1998 and 1999, to only three each in 2005 and 2006.

* The annual impairment frequency, or percentage of HMOs that failed in a given year, declined from 3.9% (nearly 1 in 26 companies) in 1998, to 0.7% (1 in 152) in 2005, and 0.6% (1 in 168) in 2006.

* Some common characteristics of financially impaired HMOs include modest to minimum levels of capital, rapid expansion, mispriced products and limited time in operation.

* Product concentration, particularly in Medicare Advantage, also has contributed to two FICs in Florida - one in 2006, the other in 2007.

* Industry financial performance has been strong; with the exception of 2005, underwriting profitability and net income rose annually in the period from 2002 through 2006.

* HMOs have shifted their product mix to Medicare and Medicaid, helping to offset competitive pressures and declining enrollment growth in the group market.

* A.M. Best expects over the near-term that current pricing levels and stable medical trends should contribute to the recent trend of fewer financially impaired HMOs.

* On the other hand, A.M. Best believes smaller, weaker players could experience stress from competition, product concentration in government programs - which could hamper flexibility if reimbursements rates were to fall - or risky investment strategies.

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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.