Over the past four years, HMOs have shown signs of solvency, stability, and strength, a turnaround from the financial crisis of the late '90s. With mergers and consolidations leading the way, there were fewer — and better run — companies, with improved underwriting discipline.
A look at annual impairment (a euphemism for failure) counts reveals a general decrease from 1998 through 2004 in the number of companies in trouble. In addition, the percentage of HMOs that failed dropped from 3.9 in 1998 to 1.0 in 2003 and just 0.4 in 2004. An impaired company is one that reports negative capital and surplus, is entering into bankruptcy proceedings, or has been the target of an action by a regulatory or oversight agency.
But A.M. Best, which evaluates insurance companies, says these happy days may not be sustainable in the near term because pressure to maintain profitability is expected to increase due to a combination of rising enrollments in less-than profitable Medicaid business and increased competition for both commercial and Medicare members. This could cause some carriers to loosen their underwriting and pricing guidelines in the future. In addition, according to the company, the profitable underwriting cycle enjoyed by HMOs so far may be flattening (see "How Many More Quarters of Profits?").
"We're at historically low trends," says Joseph Zazzera, managing senior financial analyst at A.M. Best. "It would be difficult to maintain this trend for a prolonged time."
A.M. Best says that the companies that might experience the most difficulty in the coming years could have one or more of these characteristics: They are not the largest companies; are unaffiliated with a larger group; operate in single state; lack a competitive advantage; have shaky network relationships; and/or are already experiencing poor or deteriorating financial results.
Number of impairments and impairment frequency declining
Source: HMO Impairments Hit All-Time Lows in 2003 and 2004, A.M. Best, 2005