Study: Most-integrated health plans in better shape
Smaller plans face challenges
The gulf between the most- and least-integrated health plans and healthcare systems will continue to widen in the medium term as integrated organizations benefit from steady cash flow and synergies in areas such as medical management technology, administration, and marketing, according to a senior financial analyst at A.M. Best Company, a credit rating organization based in Oldwick, NJ.
The total capital and surplus of 16 provider-owned health plans increased 40% between 2004 and 2007 and 8% between 2006 and 2007, according to a recent A.M. Best report. In each year since 2004, 61% of the plans in the study experienced an increase in capital and surplus.
The issuer credit ratings for the 16 health systems are stable and rated investment-grade. A.M. Best noted that these systems are large and financially stable, with sufficient resources to expand and maintain a successful business.
Eva Sverdlova, a senior financial analyst at A.M. Best, says well-capitalized plans are better able to compete with national players because they have built up capital, can afford to grow membership in the current environment, and are able to underprice in the medium term. Weaker plans, on the other hand, need to grow membership using different measures, such as being strict in underwriting and correctly identifying areas to expand, Sverdlova says.
The organization reported that the median Best’s Capital Adequacy Ratio (BCAR) score for the provider-owned health plans declined to 79 in 2007, from 84 in 2004. BCAR provides a quantitative measure of the risks that are inherent in the company’s investments and insurance profile relative to its statutory capital and surplus.
However, the most well-capitalized companies have built BCAR at a faster pace than their peers despite enrollment declines, according to the credit rating organization.
A.M. Best expects these trends to continue over the medium term, but it will also depend on the financial health of the parent systems and its capital needs to fund future projects.
Enrollment is down
A.M. Best found that enrollment in the plans has declined since 2004, partially because of a shift to self-insured arrangements. Median enrollment has fallen 16% since 2004, with the largest decline among plans in the 95th percentile (a 20% drop between 2004 and 2007). A.M. Best expects the trend of declining enrollment to continue in the medium term with healthcare costs on the rise and employers bearing the risk of financing healthcare benefits.
There was a slight increase in membership for plans in the 25th percentile in 2007, although A.M. Best pointed out that plans at that level can be more affected by adding and subtracting one group plan.
A.M. Best reported the median profit margin for the plans in the study was 1.7% in 2007, which was down from 2.4% in 2004. In addition, the profit margins for plans in the 25th percentile declined to less than zero in 2007, which means these plans will “experience deterioration in their capitation levels,” according to the report.
Each of the percentile groups, except the median, experienced profit margin declines, which A.M. Best noted was in part due to the shift from fully insured to self-insured plans, as well as increased pricing competition.
Sverdlova says the smaller profit margin percentage is due to an increase in high-cost claims, most notably multiple births, complicated surgeries, and a tough flu season, as well as technology moving at a rapid pace and treating more complicated illnesses.
In addition, the median medical loss ratio (MLR) for the health plans was 89.3% in 2007, which was an increase of 3% since 2004. The MLR for the plans in the study remained higher than the industry’s median MLR. “A.M. Best anticipates this trend to continue to increase over the near term as these health plans balance the need to price business appropriately and to manage price competition from Blue Cross & Blue Shield plans and national carriers,” the report states.
Direct medical expenses
The company found that the percentage of the health plans’ total direct medical expenses used in the health system and affiliates’ facilities increased by about 6%, which it noted shows “the health plans have been successful at directing their members to affiliate physicians and hospitals. This reduces the cost of paying out-of-network expenses and helps strengthen facility utilization and revenues at the health system.”
The researchers found that health plans in the 95th percentile directed 87% of their medical expenses to affiliate hospitals in 2007, whereas those in the 75th percentile directed 57%. Although there is a large difference between the two, A.M. Best noted the 75th percentile group experienced the largest improvement with 9%.
“Despite the decline in 2007, health plans in the 95th percentile are much more successful at steering patients to their affiliate providers,” according to the report.
Cash flow, revenues
The plans studied improved their cash flows as a percentage of the health system to 11%, an increase from 7% in 2006, with the largest fluctuations involving payment and proceeds from debt and changes in accounts receivable/payable. Health plans in the 95th percentile generated 36% of the health systems’ cash flows, while those in the 25th percentile experienced negative cash flows in 2007. A.M. Best suggested these findings show the most-integrated systems “will generate meaningful cash flows from their health plan business.”
Regarding generally accepted accounting principles revenues, the health plans’ revenues as a percentage of the systems’ total revenues increased to 36% in 2007, compared to 29% in 2006. The plans in the 95th percentile generated more than 50% of system revenues, which A.M. Best said showed a strong tie between the system and plan.
Sverdlova says the well-capitalized companies are well-integrated, whereas the smaller plans are not as strong because of the weaker underwriting performance, which affects their bottom line, capital, and surplus.
So what’s a smaller plan to do? “They should be stringent with their underwriting performance. They should be aware of the areas that they want to grow into, learn the demographics of the area, and price the business correctly,” says Sverdlova.
She adds that most of the findings were expected, but she says she was slightly surprised by how much the underwriting margin decreased. “I’m sure the economic conditions of 2007 added a little bit on the unexpected number. One can only wonder what results could be in 2008,” says Sverdlova.