HMO PERFORMANCE: Industrywide Profits Eclipse Revenues
A four-year trend analysis by A.M. Best reveals a drop in HMO net income despite steady increases in enrollment and revenues. Enrollment increased 72% between Dec. 1994 and Dec. 1997 -- from 43 million to 75 million, and revenues rose 77% over the period - - from $69 billion to $122 billion. Yet HMOs in 1997 experienced industrywide losses of $900 million, with collective return on equity of minus 8%, down from 1994 earnings that exceeded $2.7 billion and ROE of 36%. A.M. Best analysts reason that the disparity between revenue and net income is due, in part, to competitive pricing, escalating claim costs and growing administrative expenses. They also note that while in 1993, nonprofit and for-profit HMOs were evenly matched, over the past several years the for-profit segment has grown much more rapidly and has been generally more profitable than its nonprofit counterparts, thanks to easier access to capital markets. The fastest growth has been in Medicare-risk business, which has driven upward both physician visits and hospital patient days.
The authors report great profitability disparities between the Pacific Region and the Eastern Region, and use the differences to illustrate the affect of scale and market maturity on HMO performance. Net income in the Pacific Region, the most mature and highest performing of the nine identified, declined from $679 million in 1993 to $511 million 1997, but still outperformed other regions due primarily to benefits derived from operating scale. In fact, it was the only region to post a collective profit in 1997. Administrative expenses in the West have generally been flat, averaging about $13 per member per month. In the East, by contrast, administrative costs were $20 per member per month in 1997, up 21% since 1993. The Eastern region posted losses of $524 million in 1997 despite having the strongest enrollment growth -- driven by its Medicaid risk market -- of all nine regions. In the Northeast, physician utilization per 1,000 members led the pack: visits increased on a 10.6% compound annual basis, from 3,855 visits in 1993 to 5,760 visits in 1997. Over the next few years, A.M. Best expects improved performance from the HMO sector, driven by more rational underwriting considerations, a greater focus on the fundamental issues of care management and continued improvements designed to cut costs and deliver value. Furthermore, continued regulatory and legislative pressure combined with challenging provider-alignment initiatives will present significant challenges to the industry as it serves to improve the quality and affordability of health care (Best's Aggregates and Averages, 11/9).