HMSA rating downgraded
The S&P downgraded the insurer's rating from "A+" to "A"
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Hawaii Medical Service Association had two ratings downgraded slightly yesterday, to "A" from "A+," by Standard & Poor's Ratings Services.
S&P also said its outlook on HMSA, the largest insurer in the state, is negative. It attributed the downgrade to HMSA's diminishing profitability and operating performance for 2007 and 2008, which should be materially lower than previously expected.
HMSA Senior Vice President Cliff Cisco said the downgrade was not unexpected considering that health-care cost trends have been going up faster than HMSA's premiums. Cisco, however, noted that HMSA's ratings always have hovered around "A" or "A+."
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Hawaii Medical Service Association, which has posted net losses totaling just under $16 million through the first nine months of this year, had its credit and financial strength ratings downgraded yesterday to "A" from "A+" by Standard & Poor's Ratings Services.
S&P also said its outlook on HMSA, the largest insurer in the state, is negative.
"This downgrade stems from HMSA's diminishing profitability and operating performance for 2007 and 2008, which should be materially lower than previously expected," S&P credit analyst Hema Singh said.
S&P said the diminished profitability is mostly due to rising medical costs that continue to surpass expectations.
"We expect this trend to persist through 2008, causing HMSA's profitability to diminish to (a rate of return) of negative 1 percent," S&P said.
HMSA Senior Vice President Cliff Cisco said the downgrade was not unexpected considering that health-care cost trends have been going up faster than HMSA's premiums.
"We've had four straight quarters of operating losses," Cisco said.
Other factors cited by S&P for HMSA's projected operating loss are state rate regulation, which will become effective Jan. 1, HMSA's commitment to fund major internal information technology systems enhancements, and HMSA's three-year commitment to pay $50 million to hospitals to improve patient care and for participating physicians to acquire electronic medical records systems.
"As they've noticed in years past, the prospect of rate regulation historically has been looked at as a limitation from their perspective," Cisco said.
Still, Cisco noted that HMSA's ratings over the years always "have always been around A, A+," he said.
S&P said HMSA's diminishing profitability adds some risk to the company's financial profile because of a weaker earnings profile and lower capitalization, and that the agency could lower HMSA's ratings by another notch if this downward earnings trend persists and puts additional pressure on capitalization.
"We could revise the outlook to stable if HMSA can achieve profitability that is more consistent with its historical results, with (a rate of return) of about 2 percent."
HMSA said it had 699,806 members as of the end of the third quarter and S&P said it expects HMSA's membership will remain stable at about 707,000 through the end of this year with growth in 2008 to result in 710,000 to 720,000 members.
S&P also said it expects pretax losses at HMSA of $15 million to $20 million for this year and $10 million to $15 million for 2008.
"Although this will cause (a) surplus decline, HMSA's capital adequacy and liquidity should remain very strong for the rating," S&P said.
J.P. Schmidt, commissioner of the state Insurance Division, said he didn't think the S&P downgrade was significant and that he wasn't concerned.
"I think (the part of the downgrade that references rate regulation) is odd because it was during the period when we didn't have insurance rate regulation when they were showing losses and when we had insurance rate regulation they were showing a small profit," Schmidt said. "So rate regulation shouldn't have anything to do with their financial strength."
Schmidt also said HMSA's investment in electronic medical records "is something that every health insurer is going to have to do and it's an investment that will pay dividends in the future with more efficient processes."
"They had rising health costs over the past several years, so that's nothing new," he said. "The only thing that really is new is some additional spending for improvements to their system, which every company has to do to invest in themselves."
Schmidt said when rate regulation begins in January that the Insurance Division will look closely at HMSA's rate applications.
"We look at the financial filings of HMSA very closely because they're an important part of the business community," Schmidt said. "And when rate regulation begins again, we will take into account the projected rate of return to ensure they remain on solid financial ground."