State of the Industry 2006

October 1, 2005

Healthcare is an industry perhaps more complex, fragmented and difficult to comprehend than any other. When we try to understand the dynamics that make our industry such a challenge in which to work, we inevitably underestimate the impact of one force or overlook a series of other competing agendas altogether. It's a slippery slope to think we can understand it all, let alone control it.

Welcome to MANAGED HEALTHCARE EXECUTIVE's State of the Industry Report. We hope to make sense of the various "balancing acts" in our industry and to prepare you for another challenging year.

All this stabilization is favored news to financial analysts; for the first half of 2005, there was an equal mix of downgrades and upgrades among those healthcare systems assessed by Fitch Ratings, an authority on public finance. Since MHE began monitoring this metric for the State of the Industry Report back in 2000, the ratio of downgrades to upgrades has steadily improved, from a high of nearly 4-to-1 to the 1-to-1 ratio we see today. Fitch attributes this apparent stability to improved management strategies, relatively low cost of capital, and stable Medicare funding, at least in the near term. However, Fitch continues to warn of the same threats found in its report of a year ago: mounting capital needs, competition, workforce shortages, revenue constraints from entitlement programs, and rising bad debt expense, which can wipe out all the gains made by the public sector over the past five years (see chart, this page).

If the health system CEO feels guarded optimism from the stabilization of industry benchmarks, the managed care CEO is likely basking in reports that this segment continues to be strong. Indeed, while half of the rated nonprofit health systems were downgraded versus upgraded, half of the nation's HMOs are considered "financially strong," according to Weiss Ratings Inc., an independent provider of ratings for service and financial sectors. Based on data from the second quarter of 2004, the percentage of insurers receiving a Weiss rating of A (excellent) or B (good) rose to 50%, a significant increase from 1998, when only 20.8% of HMOs qualified. Of the 482 HMOs reviewed by Weiss during 2004, 65 companies were upgraded, while only three were downgraded.