NEW YORK -- More than a quarter of managed health care operations studied by rating agency Standard & Poor's Corp. are financially vulnerable, according to a survey released last week.

S&P released financial strength ratings on 101 U.S. managed care companies in a follow-up of a smaller survey last year.

The primary criteria used to evaluate the operations, which were selected on the basis of size and geographical diversity, were capitalization; earnings performance; liquidity; and "business review aspects," including enrollment growth, said Arun Kumar, an S&P managing director. More than half the ratings were issued last week for the first time.

Of the 101 companies surveyed, 74 were in the secure range, with ratings of BBB or above. But the remaining 27 were rated in the BB range or below and are considered vulnerable. They included operating units of large companies, such as Hartford, Conn.-based Aetna Inc.; Santa Ana, Calif.-based PacifiCare Health Systems Inc.; and Newark, N.J.-based Prudential Insurance Co. of America.

"I think there should be a fair degree of concern that many of these companies do not appear to be strong financially," said Mr. Kumar. "It's not to say that these companies are going out of business immediately, but, clearly, there is a need for individuals to know where these companies are" in terms of their financial strength, said Mr. Kumar, who said S&P plans to update and expand the survey annually.

"There's a need for consumers and benefit managers to look at the financial strength of these entities as one of the items they need to consider before they buy health insurance," said Mr. Kumar. He also noted, "Up until this point, a fair amount of the focus was on the quality of care, the access to physicians, and now the focus is also coming to bear on the financial strength."

Discussing the issue of capitalization, Mr. Kumar said he expects the situation to change because of the risk-based capital guidelines adopted by the National Assn. of Insurance Commissioners earlier this year (BI, July 6).

"Most states that regulate HMOs up to this point had minimal or non-existent amounts of capital required to run a business. This was totally inconsistent with the amount of risk these companies took on," said Mr. Kumar.

"Now that the NAIC has adopted the risk-based capital guidelines and the different states are in the process of adopting them over the next year, the whole ballgame has changed.

"Companies would have to maintain more capital at the operating companies. In the past, the earnings and dividends were upstreamed to the parent to finance their acquisitions or stock buybacks or invest in infrastructure, or to be used in dividend payouts to stockholders.

"Now that companies are held to a higher standard of capital by the different state regulators, parent companies would have to rethink their strategy of capital management of the operating companies," said Mr. Kumar.

As a result, said Mr. Kumar, over the next two to three years, "I would expect the balance sheets of the operating companies to improve."

However, he added, "the ratings are also a function of earnings performance and liquidity issues, and some companies appear to have some problems with those areas as well."

Mr. Kumar also discussed the appearance of the operating units of some major companies on the list. They included NYLCare Health Plans of The Gulf Coast Inc. in Houston. It is now an Aetna operation with Aetna's acquisition of NYLCare Inc. (BI, March 23).

The Texas operation received a "BBpi" rating, with the "pi" an indication its rating was based on published financial information and additional information in the public domain and does not reflect in-depth meetings between S&P and an insurer's management.

"I would expect companies like Aetna to substantially bolster capital strength over the next 12 to 14 months," said Mr. Kumar. "That's because Aetna has the resources to do it. Many other companies may not have the same resources as Aetna to bolster the financial strength of their operating units," he said.

An Aetna spokesperson could not be reached for comment. Other companies whose units were rated as "financially vulnerable," however, say they are financially strong.

For instance, Rich Hallworth, senior vp-administration and chief financial officer for Waltham, Mass.-based Tufts Associated Health Plans Inc., objected to the "Bbpi" rating received by its 670,000-member Tufts Associated Health Maintenance Organization Inc.

Mr. Hallworth said the rating was based on published statutory information and therefore did not take into account non-admitted assets, which would increase the plan's net worth by $62 million on a generally accepted accounting principles basis. "We are very financially strong," he said.

"We're financially sound," said a spokeswoman for PacifiCare, whose PacifiCare of California Inc. operation also had a "Bbpi" rating. She noted that the parent company has a "BBB" rating from S&P "and the company places greater value on the corporate ratings than on individual subsidiaries' ratings." In addition, PacifiCare of California exceeds the minimum reserve requirements, she said.

Others receiving financially vulnerable ratings included Prudential Health Care Plan Inc. in Houston, which reflects its HMO operations in 20 states and the District of Columbia, and Chicago-based Rush Prudential HMO Inc.; Oxford Health Plans (NY) Inc.; and Los Angeles-based Maxicare, all with "Bpi" ratings. Spokespeople could not be reached.

A spokeswoman for New York-based Empire Blue Cross & Blue Shield, which received its "B+" rating last year, said the rating is scheduled to be reconsidered soon, when it is expected to be upgraded.

Mr. Kumar said that, despite the percentage of financially vulnerable companies, the industry's outlook remains promising. "We're optimistic, primarily because companies appear to be taking the right actions to improve the financial performance," such as increasing rates, obtaining better contracts with providers and, in some cases, withdrawing from existing markets. These actions tend to point in the direction of a stronger half this year and into 1999, Mr. Kumar said.