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Spokane, Washington  Est. May 19, 1883

Health-Maintenance Groups Pile Up Billions In Cash Liquid Assets Climbed 15 Percent Or More Last Year, And Hmo’s Don’t Know What To Do With It All

The Wall Street Journal

Health-maintenance organizations are all about penny-pinching, yet they are so awash in cash that they don’t know what to do with it all.

In the past year, liquid assets at many HMOs have climbed 15 percent or more. Four of the industry’s biggest companies each have tucked away more than $1 billion, and some midsize HMOs are sitting on $500 million apiece. Thanks to rapid membership growth and slowing medical costs, many HMOs are pulling in money faster than they can spend it.

“Our problem is what to do with the money that comes in, not whether we have enough cash,” says Alan Bond, director of treasury operations at Health Systems International Inc., Pueblo, Colo. The HMO’s $475 million cash position is growing by $500,000 a day, forcing Mr. Bond to hunt for new ways to park the money in Treasury bills, certificates of deposit and other short-term investments.

The industry’s cash buildup is beginning to raise questions. Guessing how HMOs will use their money has become a favorite game among Wall Street analysts and major shareholders. Sizable acquisitions are a likely bet, they say. Other options include lowering members’ premiums, paying dividends to shareholders, repurchasing stock or concentrating on long-term portfolio management.

But as HMOs’ riches grow, customers, regulators and other parties also question whether the champions of spartan health care are getting too big a share of the health dollar themselves.

“We’ve told some HMOs: `Your financial condition is so strong that we’re denying you a rate increase,”’ says Charles Henricks, deputy chief examiner at the New York State Department of Insurance. “We’re protecting the interests of policyholders.”

HMO health plans operate by steering patients to a preselected group of doctors and hospitals deemed to be most costefficient. Unlike many industries, the HMO business doesn’t need great amounts of cash to finance internal growth, and it isn’t capital intensive - HMO’s don’t need to build factories or buy much equipment. In most cases, recruiting and processing more members can quickly pay for itself.

All told, nine of the biggest publicly traded HMOs are sitting on $9.5 billion of cash, calculates Margo Vignola, a health-industry analyst at Salomon Brothers Inc. At current advertising rates, that would be enough for them to buy every minute of ad time on Superbowl telecasts to run commercials for the next 136 years. It is “way, way beyond what HMOs need” to meet insurance-industry requirements, she says. (Like most analysts, she uses the term “cash” to include bank deposits and any marketable securities with a maturity of one year or less.)

“It’s difficult to put that much cash to work,” adds Kurt von Emster, who follows HMOs for Franklin Resources Inc., a San Mateo, Calif., mutual-fund company. “I’ve spent the last week trying to figure out what everyone is going to do with it.”

Even in lean times, HMOs have money in the bank. Premiums are collected at least a month or two before many medical expenses are paid. Also, state regulators require HMOs to keep reserves equal to a small percentage of their annual business as a cushion, so that even if several disastrous cases occur at once, patients’ medical care won’t be interrupted.

Lately, though, HMOs have enjoyed record prosperity. Membership nationwide is growing more than 11 percent a year and is expected to top 50 million by year’s end. HMOs are reining in medical costs as they win discounts from doctors and find ways to cut hospitalization rates. Earnings at many publicly traded HMOs have surged 25 percent or more in recent quarters.

The biggest cash position in the industry, $2.6 billion, is held by United HealthCare Corp., Minneapolis. It recently sold a pharmacy-benefits unit for after-tax proceeds of $1.4 billion, swelling its coffers.

The money vaults at several other HMOs are nearly as full. WellPoint Health Networks Inc. of Woodland Hills, Calif., and Kaiser Permanente of Oakland, Calif., both hold more than $1.3 billion.

As HMOs’ financial strength becomes more prominent, some of the sharpest protests are coming from large corporations’ benefits managers who negotiate premium rates with HMOs on behalf of employees. “I don’t feel any obligation to support HMOs,” snaps Daniel O’Connell, director of employee benefits at United Technologies Corp. in Hartford, Conn. His company uses HMOs and other managed-care groups to cover more than half its 76,000 employees.

In California, companies such as Chevron Corp., Pacific Telesis Group and BankAmerica Corp. have banded together to negotiate cuts of 5 percent to 10 percent in their HMO rates next year. To prepare for bargaining, the corporate coalition, known as the Pacific Business Group on Health, identified HMOs with especially strong finances - figuring that it could press them harder for rate rollbacks.