A.M. Best Downgrades Two Sierra Health Units

A.M. Best Co. recently downgraded two operating subsidiaries of Sierra Health Services Inc. The rating agency downgraded Health Plan of Nevada Inc. a health maintenance organization, to B++ (Very Good) from A- (Excellent). At the same time, A.M. Best downgraded Sierra Health & Life Insurance Co. to B++ from A-.

The action reflects A.M. Best's concerns regarding the impact of Sierra's acquisition of Kaiser Foundation Health Plan of Texas (renamed Texas Health Choice, L.C.) on Sierra's capital and financial flexibility.

A.M. Best had expected Sierra to reduce its financial leverage from 44%--which was aggressive for a health-care organization--at the close of the transaction. However, through nine months of 1999, Sierra's debt has increased as the company has continued to draw down on its line of credit. As a result, financial leverage has increased, with the company's debt-to-capital ratio growing to 48%. This ratio is above the acceptable level for an Excellent-rated company.

In addition, Sierra's total operating earnings for 1999 will not meet A.M. Best's earnings expectations.

While this acquisition has increased Sierra's Texas market share and added to its revenue sources, A.M. Best believes the company faces numerous challenges in turning around the Texas operations in a highly competitive market that is less managed-care-oriented than the company's core Las Vegas area of operation. In the near term, A.M. Best anticipates an improvement in the operating performance at the Texas HMO in 2000; however, market development and integration initiatives in Texas may result in added surplus strain over the next 12 months.

In light of these difficulties, Sierra has implemented a plan to improve its operating fundamentals in the Texas market. These plans include Sierra's recently announced restructuring of its Dallas/Fort Worth operations, including reductions of over 15% of the work force and the sale of its local retail pharmacy operations. Savings of up to $2 million per quarter are expected from these actions. Other cost-saving initiatives will depend on Sierra's ability to transfer its integrated health-system expertise to the Texas market.

A.M. Best also affirmed the B+ (Very Good) rating of Texas Health Choice, L.C.

Sierra Health Services, a fully integrated managed-care company, is the largest health-care provider in Nevada. Sierra also provides health-care services to approximately 610,000 beneficiaries in the Mid-Atlantic and Northeast regions, as well as Nevada and Missouri, under the federal TriCare program, which serves military members and their families. Sierra will continue to seek opportunities to expand its government contract business to other regions of the country.

For more information, visit A.M. Best's Web site at www.ambest.com.