AM Best Removes From Under Review With Developing Implications and Downgrades Credit Ratings of Western Health Advantage

AM Best has removed from under review with developing implications and downgraded the Financial Strength Rating to B (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating to “bb+” (Fair) from “bbb-” (Good) of Western Health Advantage (WHA) (Sacramento, CA). The outlook assigned to the FSR is stable while the outlook assigned to the Long-Term ICR is negative.

The Credit Ratings (ratings) reflect WHA’s balance sheet strength, which AM Best assesses as very weak, as well as its adequate operating performance, limited business profile, appropriate enterprise risk management and support of the two long-term health care delivery system sponsors, Dignity Health and NorthBay Healthcare System.

This rating actions reflect recent declines in absolute and risk-adjusted capitalization and lack of material improvement projected in the near term. This deterioration was driven by considerable losses in 2022, and partially driven by COVID-19-related costs and risk-adjustment payments related to its Covered CA exchange business. While the company operates under global capitation agreements, these arrangements have not prevented the recent operating losses, due partially to uncovered pharmacy and out-of-network claims.

In addition, capitalization remains pressured, as WHA historically has managed to low absolute and risk-adjusted levels of capitalization, based on state minimum requirements. To support capitalization, the company has received explicit financial support from its sponsors, which has come in the form of promissory notes during fiscal-year 2022. The notes are allowed to be included in California’s minimum tangible net equity calculation; however, AM Best remains concerned as this is significantly lower than NAIC risk-adjusted capitalization and Best’s Capital Adequacy Ratio (BCAR) levels. Therefore, balance sheet strength assessment is not expected to improve materially in the near term. Additionally, AM Best considers WHA’s financial leverage to be high due to additional borrowings during fiscal-year 2022. The potential for volatility in operating performance further impacting capitalization also supports the negative Long-Term ICR outlook. AM Best also notes that the company remains concentrated geographically, operating in just nine California counties due to its focus on its sponsors’ footprint. Furthermore, WHA operates in the concentrated and very competitive and price sensitive group employer market.

AM Best also notes that the company’s ratings are further supported by its relatively lower-risk business profile, supported by the global capitation by its sponsors for most of its business and establishing its medical loss ratio for its core lines of business at less than 92%. WHA plays a strategic role as the health plan for the sponsors, directing members to the sponsors’ facilities. The ratings also take into consideration the two sponsor’s overall creditworthiness and network, which supports WHA’s operations.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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