Coventry’s perspective on workers comp

Coventry CEO Dale Wolf presented a brief overview of the company’s prospects at a JP Morgan conference last week – while Wolf’s comments about WC were brief, they were also revealing. (webcast is available till 4/7/08)
To date, the WC business has ‘Done very well” (paraphrase) – while it is only about 5% of revenues it drives 10% of profits. Coventry’s WC business is even more attractive as it is fee-based and thus not subject to the underwriting cycle.
Wolf specifically mentioned Coventry’s WC PBM as a key growth driver. The PBM, FirstScript, did have notable sales successes in 2007, a significant portion of which was driven by packaging the PBM with bill review and networks. The CNA sale (a package deal of networks PBM and other services) was only done when Coventry slashed their PBM pricing well below that of the two other finalists . (sources indicate the pricing on that deal was at breakeven or possibly slightly below).
I mention PBM because unlike network and bill review services which are fee-only, PBM revenues also include the cost of the drugs. (Coventry reported PBM ingredient costs will total $150-$170 million in 2008) Thus, a deal with a mid-size carrier may generate $50 million in top-line revenue, but 80-90% of that is pass-through. If one is looking to grow top line, PBM sales are going to be the fastest way to get there. Especially when low margins on PBM sales can be offset by price increases on network access, where Coventry believes it has strong pricing power (from my conversations with multiple large payers).
Coventry expects WC to generate more than $700 million in revenues for 2008; with profits from the line estimated at $75 million. (Note – WC revenues were flat from Q2 2007 to Q3)
I would also note that Wolf, in talking about the WC business, said words to the effect that Coventry ‘would take advantage of their leading position’.
Coventry management expects meaningful growth from the WC business in 2008. From conversations with large payers and resellers (bill review companies and managed care firms) a good chunk of that growth is coming from price increases of two to four points on network access fees – by far the most profitable segment of their product offering.
While nature abhors a vacuum, markets positively hate a monopoly. Readers may be interested to know that there is at least one well-capitalized entity looking to provide an alternative to Coventry; stay tuned.