Could be.
For a couple days there have been rumors swirling around Hartford (Aetna’s hometown) that the big insurer may be looking at Coventry’s books ahead of a possible acquisition.
With Coventry’s stock still relatively low, and at a P/E under 10, the company looks like a good deal. CVH’s stock bounced up a couple bucks early Wednesday, and has stayed in a fairly narrow range since then. There has also been significant volume in options markets, volume that appears to indicate some investors’ sense that CVH is in play.
Aetna and Coventry do have an existing, if really tiny, relationship – Coventry uses Aetna’s work comp network in many states. I don’t know the dollar value of that deal, but doubt it is much more than ten million annually, if that. That’s not terribly significant at ‘mother Aetna’ where annual revenues are over $30 billion.
If Coventry is on the block, I’m not so sure Aetna’s a serious option. CVH stumbled recently after missing their earnings forecast earlier this year, a miss that was painful both to investors and management who had cultivated a (to that point well-deserved) reputation for consistently hitting their numbers. Coventry is particularly strong in the smaller employer market, and their ability and expertise in that segment could be helpful to Aetna if it seeks to grow its small employer market share. Coventry does have a growing individual block, but Aetna has already expanded its individual business significantly and is now in 29 states.
Coventry is not a national account company, a market that has been Aetna’s sweet spot for years. Its new markets, which tend to be in secondary metro areas such as Oklahoma City, still represent relatively few lives.
Lastly, Coventry’s provider contracts are certainly not as good as Aetna’s.
Which leaves us with the question – why would Aetna buy Coventry? The only real reason I can see is a strategic one – to gain more strength in the small employer end of the market. There’s always the American League East (see Red Sox/Yankees bidding wars for free agents) strategy – if Aetna buys it Anthem can’t – but Aetna is not a company that would spend corporate assets just to keep a property away from another competitor.
If you look at Aetna’s acquisitions in the past, you’ll notice there have not been many. And the deals that have been done – PPOM and Schaller Anderson, have been highly selective and oriented towards acquiring new skills, new market expertise, and new/better technology – not health plan acquisitions.
Is an Aetna-Coventry deal possible? Sure. But highly unlikely.

The big question is this: is Coventry’s screwup a symptom of a larger issue, or is it specific to Coventry?
As of now it looks like the problems are not industry-wide. This leaves one inescapable conclusion – mistakes by management. Everyone, and every company, makes mistakes at times; what makes this so noticeable is it comes from a company with a history of strong results and from management that is (or perhaps was) extremely self-confident.
Bob Laszewski went back and read Coventry’s Q1 earnings report; here’s his take:
* Their private fee-for-service (PFFS) problem should have been obvious to to their actuaries since Coventry had apparently not issued ID cards to new PFFS customers and claims weren’t coming in as they should have been. The PFFS data had to be too good to be true and that should have been obvious.
* Their explanation for seeing their commercial trend jump by 200 bps is inadequate. They said they are seeing an increase in large claims and hospital claims generally. That is true of other health plans but not to anywhere near the same degree as Coventry. It is not clear to me that Coventry has really gotten to the bottom of all of this.
Bob also quoted extensively from Coventry’s last earnings call. Looking back, the overweening self-confidence is breath-taking – here are a couple excerpts.
“We’ve said for the last three years that the core operating growth rate in a purely commercial business was not as high as some were suggesting. We took some flak for that…Variations in medical cost trends generally do not happen quickly [emphasis added] and given the progress in analytics within the industry, will be pretty closely anticipated in pricing. That doesn’t suggest we will never make a mistake and miss it a little, but that’s far from an underwriting cycle…don’t look for the operating margins of our commercial operations to fall off the table. They won’t. [emphasis added]
Perhaps most telling is this comment from CFOP Shawn Guertin:”those that are close to the details and fundamentals of the business, will succeed over the long haul.”
Kudos to Coventry for getting this news out quickly. While they can, and should, be pilloried for not knowing all the factors that led to the problem, better to get the news out quickly then wait weeks more in an effort to be able to answer all the questions.
My sense is that Coventry’s management has been spending way too much time managing the numbers and nowhere near enough time managing medical. Those are not the same thing. Reflecting back on the calls I’ve listened to and management reports I’ve read, I can’t recall any detailed discussion of disease management, hospital expense management, outpatient utilization, or centers of excellence. These guys (and they are mostly guys) know the numbers better than anyone, but I don’t get the sense that they spend any time looking under the numbers, at medical cost drivers.
Contrast that with Aetna, a company that has invested both dollars and management skill in analyzing, understanding, and addressing their medical cost drivers. Their website and press releases reflect a focus on medical – reform, drivers, new initiatives, getting information out to members, physician ratings. There’s a lot there. And this isn’t just fluff, the work they are doing is deep and targeted at the right issues.
Aetna gets it. So far, Coventry hasn’t. We’ll see if this stumble triggers a rethinking of their approach. If they get defensive, fire a bunch of middle managers (which it appears they are already doing) to get costs under control, and keep doing what they’ve been doing, they will not remain among the industry leaders .

Since Coventry’s announcement late Wednesday that they were cutting earnings projections almost in half, the financial markets have been hammering health plan stocks. Their pessimism may be overdone.
Humana and Aetna have reaffirmed their earnings forecast while Wellpoint, Cigna, and UHC have been silent (as of this moment). The market’s fear is that Coventry’s news that they failed to accurately forecast the medical loss ratio for both the Medicare private ffs and group health business is the first indication of an industry-wide problem. Especially because Coventry has carefully cultivated an image of competence, both absolute (we know our business very well) and relative (we’re more on top of our numbers and business than other health plans).
I’d point to Coventry’s presentation at the Citigroup Healthcare Conference at the end of May as typical. “…Medicare…has obviously been an area offocus andgreat success for Coventry and 2008 is no exception…(small group) is really a business that is premised on a deep understanding of local market dynamics, really a fanatical attention to detail.”
Contrast that with management’s statement re Medicare pffs in Thursday’s call, where CEO Dale Wolf said that it has been tough to forecast results due to the rapid growth of that business, while acknowledging the need for Coventry to better track cost drivers. It got tougher for Wolf, as the analysts, who seemed genuinely surprised by the news, got more and more specific as the call went on. Wolf admitted that Coventry had limited visibility into group inpatient and outpatient costs, had not yet figured out exactly what drivers led to the cost increases in outpatient, and there had been cost spikes in several specific markets including Utah, Atlanta and central IL.
These factors led Coventry to revise their cost trend estimates for the group business upwards by 150 basis points, driven by a 300+point increase in outpatient and 100 point jump in inpatient costs. Medicare trend rates were also raised. Meanwhile, other health plans were not revising their numbers.
Both Humana and Aetna publicly affirmed their forecasts, with Aetna’s CFO noting “The medical cost trend we are experiencing in the second quarter is in line with our expectations to date and consistent with our prior guidance of 7.5 percent, plus-or-minus 50 basis points.”
Humana’s announcement was even more specific “Analysis of medical claims payments and receipts through May 2008 indicate no adverse prior period development for either full year 2007 or first quarter 2008 medical claims estimates,”
And ten days ago industry giant Wellpoint said it would also be confirming its earning forecast, albeit in private meetings with analysts.
Here’s the net. There does not appear to be an industry wide issue. Coventry’s history of success and strong performance may have led to overconfidence, a lack of focus, and perhaps atouch of hubris. Wolf’s tone went from defensive to chastened to almost combative, and I’d bet this screwup makes Coventry a better company.
But I’ll hedge my bet; Coventry has a hard-earned reputation for arrogance and lack of concern for the customer. If that doesn’t change you can expect another, similar announcement at some point in the future.