The notice for the teleconference popped up in my email inbox a mere hour and a half before the telecon was scheduled to begin. That was the first indicator of potential trouble.
The second was the opening line from Coventry’s CEO: “To say we’re disappointed with the news we shared earlier this afternoon is an understatement…”
The source of Mr Wolf”s disappointment was Coventry’s report that it will miss its financial projections – by a wide margin.
For a company that has long been (justifiably) proud of its ability to tightly monitor and manage its business, the disclosure that it had significantly underestimated Q1 and Q2 medical costs was a bitter pill indeed, all the more so as it came a few weeks after Wolf’s recent efforts to pump up internal morale by comparing Coventry’s management discipline favorably to competitors.
Earnings will fall short due in large part to higher than expected medical costs in Coventry’s Medicare private fee for service and core group health businesses. In explaining the failure to meet the Medicare program’s projected MLR, CFO Shawn Guertin described the problems inherent in the claims submission and processing flow. Guertin went on to note that the company also had identified some problems in Coventry’s internal claims processing. Curiously, management blamed part of the problem on ID cards not being used by claimants, which delayed claims flows internally. Evidently some members don’t bother to show their Coventry cards when leaving the doctor’s office. The office sends the bill to Medicare, who returns the bill with a note that the patient is not a member. The office then contacts the patient, gets the correc claims submission info, and sends the bill to Coventry.
This takes time, and has led to Coventry under-estimating claims volume and expense for its Medicare private ffs business. I’d note that in prior calls management has been effusive in its self-praise for its ability to operate this business with statements like ‘we couldn’t be more pleased with how this business is running’.
For the Medicare business, the MLR is up 300-340 basis points over prior guidance. This isn’t even close enough for horse shoes or hand grenades. From comments by management on last night’s call, it appeared this popped up in April and May, after things appeared to look pretty solid earlier in 2008.
Again, this is a pretty big surprise.
On the group health front, higher trend in group outpatient utilization and inpatient unit cost, or price per service appear to be the problem. Instead of the forecast 100 basis point reduction in MLR, management is now expecting higher medical costs – with a potential swing of 400 basis points for outpatient expense. Inpatient costs are also up 100 basis points, so the combination is driving up total MLR by 150 basis points.
Another significant contributor to the higher MLR is an increase in the number of more severe (more costly) claims – not more claims, but more high cost claims, specifically between 50k and 150k in dollars paid.
In contrast hospitals are not seeing increased utilization. Facility revenue numbers are not trending up. Coventry wasn’t able to figure out why their hospital costs were going up while overall hospital utilization nationally is not.
Admittedly Coventry has not yet determined all the factors causing these increases in MLR. They do appear to have a grasp on the major factors; from the tone and delivery
of management comments I’d expect there’s a lot of yelling at Coventry HQ, likely to be followed shortly by the distinctive sound of heads rolling. (During the call Wolf did allude to staff reductions in a response to an analyst’s query.)
Lastly, management reported that the work comp business is not meeting projections due in part to lower fee revenue for bill review.
As the market closed, Coventry’s stock price had dropped to $40.97, resulting in a P/E just under 10. Coventry has long been rumored to be a potential acquisition target, and if the stock price declines further (a not unreasonable expectation) suitors will likely emerge.
Jun
19
Joe,
Coventry’s arrogance has finally gotten them just what they deserved.
After Concentra’s merger with First Health, they played hardball and cancelled the majority of their network access agreements with bill review companies. They thought they had us just where they wanted us, without network access and unable to service our clients. Somehow they thought this would give them the ability to take all of our customers.
Boy… They sure miscalculated us and our worth to our clients. We didn’t lose clients to them and we obtained network access from other networks. Did they think they were the only ones that could lease networks?
Not to mention, Conventry’s bill review and repricing service is very poor. Instead of improving their service, they thought they would force our clients to use them. Wrong!
If this doesn’t give pause to those TPA’s who have made Coventry their primary strategic vendor & business partner, I’m not sure what will. The inducements to use Coventry are attractive to the intermediary, but when all is said and done, will it cover the eventual loss of the TPA’s customers because of lack of willing network participants and other poor service provided by Coventry. Just asking.
Joe, I think you have a typo in there. I just read the transcript from the conference call, and its Medicare, not Medicaid, that is up 300-340 basis points on MLR.
That said, Guertin’s excuse that it’s all the members’ fault for showing their traditional Medicare cards vs. their Coventry cards when receiving physician services, while I don’t doubt it to be true, certainly reinforces the allegation that got Coventry, Humana, Universal American and others in hot water last year over the marketing of Medicare Advantage plans. The argument by the government was that people were sold policies they did not understand, and in some cases did not even know they were purchasing. I remember thinking at the time that the accusation might have been a bit overblown. But if scads of seniors are showing up at the doctor’s office and not showing their Coventry cards, it’s a good bet it’s because they didn’t know what they had bought.
Whaddaya know, actions really do have consequences. Busted!
It sounds like bad Utilization Review.
I’m confused that they’re still caught off guard by their Medicare utilization, though. Haven’t they been adminstrating these products long enough to know about the billing issues and work them into the projections?
I can just imagine what is happening at other manage care health insurance companies.
The under reported issue is the comp sector. You can’t have people with a group health mind set manage comp business successfully. Look for Coventry’s comp pieces to be sold off soon and other entities to move in and nibble off their business regionally and Coventry to lose market share. Heck, what am I saying that is already happening!