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.
Jun
20
