Coventry earnings call – the analysts blew it

I think I’ve figured out why analysts have been unable to accurately forecast health plan financials – they don’t know what questions to ask.
That’s the only conclusion I can draw after listening to the latest earnings call from Coventry Health. The mid-tier health plan company is still reeling a bit from last month’s announcement that it had been surprised by a sharp increase in medical costs, an increase that evidently had caught management by surprise.
Folks, this is a health plan company – one that claims “We deliver exceptional value every day, driving solutions that help people enjoy optimal health.”
One might think that a health plan company makes money by managing medical care for hundreds of thousands of Americans. Near as I can tell, Coventry isn’t a health plan, it is a transaction processor that makes money by pricing its insurance far enough above medical costs to administer the plans and make a bit of margin.
And from the questions that were asked ,and the ones that weren’t, it is pretty obvious Wall Street analysts think Coventry is a transaction processor as well. Out of the twenty or so questions after the management presentation, there was one – yes, one, that got anywhere close to actually inquiring about medical management. That questioner asked what Coventry could do or had done to deliver care to Medicare enrollees through an HMO at lower cost than thru the standard Medicare plan. Coventry Chairman Dale Wolf responded by noting that hospital days per 1000 members among Medicare HMO plans could be in teh 900-1300 range, compared to standard Medicare rates of around 3000 days/1000.
That was it. No follow up question as to how they could do that, what the long term implications were, how that affected pricing, what the techniques were that delivered such a great result and could those techniques be used for commercial members.
The entire conversation was about medical trend and how Coventry was fixing its pricing model to reflect higher trend, and if enrollment was going to decrease as a result. Not the factors causing medical trend and what Coventry was doing about it. Well, to be fair, there was a little dialogue about higher inpatient utilization and unit costs in Medicare, and higher hospital utilization on the commercial side. But if you were interested in Coventry’s solution to same, you’re out of luck. Not one analyst even asked.
If analysts don’t know to ask the company why their costs are going up and what they are going to do about it and how that will play out, what, exactly, are they ‘analyzing’?
There’s this thing in business called a sustainable competitive advantage – something you do really well, that is hard to do, that others don’t do well. This gives you an edge in the market, one that makes you a perennial winner. Coventry doesn’t have one, and neither do any of the other health plans. Because all they do is process transactions, adding no value.
Here are some of the questions they should have been asking.

• What key indicators of medical trend do you watch closely?
• Exactly what is your average inpatient days per thousand for each block of business and how does that compare to industry standards?
• How about admissions per thousand?
• what is driving trend? Is it unit cost (price per service), utilization (number of those services received by a member when they do get those services), frequency (percentage of members that get that service) or intensity (higher cost version of a technology or more expensive procedure type than expected)?
• Which types of medical care are the biggest drivers; ancillary, physician services, pharma, inpatient, outpatient?
• What is your plan to address those issues?
• How will you measure results and when will you know if you’ve been effective?
• What is Coventry doing about members with chronic conditions? How have your results compared to industry standards?

And the big one:
How would Coventry compete and win if it could not risk select and had to take all comers at a community rate?
Because that may well be the scenario Coventry, and all its competitors, face in two short years.
Note – this applies almost equally to most every health plan. In fact you could just about replace ‘Coventry’ with Wellpoint, Cigna, Humana, Blue Cross, etc and the same perspective would hold true.
Now I really am going on vacation.