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Jan
21

Coventry Health – it’s about medical, folks!

It’s no secret that Coventry Health had a tough 2008. After several years of continued growth in profits, revenues, and market cap, management was nothing if not self-confident. Perhaps not self-aware, but certainly self-confident. That ended a little less than a year ago, with the announcement that financial results had suddenly plummeted due to higher medical loss ratios.
The earnings debacle of 2008 started in the spring and recurred in October with additional bad news. The overall impact was more analogous to total immersion in the Barents Sea (think Deadliest Catch) than a dash of cold water in the face. The result is not heightened alertness and awareness, but rather a serious case of hypothermia, with the accompanying symptoms of lethargy, impaired decision-making, and a rather tenuous prognosis.
As I said back in June; 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. There was a bit more discussion of facility costs in a lengthy equity analyst presentation last week, with CFO Shawn Guertin and Chairman Dale Wolf noting (this isn’t an exact quote but pretty close) “it is really clear that it [the biggest cost driver] continues to be facility [costs] – facility patterns of care and units cost – and we are going everything to plug any leak we can find to tighten everything down. It is a unit cost issue…” In response to a follow up question, Wolf said Coventry’s network discounts look “very very competitive” (compared to other larger competitors).
That’s great. Yet Coventry’s medical trend is still projected to be higher than (most of) the competition, and it doesn’t look like this is due to pricing.

I’d also note that (yet again) there was precious little in the way of insightful questions from the assembled equity analysts. A couple individuals asked questions that sorta addressed underlying cost drivers, but there was no real due diligence, no digging deep into the facility cost issue, and absolutely no question about or reference to utilization. This is particularly surprising; it is abundantly clear to anyone who has spent more than a few minutes examining health care cost drivers that utilization is THE key driver.
I’m also a little confused given Wolf’s comments that Coventry’s network discounts look good, yet in an earlier statement, Guertin noted facility unit costs were problematic. Perhaps I misunderstood.
Here’s the net. A somewhat-chastened management team wants analysts and investors to look forward to 2010, as that’s when all their efforts will bear financial fruit. Yet I don’t see any real evidence that they are paying any attention to their ‘cost of goods sold’. Sure, they know the numbers, the loss ratios, pricing, and the impact of all that on EPS, but there’s precious little evidence that they understand, or are addressing in any meaningful way, the underlying drivers of technology, chronic illness, utilization.
What does this mean for you?

Network discounts are not a managed care strategy.

Tomorrow we’ll address Coventry’s Medicare strategy.


2 thoughts on “Coventry Health – it’s about medical, folks!”

  1. At this point in time, provider networks are ubiquitous. They all look the same and given the power shift back to hospitals and medical groups it would be surprising to learn if any one payor has a significant advantage over another payor in terms of network size, scope and overall discount. Joe you are absolutely corrent that it is the utilization factor and whatever ‘special sauce’ the payor serves up in terms of disease management, utilization and ability to manage wellness. Sadly it is the perverse reimbursement methodologies that permeate the system — capitation or fee-for-service– generate the over or under utilization we are seeing. So access isn’t the issue. It is cost and quality that will ‘save’ the day. When we can reach consensus on what is truly appropriate care and what is truly a fare and value added price, then the payors should be able to answer to the public and the analaysts on the cost of goods sold!

  2. Joe,
    You are right on. Provider discounts are artificial and inflate the cost of health care. There are so many carve outs and exceptions and every single bill falls outside of the “negotiated” price. One day on the hospital? Well if its cardiology or orthopedics its an exception. If there is an implant or “high cost drugs” – it’s an exception – well what in the world falls within a contracted price anymore? What a waste of time it is to negotiate with a provider. Utilization Jonathon? What an expense added to medical loss ratios…what a travesty…

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Joe Paduda is the principal of Health Strategy Associates

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