Coventry’s Medicare business

Coventry’s presentation at the JP Morgan investor day last week was puzzling for a couple reasons. As noted yesterday, there was almost no discussion of medical cost drivers, either by CFO Shawn Guertin or Dale Wolf (Chairman and CEO) or by any of the analysts present.
The other puzzlement was the company’s continued emphasis on Medicare Advantage as a core business. According to Guertin, the company’s biggest success in 2008 was better than expected Medicare sales. He went on to note that this was one of Coventry’s key drivers; in terms of member volume, Medicare Advantage is a close second to group health followed by Medicare D. And, Coventry is spending about $45 million in 2009 to expand the company’s Medicare network footprint, which they call their coordinated care network. The network has to be built in 2009 so they can file the additional network coverage areas with CMS in 2010.
If I heard that right, they are looking to invest $45 million in Medicare Advantage, and it is a key driver of the company’s success.
Here’s more detail. Guertin noted that 2008 was an “exceptional year in Medicare Advantage”; they filed for 9 new markets, Medicare private fee for service (PFFS) growth was also solid and it will continue. Total membership is projected to hit 455k by the end of 2009 up from 380k in 2009. Leaving aside the potential for Congress and the new President to make dramatic changes in MA funding, Coventry’s strategy makes sense. They are currently conducting a detailed review of products and margins as well as the positioning around zero premium products (Medicare products that don’t require any additional premiums from members) and how they stack up in each market. They are growing in these products, the ones without rich benefits, but medical losses are around 90%.
So Coventry’s growth is in the right products; ones with lower risks and less rich benefits that are likely to be selected by people with lower health risks. However, their Medicare HMO business is doing better financally as it has an MLR significantly less than the PFFS’ 90% MLR. The strategy is to build out their networks in those areas with lots of PFFS members and hope to convert those members to the HMO, thereby taking advantage of the lower MLR delivered by the HMO. Currently about 58% of Coventry’s PFFS membership is in states with MA plans in existence – some percentage of that PFFS population will likely switch to an HMO product.
By converting members from PFFS to network products Coventry’s margins increase by five points, making the payback on the $45 million investment one year.
Guertin and Wolf did acknowledge the politics surrounding MA, but their acknowledgement did not reflect any real concern. Instead they noted their plans’ value proposition; with one saying: words to the effect that “there’s no question the enhanced benefits for seniors and overall reduction in medical expense for the system and society and better quality of care and life they get thru various health management program seniors…its indisputable that MA brings a lot of value”.
That may be the case. I’m not so sure it will be enough to prevent Congressional action to eliminate the MA subsidy.
I don’t understand why a health plan would bet it’s future on a business that may well change a lot and quickly.
Anyone?