Coventry’s earnings call – facility costs are the problem

The Allen Wise II era has begun with today’s release of Coventry Health’s fourth quarter 2008 earnings. Wise, who occupied the CEO/Chairman’s office before the recently-departed Dale Wolf, resumed the position ten days ago after Wolf resigned.
Here’s my key takeaway. Wise has figured out that Coventry’s non-group lines of business – work comp and Medicare – were in part responsible for higher medical loss ratios for their group business. Recall that Coventry’s medical loss ratio (MLR) sent up more than 300 basis points last spring, sending shock waves through the company.
It appears that Coventry’s local network negotiators/provider relations staff had to consider medicare and WC when negotiating contracts with providers (especially facilities), and the larger providers said that if Coventry wanted deals on those lines, then their unit prices were going to increase. This led to higher MLRs on their core group business. For Coventry, higher costs are being driven by facility expense.
More to follow as I digest the call and comments.
Here are a couple highlights.
– Medicare Advantage membership increased 34% in 2008. I suppose that’s good news, although the pending termination of the MA premium subsidy isn’t going to help the profitability of that segment (expect a rapid cut in the Feds’ 13% average subsidy this year).
– Commercial group membership declined each quarter in 2008, leading to a decline of ust under 100,000 members for the full year. This isn’t necessarily bad news, as the company raised prices a lot after last summer’s surprise disclosure that the Medical Loss Ratio unexpectedly jumped.
– The workers comp business is muddling along, with no evidence of growth. It’s not possible to tease out the precise WC numbers as they are combined with other businesses in the Specialty Services Revenue line item – but that line was essentially flat quarter over quarter throughout 2008. And although it grew nicely (if my guess-timations are accurate), in the past, it looks like that growth leveled off during the last three quarters of 2008. For more on Coventry’s WC top line growth strategy, click here.
Finally, what does the future hold? As I noted a year and a half ago, the company has “a tight focus on managing the medical loss ratio (MLR), although that ‘management’ appears to emphasize financial rather than medical management – the MLR strategy is driven much more by increasing premiums ahead of medical inflation than by actually ‘managing’ medical care and costs.
This will serve the company well over the near term, but the ‘MLR management approach’ has to change over the longer term.”
What does this mean?
A change in management personnel may not mean any change in how the company operates. Simply put, Coventry has to change its business model from one that is financially driven (raise prices) to one that emphasizes medical management (actually add value). This is CEO Wise’s second stint in the job; we’ll see if he changes course.
Note – there’s a lot to interpret, these are initial takeaways so more to follow