Coventry Healthcare – Q1 2009 progress report

This is a big day for mid-tier healthplan Coventry. After a year of turmoil and ups and (mostly) downs, CVTY has been under the leadership of returning CEO Allen Wise for a full quarter. Today Coventry announced Q1 results, which were projected to include earning of 24 cents a share, according to analysts surveyed by FactSet Research. The company surprised analysts when it reported earnings of 30 cents and projected 2009 revenues just under $14 billion.
The quick take – medical losses are coming under control through higher pricing, commercial membership is down, governmental plan membership is up, Coventry will exit the Medicare PFFS business, they are going to retain the workers comp business and Coventry is not for sale.
Details
While the results look pretty poor in comparison to Q1 2008, recall those results were wrong, as the company had yet to figure out its medical loss ratio problems were quite severe. On balance, this quarter looks reasonably solid.
The primary driver of improved results appears to be the renewed focus on the company’s medical loss ratio, which had slipped badly during the previous two years.
Here are some of the highlights.
– Net earnings were down about 65% due to higher expenses.
– Health plan commercial group risk MLR (medical loss ratio) was 80.9% in the quarter, down 230 basis points from the prior quarter. This is a big win as it appears the turnaround in healthplan performance has come earlier than expected.
– Commercial membership decreased 2.5% to 2.8 million. This is not good, as this is the profitable core of the company, Coventry’s bread and butter. The good news for the company was they increased pricing across most plans – this increase drove the improvement in MLR although it undoubtedly contributed to the drop in top line.
Coventry is selling more employer plans, but ingroup membership is down – people just can’t afford to pay their share of the premiums, even when subsidized by their employers. This is one of those canary-in-the-mine issues that has broad implications, far beyond this one mid-tier healthplan.
– Medicare Advantage membership was up 114,000 during the quarter; the MA MLR was 90.5% in the quarter, down 40 basis points from the prior quarter.
– Medicare private fee for service (PFFS) is not doing well, and it looks like Coventry will exit this business. This business grew dramatically over the quarter, with membership up some 75,000 to 318,000, driving revenues of Wise noted Coventry’s board will have a (non scheduled) meeting April 30 which happens to be the day before Coventry has to decide whether it will stay in this business.
Don’t bet on it. If Coventry does exit the Medicare PFFS business, top line impact will be significant – likely more than a couple billion dollars.
– Medicare Part D membership of 1,501,000 grew by 570,000. Notably, Humana dumped 180,000 Part D members: these were the folks who cost the company about a buck a share in earnings in 2008 due to higher than expected costs. One analyst thinks Coventry picked up some of the members dumped by Humana…
Wise expressed confidence in the results, saying he’s “reasonably comfortable” with Q1 results. CFO Shawn Guertin made a point of noting that most growth in Part D was not in their high-tier products and he feels ‘comfortable’ as well.
– Workers comp – Wise stated he is committed to maintaining and eventually growing the workers comp segment as it is profitable and returns good margins. He’s “absolutely committed to this business.” Guertin reiterated the company’s positive view of comp, saying results are very strong (or words to that effect). (work comp accounts for about 6% of Coventry’s revenue, with much of that from their PBM FirstScript).
More on this later.
Wise closed his opening comments by saying “the company is not for sale”. I’d note that few companies that are for sale advertise that fact.
What wasn’t covered
Once again, there was almost no discussion of core medical cost drivers – nothing beyond a couple lines from Wise about Coventry’s desire to invest in chronic care management for their Medicare members and two softball questions from analysts about cost drivers. (One was answered with the statement that facility unit costs and outpatient facility utilization appear to continue to be the problem. The second question referred to the company’s strategy regarding addressing unit costs by negotiating hospital contracts coming up for renewal and the potential impact of MS DRGs etc. Guertin’s answer was it is tough, hand to hand combat, about a fifth to a third of their hospital contracts come up for renewal this year… There was no declarative statement and certainly nothing substantive to say we’re focusing tightly on these areas or types of service. He did not respond to the MS DRG topic, and there was no follow up from the analyst.)
In what other industry would analysts not ask deep, penetrating questions about the underlying costs the company’s main product? Costs that are going up in the high single digits each year? Costs that are causing enrollment declines in the company’s core business? Costs that hammered the company last year, that drove the stock down by almost 90%? Costs that were acknowledged to be poorly understood in several of the calls last year?
Medical costs account for $11 billion – about 80% – of the company’s $14 billion top line – and there were two superficial questions?
Wow.