Coventry Healthcare – they’ve solved yesterday’s problem

From comments made by management at Coventry’s presentation at Morgan Stanley investor day last week, the company’s efforts to refocus on core businesses appears to be working.
Of he two key takeaways one was wildly obvious while the other much less so. The company’s tight, almost monomaniacal focus on medical loss ratio (MLR) was quite noticeable; CFO Shawn Guertin’s comments about Coventry’s investment in clinical management was not, yet perhaps no less important.
First, the results for the first half of 2009. It went well. Commercial MLR looks to be coming in about 50 basis points better than initially projected, Medicare growth has been very good and MLR looking OK. And no surprise, Commercial membership and specifically risk membership (fully insured, mostly small group business) is ‘under pressure’.
Projecting forward, Guertin said for the second half of the year, commercial MLR is top of mind, with an expectation of some increase in COBRA takeup due to the Federal subsidy in ARRA, swine flu and deductible seasonality (as the year ends, more members have hit their deductible so medical costs payable by insurers increase). They are most concerned about COBRA’s impact on MLR, and have pushed projected MLR up 50 basis points due to the increased uptake.
Coventry ‘grew tremendously this year in Medicare’, and that is good, but they are not yet entirely comfortable with the growth and are ‘still watching and tracking pretty closely’ to try to identify potential cost spikes.
What’s going to happen with goig forward? Coventry is seeking to strike a balance between membership loss and price. Still focused on managing SGA broadly under CEO/Chairman Allen Wise’ direction.
One question asked if there is anything they are looking at exiting; Guertin said no, they are pretty much completed with the process of cutting non-core businesses. Don’t look for them to sell businesses, including the Workers Comp business. In fact Guertin highlighted the WC business as different piece that has ‘performed very well this year and continues to perform well’ and will continue to grow going forward.
Regarding reform, if reform includes community rating and universal mandate that will remove what Guertin believes is a competitive advantage for Coventry.
They’ve done a lot to improve their underwriting skill, he sees this as a loss of an advantage they had but if these changes occur they will be left with a level playing field, These days the company is doing a lot of thinking about the cost proposition of the product and value, and how best to compete in a post-reform market. In what was a bit of a rambling comment on Coventry’s strategy, Guertin said they are asking ‘Should we tailor a high performance network; we can’t change plan design but truly need to manage cost, we are investing in clinical programs and network design will be key to that.’ (not verbatim but pretty close)
Guertin got back on track responding to a question about reform scenarios, saying words to the effect that their ‘basis for competition has always been about cost and thinks that may help them as it is the ‘core of what they are’. They would spend their money on clinical and network management as opposed to brand or marketing due to the overwhelming marketing advantage of blues. Coventry wants to be positioned as a high quality but really cost effective player; think of Coventry as the Southwest Airlines in an insurance exchange, and they are trying to drive company in that direction.
What does this mean?
Coventry has never been about medical management. They are a pricing arbitrager and risk selector, priding themselves on managing the delta between insurance premiums and medical costs. They have not ever claimed to be expert in managing the medical costs themselves.
If reform comes, they will need to get really good at managing medical really fast. Coventry’s competitors aren’t exactly fully prepared for the new world either, but many of the Blues, along with Aetna, are a lot further along than Coventry. They also have market share (which Coventry doesn’t), solid brand images (which Coventry doesn’t), and in some instances substantially better relationships with providers.
I still don’t think we’ll get comprehensive reform this time around, and if we don’t Coventry may think they’ve dodged a bullet. But sooner or later reform will happen, and those healthplans that aren’t very good at managing medical are going to be toast.